Splashing the water

Michael Taft: First there was Claiming our Future with its bold but common-sensical proposals to promote growth and equity in the economy. Now we have the Nevin Economic Research Institute (NERI) laying down a new fiscal framework to pursue such an alternative economic strategy. And it poses a real challenge to all progressives.

Some of us have just been working at the edges of the pond. For instance, some of us have argued for a freezing of current public expenditure at current levels up to 2015, substituting tax increases in place of spending cuts, and relying on an investment programme (mostly paid out of own resources) to increase our productive capacity in the medium-term. Of course, this approach accepts real cuts in the overall spending package (after inflation) but the argument is that savings on unemployment costs can be redirected into other areas of current spending. It still represents an expansionary fiscal platform, but a tight one.

NERI, however, runs past us all, jumps into the pond with both feet and starts splashing the water all around – including all over us. They, too, propose an expansionary programme but instead of freezing public spending, they want to increase it – increasing it to EU averages in the long-term. This would be combined with increasing government revenue to similar EU levels.

Let’s look at the differences – comparing Government projections, a ‘freeze-spending’ scenario, and NERI’s proposals. The following looks at overall spending minus interest payments – that is, primary expenditure.

As seen, while freezing spending would provide an additional €4.3 billion for current and capital spending above the Government’s projections, NERI’s proposals would provide an additional €9.8 billion. That’s a mighty sum.

The objections will be loud and voluminous – you’re adding to debt, you’re avoiding tough decisions (no one ever mentions avoiding bad decisions), you’re padding an already wasteful and inefficient public sector, etc. etc. and more etc.

But let’s briefly looks at some of the issues NERI’s proposals raise.

The first is whether you use GDP or GNP (or more properly GNI – which is GNP plus net EU payments) to measure spending. This is one of those bottom-less pit debates where consensus is almost impossible. I don’t intend to re-run the arguments here. However, it is worth noting that while Irish GDP per capita exceeds the EU-15 average, owing to the froth of multi-national accounting, Irish GNI per capita is about average. Average income, average spend – that’s NERI’s approach.

This suggests another approach to looking at expenditure. The following looks at Government spending on public services per capita. This is useful category given that overall spending can be skewered by pension expenditure in EU countries with a much older demographic.

Ireland would have to increase its spending on public services by €7.5 billion just to reach the average EU-levels. There’s doing more with less as the mantra goes; then there’s doing less with a lot less.

Second, NERI’s proposes to increase Government revenue to EU-15 averages. This would be a substantial sum. By 2017 it would mean €13 billion extra. I can hear a big gulp. But the important point here is that this doesn’t mean that this amount must be met by increasing current tax levels. Increasing growth and employment will make up a large part of this gap.

For instance, the Government intends to increase tax by €3 billion over the next three years. However, they project government revenue will increase by €7.5 billion. Growth will increase government revenue by nearly two-thirds; the fiscal adjustments will only account for a third. And that’s in a scenario where the Government is cutting investment and domestic demand. Imagine the increase in government revenue in a scenario where investment and domestic demand is increasing.

Third, the idea that public spending is a drain on public finances has been firmly established in the public debate by the austerity orthodoxy. NERI’s programme challenges this view.

For instance, the ESRI shows that increasing spending on public services by €1 billion (a combination of increased employment and wages) would mean an increase in the borrowing requirement of €580 million in the first year. Increasing income tax by €1 billion would reduce the borrowing requirement by €744 million. In other words, a straight one-for-one increase in income tax and spending on public services would result in a net reduction in the borrowing requirement.

This is not an argument that we can spend our way out of a recession. We can’t, we must invest. But it is an argument for a more sophisticated fiscal approach which uses a number of instruments in a carefully calibrated way. Increasing taxation beyond the economy’s capacity to absorb it (such as happened in the last few years) while increasing public spending without regard to productivity (which happened under Fianna Fail’s failed programme in the late 1970s) is a recipe for a real mess.
However, increased spending combined with similar increases in taxation can be a net boost to the economy and public finances. Imagine if we introduce a wealth tax and took the proceeds to roll-out an early childhood education network – that would be a boost in the short and long-term.

None of the above constitutes a ‘model’. There is still considerable work to be carried out. But there is considerable evidence to show that NERI’s programme would work, that Claiming our Future’s vision is achievable.

NERI has jumped into the pond and is splashing the water all around. I suggest we all follow suit. I have dipped my toe in. And the waters of an expansionary economic strategy are just fine.

Invest and do no further harm

The Nevin Economic Research Institute will be publishing its second Quarterly Economic Observer later today. Click here to download the full document. Commenting on the report, NERI Director Tom Healy called for a more gradual approach to fiscal adjustment that allows space for domestic demand to recover as well for investment to have a positive impact on employment and output. He stated that a stimulus through investment and holding to the current level of public spending could help restore confidence and improve revenue buoyancy in the short term while taxes on high-income and high-wealth households would begin to move Ireland towards European norms of taxation.

Innovation value for money

David Jacobson: In yesterday’s Irish Times (Business and Technology supplement) there is a good-news story about Science Foundation Ireland’s (SFI’s) funding of research projects. To illustrate, to quote the headline, that SFI’s “value for money approach pays off”, the journalist JJ Worrall reports on interviews with Principal Investigators of three projects. This note is not aimed at rejecting the argument that there is value for money in these investments in research; rather I want to show that it may or may not be value for money. Many additional questions have to be answered before a firm conclusion can be arrived at.

Let us focus on just one of the projects to illustrate some of the problems. The project is “Employing Artificial Intelligence to Make Constraint Programming Easier to Use for Decision Making” to which €3.3 million was allocated. This grant funded the establishment of the 4C research centre at UCC. Evidence of success comes under four headings.

1. Job creation, where “about 50 4C staff had their work funded or co-funded by the grant”.

2. Spin-off companies, in this case Keelvar which produces web-based software for financial traders and ThinkSmart, the focus of which is “location analytics”.

3. Agglomeration effects, or knowledge spillovers, the argument being that the presence of the research in 4C has attracted others to co-locate. According to 4C, it has helped IDA to attract such companies as United Technologies and Quest Software to Cork. In addition business data analysis company EMC has set up its Research Europe lab in Cork, working in partnership with 4C.

4. Research output, which for this project includes “about two dozen inventions, …about eight intellectual property licences and two patent applications”.

Answers to the following questions, under the same headings, would help to sharpen the focus, determine whether there is indeed value for money and ultimately help to evaluate the state agencies involved in innovation, the innovation policies of the government, and the processes of implementation of the policies by the agencies.

1. How permanent are the jobs, or are they specifically linked to the length of the project funding? How many of the people filling the jobs are likely to stay in Ireland at the completion of the project? In many cases the bottleneck in research in Ireland has been not funding but qualified staff and as a result PhD students and post-docs were imported from elsewhere, only to return home when the projects ended.

2. There is a history in Ireland of advanced tech SMEs being bought out by multinationals, resulting in their relocation to the home base of those multinationals. A small number of entrepreneurial professors may get rich from this, but it may not add much to industrial development in Ireland. How likely is this, rather negative, scenario to be replicated in this case? One of the other projects discussed in the article, Metropolis, has already had a spin-off company, Kore Virtual Machines, bought out by multinational games company, Havok “for an undisclosed amount”.

3. Agglomeration effects are very difficult to measure. Nevertheless there are strong arguments, and much qualitative evidence, in their favour. The main question here is the extent to which, if at all, United Technologies and Quest were attracted to Cork as a result of the grant. It may be impossible to separate IDA efforts and material support from SFI grants in terms of their impact on location in Cork, but these are clearly factors in the assessment of the results of the research grant. Might some of the research have been done anyway? EMC already had an R&D centre in Cork in 2008, before 4C had achieved anything; might it have collaborated with UCC academics in its new Research Europe lab even without 4C?

4. The intellectual output of R&D frequently has no impact on productivity because much of it never gets implemented. It is quite likely that more important than the specific outputs from the research is the “how-to” learning that was obtained in the process of doing the research. It is such learning that enhances the innovative capacity of firms and entire national systems of innovation. Competitors producing “copy-cat” products or processes that manage not to contravene patents will not get ahead if the dynamic capability arising from the learning enables the original firm or research centre to create new applications, and even new markets.

Such questions focus both on the detailed and on the general impacts of SFI’s grants. They suggest a need for a detailed examination of Ireland’s system of innovation, from the top, including relevant government departments, innovation agencies, universities and R&D companies, to the wide-ranging effects of culture and education, including primary education, on originality and creativity. The three projects described in the article may well be value for money, but what would be the impact on innovativeness in Ireland in 15 years if SFI’s funding was spent in its entirety on programmes to enhance originality and creativity in national schools?

The ESRI Quarterly and 'The Small Open Economy'

Michael Burke: The latest ESRI Quarterly deals very briefly with the issue of economic stimulus.

‘We would be very cautious about a domestic stimulus in Ireland, however funded, as history and experience shows that such a stimulus would have little effect on the domestic economy, but would lead to a worsening of the balance of payments’ (ESRI Summer, QEC, p.41).

Of course, if it were really the case that an Irish stimulus would lead to a worsening of the balance of payments than it would be counter-productive by increasing the overseas indebtedness of the economy, to add to all its other debts.

It should be noted that the ESRI makes no distinction between types of stimulus. Promoting the purchase of goods not at all made in Ireland would be counter-productive, as that could only be met by increased imports. This is what happened with the cut in VRT. But promotion of investment in or purchase of goods wholly or mainly provided in Ireland would not have that effect.

The ESRI also engages in hyperbole when it argues that the experience of the 1950, 1970s and 1980s is that any stimulus measures means a large proportion of stimulus would go to imports. The series of National Development Plans have precisely been a domestic investment stimulus which lifted both the growth rate and the long-term productivity of the economy.

Where Would Stimulus Go?

The assertion that any stimulus would lead to a worsening of the balance of payments is not supported by an analysis of the Input-Output Tables for the Irish economy.

In effect there are distinct categories of sectors in the economy where that would not be the case. The first is comprised of those sectors where the import content of inputs is negligible. This means that any increase in the output of these sectors would require no increase in imports. The second category of sectors includes those where the export output is much higher than the import content. This means that firms based in Ireland are importing lower value goods or services and re-exporting them having added significant value to them. The third category is comprised of those sectors where, even though the import content of inputs are high, the domestic multiplier effect is so large as to produce a significant boost to the domestic economy.

The first category is where import content of inputs is low. As the CSO says (p.10), of 53 sector groups there are 7 which have an import multiplier of less than 0.15, that is for every €1 extra of domestically produced output in these sectors, less than 15 cents is required indirectly in imports. These include wholesale trade, real estate services and education, motor repair, retail trade and repair of household goods. Health services have in import multiplier of just 0.16. Investment in these areas would overwhelmingly boost the domestic economy.

The second category is comprised of those sectors where the export component of output is much greater than import inputs. They are naturally dominated by the sectors in which the overseas multinationals predominate, printed materials, chemical products, office machinery and financial intermediation. But that is not exclusively the case, as the manufacture of food and beverages and the wholesale sectors both export more than they import. Providing services or ancillary inputs to those MNC-dominated sectors, or investment in the two large indigenous exporting sectors would be a positive for the balance of payments, as well as boosting output and employment. Altogether there are 27, of 53, product categories where higher value added means they export more than they import.

In the third category are those sectors where the boost to the economy from increased investment (the ‘multiplier effects’) are so great as to override concerns regarding import content. There are also 7 out of 53 sector groups where the output multiplier is 1.66 or greater (pp. 38-40), implying that the State would have a direct positive return on investment in these areas. These include agriculture, food and beverage manufacturing, water collection and distribution, construction, hotels and restaurants and water transport. The state could either directly invest in these (eg, water distribution and collection, construction/refurbishment of schools) or facilitate investment (eg, through promotion of tourism to benefit hotels and restaurants) and provide a positive return to the Exchequer. Indeed, in the case of tourism promotion, it would make sense for the overwhelming bulk of the investment to be made overseas.

The truisms regarding Ireland’s status as a small, open economy should not obscure the potential for State-led investment in a wide range of product sectors which have little import content, or whose domestic impact is so great as to render the objection that there will e increased import demand meaningless.

In fact, we could go further and argue that the ESRI’s entire framework is wrong. If the aim of policy were to prevent imports then there are numerous examples internationally and in Ireland’s own history where everything from import-substitution to autarky where that has been tried and failed.

27 of the 53 product sectors in the Irish economy export more than they import. Investing in those sectors, either directly or indirectly would boost imports, but exports would grow by a greater amount. Even those sectors which currently export nothing according to the CSO, like education, could become significant exporters by attracting overseas students. There is a vast and growing demand for high value-added education primarily in English and, as coverage of Euro2012 shows, everyone likes the Irish. But that too would require state-led investment and the input of high-value imports, both material and human.

The advocates of austerity are now calling for growth

Paul Sweeney: When all of the advocates of austerity are now calling for growth as well as more cuts, is it no wonder the public is confused?

The peoples of Europe have clearly decided a) that the level of austerity imposed on them is too harsh, b) it is hitting the poorest hardest (what is new?) and c) it is not working (after four years, they know it for sure!). So the conservatives have a new hymn sheet with the word growth peppered at the end of every refrain instead of amen. But people are not fools. They know that the growth policies being proposed are “Structural.” They are impacting only on supply side, with cuts in minimum wages, basic hours, benefits and all the rest of it where it impacts on the precariat.

Our own government is deeply disappointing in its slavish adherence to the Supply Side Approach to the economy. Four years on, plummeting domestic demand – by 26 per cent and still falling - and large falls in GNP and GDP are worrying. There was a rise of 0.7% in GDP last year. This fact has been trotted out at every opportunity as a great economic “fact”. Unfortunately, this piddling performance could be revised down to 0.0 shortly and even at this pace, it will take 15 years to get back to where we were.

Sebastian Dullien has a good critical perspective on what needs to be done here. It ties in nicely with the finely honed Demand Side analysis, recently undertaken by the Irish Congress of Trade Unions for boosting jobs and confidence in Ireland’s collapsed economy.

Reflections on Greece

In a commentary written yesterday, Paul Krugman noted that the "Greek election [...] ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway. The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris".

You can read the rest of his piece here. Comments?

Innovation policy and perfomance in Ireland

Sinéad Pentony: TASC hosted its second lunchtime seminar yesterday. Professor David Jacobson examined the issue of innovation policy and performance in Ireland, which is based on work that David has been doing for TASC on the wider issue of industrial policy, which will be published in the coming months. The presentation included a critique of innovation policy and highlighted the fact that innovation is much more than R&D; that low R&D industries may be major users of results of R&D generated elsewhere; and that low R&D industries may also be innovators. The presentation also provides a very useful assessment of Ireland's performance as a researching country by examining the international evidence.

Remote scenarios?

Consider the following scenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union. German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.

You can read the rest of Dani Rodrick's post on 'The end of the world as we know it' over on Social Europe Journal.

Guest post by Martin O'Dea: A simple suggestion

Martin O'Dea: Forgetting banking debt and its link to sovereign debt and resolutions required around this issue and just dealing with excessive sovereign debt, if I might. Can blocks of sovereign debt, instead of just being subsumed into Euro Bonds, not be reconstituted so that they create some of what the fiscal treaty was attempting in terms of structural balance? In other words, could sovereign debt above perhaps 80% not be repaid (interest on same etc) until the country is running a current surplus? As the country's surplus increases the amount of repayment correspondingly goes up. The design would need to be long-term and equitable in its nature but should also leverage a short-term mechanism to bring sovereigns back from the brink of default and allow current deficits be addressed without the markets focusing on sovereign default potentials.

The Costs of Working in Ireland

Nat O'Connor: The ESRI withdrew a working paper today. The Irish Times reported that this was "unprecedented". However, another ESRI report (on waste incineration) was being "re-examined" by the ESRI last year, so it is not completely unheard of.

Working in a think-tank that also publishes discussion papers that are the author's sole responsibility, I have a certain sympathy for the ESRI's position. The whole point about working papers - and the Cost of Working piece was just that, not a 'report' as The Irish Times claims - is that they are open for discussion and debate, and there is an opportunity for new information and new analysis to influence the author's thinking before a final version is produced. Taken to a logical extreme, it is always possible that working papers in the social sciences are simply wrong. The margin of error in statistical analysis always allows for a few lemons. But this is not always obvious and we need the publication of more, and more diverse, analysis in Ireland, not less.

The pity about this brief storm is that the withdrawal of the paper will focus more attention on its uncertain conclusions than if it was quietly ignored. It's worth noting a couple of things about the paper. (I found a copy here: http://www.rte.ie/news/2012/0612/esri_report.pdf).

First of all, the data is from the 2004/05 Household Budget Survey, at a time when we had practically full employment in Ireland. While the 'incentives' might seem to have made moving from welfare to work unattractive, the fact was that practically everyone was actually working and many people left welfare to take up employment. This somewhat deflates the central argument of the paper.

The paper rightly points out the fact that childcare costs are extremely high and that they - and other costs - are a barrier to people entering work. There is no doubt that there is a weight of evidence that people, especially women, are put off from entering the labour market because of the costs of childcare. People parenting alone are particularly affected by this.

But the paper does not examine other costs, and factors that offset these costs. For example, housing costs are a major factor. People who gain employment will lose Rent Supplement, whereas people living in local authority social housing can maintain their lower-than-average 'differential rent' when they gain employment. (Differential rent is not a bad thing, as cheaper rent makes it possible for some people to take lower paid employment). In other words, there are lots of major variables not examined in the paper that change the incentives about working.

Moreover, are economists better placed than psychologists to explain why people go to work? During the boom period, some people went to work for marginal benefit, when costs like childcare are factored in. However, people work in order to maintain social networks, for a sense of personal independence and for lots of other reasons. Looking only at a set of short-term cash 'incentives' won't tell the whole story.

Finally, there are other important factors to be examined. NERI point out that the ratio of people unemployed to job vacancies in Ireland is the second worse in the EU. In other words, there are far more people looking for work than there are jobs, and no amount of changing incentives is going to improve that. The real focus should be on boosting demand in the economy to generate more employment opportunities.

Paul de Grauwe on the need for action

Paul Sweeney: With all the events happening in Europe and the lack of leadership by the Prime Ministers, Finance Ministers, the economic Commissioner s of the Union itself and most of all from the unelected leaders (laggards?) of the ECB, it is refreshing to read a view that gives some ideas on leadership.

Paul De Grauwe, formerly of Leuven University and now of LSE, has been on top of comment and in my opinion, sound solutions for the past three or four years of the crisis.

This is a well-written, clear and concise viewpoint, well worth reading in full.

Guest post by Suzanne Rosselet-McCauley and Adrian Devitt: Restoring sustainable competitiveness

Suzanne Rosselet-McCauley and Adrian Devitt: Competitiveness is one of the most abused terms in modern economics, meaning many different things to different people. Ireland, perceived during its Celtic Tiger years as a star performer in international competitiveness rankings, rose to a peak of 5th place in IMD’s World Competitiveness Yearbook (WCY) in 2000. Considered one of the world’s most prominent indices of global competitiveness, Ireland’s ranking began to fade during the years preceding the financial and economic crisis of 2008-2009.

In our research on national competitiveness, it has become apparent that there exist many different roads to competitiveness and that a “one-size-fits-all” recipe cannot be applied to all countries. It is not only a question of how “competitive” countries are, but rather how they are sustaining national competitive advantages and achieving greater prosperity for their populations, in terms of increasing living standards and human development (health, education, training). Researched by Forfás, the NCC’s Competitiveness Scorecard has reported on these factors over the past decade.

Unfortunately, the drive for competitiveness is often misunderstood as a win-lose battle between firms to gain market share or between nations for export dominance. But for any company or nation, narrowly looking at cost, price or export competiveness will not be enough to deeply impact sustainable profitability or economic development.

So what happened to Ireland’s competitiveness as the country’s ranking declined in the WCY year after year to an historical low of 24th last year? Clearly, as prices and wages climbed during the boom years, Ireland’s price and cost-competitiveness eroded. Infrastructure constraints also grew. But as the boom continued and as debt was built up and property prices skyrocketed, a sense of invulnerability seemed to take over during these “miracle years”. Since 2008, while Ireland’s competitiveness potential has improved as cost competitiveness improved and capacity constraints eased, indicators tracking current economic performance (e.g. unemployment, debt rates) continued to lower Ireland’s overall ranking.

This year, the tide appears to be turning and Ireland’s ranking has improved to 20th place (out of 59 countries). Over the past year, Ireland has benefited from booming exports and sustained inward investment, retaining its place as one of the most attractive locations for multinationals. The improved ranking is also testament to Ireland’s business-friendly environment, in terms of investment incentives, a competitive tax regime, a high availability of skilled workers who are also English speaking and IT competent. For example, in the IMD 2012 WCY, Ireland ranks:

• 1st for the availability of skilled labour
• 1st for the flexibility and adaptability of the population
• 1st for positive attitudes towards globalization
• 1st for investment incentives
• 1st for understanding the need for economic & social reform
• 2nd for a lack of discrimination towards foreign investors
• 2nd for lack of protectionism
• 3rd for patents in force

But what about the future? Will the global crisis be seen as an opportunity to move towards a more sustainable path of competitiveness? Notwithstanding the legacy of the property bubble, Ireland has significant strengths to build on. For example, a significant proportion of Ireland’s exports are classified as complex goods or services (i.e. high value added). The degree of complexity apparent in Ireland’s export profile differentiates Ireland from other peripheral EU economies. While it is essential for Irish competitiveness to continue to pursue cost efficiencies in all sectors of the economy, it is also vital to continue to develop the exporting capabilities of high value, complex sectors and their supply base. The key challenge is to strengthen the foundations for long-term sustainable growth and Ireland’s potential for future competitiveness.


To really get ahead, sustainable competitiveness must be the ultimate objective of a business or national development strategy. This implies the following:

• Improved performance in education, worker training, and retaining talent
• A long-term view towards business and capital investment
• Building innovative capacity by fostering an environment of creativity and knowledge transfer
• Spurring indigenous technology to develop domestic global brands
• Finding an equilibrium between economic gains and societal well-being

Building Ireland’s potential for future competitiveness will require addressing three major challenges: macro economic and fiscal stability, R&D and innovation, and infrastructure. First, a continuing focus on stabilising the banking system and public finances, thereby reducing volatility and uncertainty. It is only in a predictable environment that investors will take a long-term view and seek to improve productivity.

Second, Ireland’s companies need to constantly upgrade and innovate to stay ahead. This requires a continued focus on R&D by boosting expenditure and supporting the transfer of people and knowledge between research and academic institutions and the private sector, as well as the dissemination of this knowledge into innovative goods and services.

And the third bottleneck for sustaining competitiveness is infrastructure. Not only continued investment in basic, physical and digital infrastructure, where Ireland has made good progress, but also addressing the constraints in financial infrastructure, for example by improving access to credit, venture capital for start-ups, and supporting entrepreneurship and small- and medium-sized enterprises.

Lastly, while attempting to tackle the above challenges, it is important not to neglect the country’s social infrastructure in terms of education, healthcare and pensions, while ensuring that the benefits of growth are shared equitably across the population.

If the improved IMD ranking is any indication of Ireland’s comeback, then the competitiveness horizon looks brighter. Having improved four places to 20th – the strongest improvement in a decade - potential exists to improve further. There is also evidence that the Irish have a strong capacity to adapt to difficult and troubling times, as seen in the high rankings (1st) for “understanding the need for economic and social reform” and for the population’s “flexibility and adaptability”. A difficult road still lies ahead but Ireland possesses many of the prerequisites for competitiveness that will help ensure a better future for the next generation.
Authors: Dr. Suzanne Rosselet-McCauley, IMD Fellow, former co-author of the IMD World Competitiveness Yearbook, IMD. Adrian Devitt, Head of the Economic Analysis and Competitiveness, Forfás

Fiddling while Europe burns

Paul Sweeney: Today’s Financial Times tells us that in an effort to persuade Spain to accept a bailout, “unlike earlier bailouts for Greece, Portugal and Ireland, the proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU and could even dispense with the close monitoring by international lenders that has proved contentious in Athens and Dublin, according to people familiar with the plans.”

It is reported that the oversight of the support to Spain would be dependent on increased outside oversight and faster restructuring of the banking and financial sector.

Why should Ireland and Greece have severe austerity imposed under the Memorandum of Understanding with the Troika of the EU, ECB and IMF while Spain gets off more lightly in comparison?

The answer is of course, size and importance. Ireland is unimportant in the order of things and this hard lesson is being driven home in the wake of last week’s referendum vote. We can be the model of goodness and obedience and the veritable “Poster Child of Austerity” but it still does not matter to the kingpins in Europe.
Not that austerity at this level is working. It is exacerbated by European and world conditions, but still is too severe in such a short time period. Yes we are heading towards target - if not acutely to hit it - on the deficit level, but little else is working. Growth is anemic and at last year’s level of GDP growth of 0.7 per cent, (if it's not revised downwards by the CSO later) it would take 15 years to get back to the level of 2007 GDP. It would take far longer on GNP and a very long time for the recovery of domestic demand to reach the level of five years ago.

Unemployment is at a very high level of over 14 per cent and it is at 25 per cent by the wide measure – officially. Emigration is very high too and participation in work has fallen dramatically especially for women and the young.

It is excellent that FDI continues to flow in and jobs are created. This shows that the fundamental economy in Ireland is working. Indeed it is working very well – very well!

But it is not enough. Domestic demand has fallen massively. And it is not just the collapse in investment (due to lack of confidence but also lack of state-led investment) but especially its main component – consumer spending.

What would help? If the so called leaders in Europe (largely a bunch of conservatives hide-bound by 1920s economics) could get their act together before the whole edifice falls apart, that would be most helpful. The edifice that is collapsing is both the euro, the European Social Model, the Single Market and the European Project itself. They have been fiddling while Europe burns - for four years now.

The election of Hollande has changed the balance, somewhat. The EU is no longer dominated by Germany and France. (It may seem like it is now just Germany, but Merkel is increasingly isolated). This gives some hope. If the left is elected in Germany and Italy within the next year, all may change. But social democracy and socialism in Europe is in crisis too.

Many of the political leaders of social democracy and socialism have forgotten their core values. Instead, they espoused what is now fairly clearly a failed market system. Most have now recognised this. Yet most these leaders still seem immobilised. Intellectually and politically.

The immediate answer should be the message that – “the European Social Model is alive and well. When sustainable growth returns, it will be enhanced.”
It’s a simple message which would give hope to hundreds of millions in Europe. It also needs to be accompanied by policies to stimulate growth, now. For them, it seems the European Social Model is under deep threat. It not just that ECB boss Draghi said the Model is finished, but the conservatives have decided to end the Post-War European Social Contract.

They simply want to keep the money. Sharing is out. The cake is no longer growing. The Soviet tanks are no longer in Germany. The alternative socialist vision is blurred. What impetus is on the elite and owners of capital to share but the minimum, with labour?

The European elite have decided, along with their US cousins, that inequality does not matter. But they are very wrong, as Joe Stiglitz says in the blog below. He says “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending.”

In conclusion, it does seem that we are heading back to naked class war in Europe.
If you do not believe me, then why are the European elites and the ECB saving the banks and letting sovereign states sink? Why, after four years, are there still no solutions?

Joseph Stiglitz on the price of inequality

[...] America has the highest level of inequality of any of the advanced countries – and its gap with the rest has been widening. In the “recovery” of 2009-2010, the top 1% of US income earners captured 93% of the income growth. Other inequality indicators – like wealth, health, and life expectancy – are as bad or even worse. The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

Click here to read the rest of Joseph Stiglitz's piece on the price of inequality, courtest of Social Europe Journal.

The crisis in Greece and arms purchases

Jim Stewart: Recent comments by the Head of the IMF (Christine Lagarde, Guardian Newspaper 26th May) in laying the blame for the crisis in Greece on Greek people (Greek people should help “themselves collectively by all paying their tax”, and that it was now “pay-back time” for Greece) have proved controversial. Overall Lagarde is quoted as stating that “she has more sympathy for children deprived of decent schooling in sub-Sahara Africa than for many of those facing poverty in Athens”.

Hostility to Greece

Taking these views at face value, and ignoring the calculus as to how different levels of deprivation might be compared and the role of the IMF in fostering such deprivation, they are not unique. The head of Deutsche Bank has described Greece as “a failed state ... a corrupt state” (Guardian newspaper May 26, 2012). Der Spiegel (5/10/2012) quotes newspaper coverage citing growing sentiment in Germany that Greece may leave the Euro and that this might be a good thing as a Greek exit could make the euro stronger and could also have a “disciplinary effect on other countries”. At the same Spain and Italy are regarded with sympathy in contrast to Greece. An article in the New York Times states ‘Greece, on the other hand, is roundly criticized for lying about the true state of its finances again and again, before and after joining the euro zone, and its failure to take any of the numerous steps demanded by its creditors to modernize its economy and — a particularly sore point — its tax collections. Its status as a special case is underscored time and again’.

Recent comments by the minister for Finance in Ireland to the effect that Greece leaving the Euro would have little effect in Ireland as “it is very far away” and the only item purchased from Greece is Feta cheese are part of the same pattern. Such comments are far removed from EU declarations on solidarity.

What has changed? In Ireland Greece is the example to be avoided. The Minster for Foreign Affairs in Ireland is quoted as stating a default would “place Ireland in the same situation as Greece” (Irish Times, 27/4/2012).

In the case of Germany, anti-Greek sentiment is partly motivated by economic nationalism. Der Spiegel quotes the head of CSU (Horst Seehofer) as seeing a Greek withdrawal from the Euro as the best option and states “We must preserve Germany’s economic strength. That’s more important than Greece remaining in the euro zone”.

A key feature of much of the comment about Greece and the Euro is its relative lack of analysis. One reason for this is that much of the comment originates from a political position which is closely aligned to the position of the current government in Germany.

Take for example comments by Mr Asmussen (described by the Guardian newspaper as Germany’s representative on the ECB council) who stated: "Greece needs to be aware that there are no alternatives to the agreed bailout program, if it wants to stay in the euro zone" (Reuters May 8 2012). More political still are comments by the President of the Budesbank who is quoted by Reuters as stating "If Athens does not stand by its word, then that's a democratic decision. The result is that there is no more basis for further financial aid" (Reuters, November, 5, 2012).
This lack of analysis is reflected in comments that Greece will be required to leave the Euro. Greece cannot be required to leave the Euro. Greece may itself decide to leave the Euro but again the mechanism for this is unclear, but there is no mechanism by which other countries can require Greece to leave the Euro. Even if Greece were in some sense to leave the Euro, the large black economy is likely to mostly trade in Euros, and elements of Greek banking will move offshore to other Euro area countries.

Military Spending by Greece

A lack of analysis is also reflected in the failure to consider the implications of the size of military expenditures by Greece as indicated by stocks of military equipment (see Table (1).

Greek Military Equipment (In Service)

Source:Wikipedia.
(1) Wikipedia note that military equipment is from German, French, American, British and Russian suppliers
(2) A total of 170 new Leopard (German) tanks were delivered between 2006-2009.


Greece was among the world's top five largest recipients of major conventional weapons for 2005-2009, and was third place for 2000–2004. The transfer of 26 F-16C from the United States and 25 Mirage-2000-9 combat aircraft from France accounted for 38 per cent of the volume of Greek imports for the period 2005-2009 (SIPRI Trends in International Arms Transfer 2009, p. 5). Greece was the largest importer of German conventional weapons in the period 2007-2011 and the second largest importer of French conventional weapons (source: SIPRI Trends in International Arms Transfers 2012). Since Greece joined the Eurozone until 2010 military expenditure has varied between 2.3 and 3.4% of GDP, compared with 1.4 to 1.5% of GDP for Germany and 0.6 to 0.7% for Ireland. Since joining the eurozone cumulative military expenditure for Greece amounts to around €63 billion (Source here). Even in 2011, Greece continued to import arms and has outstanding orders for five German submarines.

Yet it is difficult to find any reference to arms spending as a contributory factor to the fiscal and economic crisis in Greece, by outside commentators or by Greek commentators (see for example Costas Simitis, former Greek Prime Minister, writing in the Guardian 27th April, 2012).

It is also inconceivable that the Minister for Trade in France in 2005-2007 (Christine Lagarde) did not approve of arms exports and it’s likely financing by French Banks. Again it is inconceivable that exports of arms from Germany were not approved at a political level and financing provided by German banks. Expenditures on imported military equipment do not lead to economic growth but rather the growth of international debt. By facilitating such expenditures Germany and France bear some culpability for the predicament now faced by Greece. This should be recognised in terms of bilateral aid to Greece to help achieve genuine economic reform, productive investment and basic levels of affordable health care provision. Lecturing Greeks to pay tax while at the same time offering no positive vision will ensure the Greek crisis continues inside or outside the Euro.

Krugman - on just about everything

Nobel Laureate Paul Krugman's visit to Britain has given rise to a number of interviews and articles. Click here here to read a full transcript of his very wide-ranging interview with the Independent's Ben Chu. Seperately, in a piece reprinted by Social Europe Journal from the New York Times, Krugman takes a look at that mythical Irish creature, austerity-generated recovery.

Has the State any Business in Business?

Sinéad Pentony: TASC held its first lunchtime seminar yesterday. Paul Sweeney considered the question - ‘Has the State any business in business?’. Paul’s presentation put the issue of privatisation in the current context; identified the winners and losers in privatisation; and how/where it fits into industrial policy. The presentation draws a number of conclusions including the need for a more nuanced approach – privatisation is not a black and white issue; and there is a need for more diversity in the forms of ownership, as set out in the recent report by The Ownership Commission, which was chaired by Will Hutton.

Our problem is not the EU - our problem is ourselves

Colm O'Doherty: Earlier this year, in Davos, Enda Kenny spoke about moral failure and its responsibility for our economic crash. He said that easy access to credit had spawned greed to a point where it just went out of control completely and ended with a spectacular crash. There was an immediate outcry in Ireland on foot of his comments and he was accused of playing the blame game. However, with the referendum on the fiscal treaty now being debated across the country, it is timely to ask some hard questions about ourselves – can we be trusted run our own affairs in a fair, just and moral way? If we are not externally regulated, do we run the risk of handing over our country to greedy business people and greedy politicians as we have repeatedly done over the past thirty years? Greedy capitalism and the inequalities it rests on, triggered the economic crash.

As Finnish academic Antti Kauppinen points out the sub-prime loans given out in the US to poor people, who because of historical injustices were unable to access mainstream credit, triggered the world wide crash. Inequality lit the fuse which started the meltdown in the US. Inequality in Ireland has been well documented by Combat Poverty, the Irish Anti-Poverty Network and the OECD. Our fiscal policies are the core problem here. The policies which spawned our economic crisis have their origins in Leinster House rather than Brussels. Regressive taxation policies which re-distributed income from the least well off to the middle and upper classes through tax breaks encouraged reckless property speculation. These policies have been repeatedly endorsed by the electorate over the past twenty years. The tax base has been narrowed to a point where we have an extremely low tax-to-GDP ratio. At 28.2% in 2009, the total tax-to-GDP ratio here was the third lowest in the EU and the second lowest in the euro area. The ratio in Denmark for the same period stood at 48.1%. It is no wonder that we are reliant on bail-outs from the EU to fund public services. Clearly the State cannot fund essential education, social protection, activation and health services on an income which is lower than that achieved in Slovakia and Bulgaria. While this ratio was on an upward trend between 2002 and 2006, it has decreased by four percentage points from 2006 to 2009.

As Antti Kauppinen, commenting on the layers of greed capitalism which were enshrined in our tax system, said in a recent address to the Policy Unit in TCD:

In Ireland, we know the ethos of greed reached the highest offices in the land . From an outsider’s perspective, the number of former Taoisceachs and ministers hauled in front of tribunals is comical. If the elected representatives of people use their position for personal enrichment at the expense of ordinary people, why would businessmen hold themselves to higher standards? As if personal example wasn’t enough, Ireland as a country has pursued its self-interest at the expense of others with its now sacrosanct low corporate tax rate.

So rather than scapegoating the EU for the inequalities which have been key to the inflation of our home-grown economic bubble, we now need their assistance in protecting us from ourselves. We need to raise our corporation tax to pay for our public services. We need to widen our tax base so that the high earners and wealthy members of Irish society pay their fair share. The path to follow is greater austerity for the rich. At present a person earning over 32,800 Euro enters the 41% top tax rate and is paying the same rate of tax as an individual earning multiples of their income. Structural inequalities in Irish society are patterned by the differential opportunities available to individuals to gain economic, social and cultural capital. In simple terms, the dice are loaded in favour of the well- off promoting their class interests through a tax system which takes no account of their favoured position in an unequal society. Their social contract is more important and is afforded a superior status - they cannot be required to shoulder a greater share of the financial burden resulting from our economic crash because this would cause them to flee abroad.

By increasing the tax revenues available to the State we can reduce our level of borrowing from the EU and the IMF. At the very least, if taxing the rich is not an option, then they should have to pay more for services and receive less in state support so that funds can be directed at the most vulnerable and disadvantaged in society. These are direct actions which can be taken here and now by Irish citizens. It should be obvious to everybody that a myth that was used as a fig leaf for our Irish model of greedy capitalism - that American levels of tax (low) can produce Scandinavian levels of public services (high quality and expensive) - was just a myth. What is hard to understand is why anti-treaty voices on the left have decided that the enemy is the EU, when it is clearly our own brand of greedy capitalism which has forced austerity on the less well-off citizens of our state. It is not hard to understand why the 'no' campaigners on the right want to blame the EU and cut us loose from fiscal regulation. Libertas and other neo-liberal voices supporting unfettered and de regulated capitalism are opposed to the managed capitalism promoted by the EU. Sinn Fein’s implicit view that everything native is good and that everything foreign is bad is consistent but doesn’t square with the facts.

Citizens voting on the treaty need to seriously think about the damage caused to our society by home-grown taxation policies which have clearly favoured the well-off and re-distributed funding from public services to speculators. They need then to make links between our fiscal insolvency, the ongoing need for financial support from the EU and these inequitable and unsustainable taxation policies.

How bad is Greece?

Rory O'Farrell: Government deficits can be broken down into two parts: interest payments and the 'primary balance'. The primary balance includes everything other than interest payments; so it includes social welfare, money raised through taxation, salaries etc.

Greece is often portrayed as a basket case that just can't get its act together. However, as can be seen (click graph to enlarge), Greece's primary balance is better than France and Netherlands. Greece's problems are largely due to the legacy of the past.

NERI Information note on the Fiscal Compact

Tom Healy: The note presents some important facts and insights - not all of which have got an airing in the public debate to date. The document may be downloaded here.