Falling Irish bond yields

Michael Burke: Irish bond yields are falling. At the time of writing, the yield on 10yr bonds is 8.65%. This is down from the peak of 14.22% on July 15. Yields are inversely related to prices, so bonds have been appreciating sharply. According to Financial Times’ data the benchmark 10yr bond has increased in value by over 40% since mid-July and currently trades at over 76 cents in the Euro, up from less than 54 cents.

Irish government debt is a ‘spread market’, one in which its price is mainly derived from its relative value to other Euro-denominated government debt markets. Therefore, the change in the relative value of Irish government debt is a more important marker of specific factors affecting perceptions of the Irish economy and fiscal position.

The absolute peak in Irish yields coincided with their peak spread over German bunds of 1134bps (basis points, or 11.34%). This was also the peak in the spread of Italian government bonds, known as BTPs. Then the yield spread was 828bps. One week later the Irish yields had fallen to 11.89% and the respective yield spreads over bunds and BTPs had narrowed to 906bps and 648bps. Put another way, while Irish yield were plummeting, German yields were actually heading higher and Italian yields were only falling very modestly.

But that pattern has not persisted, even though Irish yields continue to fall dramatically. Yields on all 3 bonds fell until August 18, when Irish yields reached 9.74%, bunds touched 2.09% and BTPs dipped to 4.95%, for spreads of 765bps and 479bps respectively. Since that time both bund and BTP yields have edged higher but Irish yields have continued to fall. By close of trading last week Irish 10yr yields were 8.82% and bund and BTP yields were 2.23% and 5.09% respectively. In little more than a month the nominal level of Irish yields has fallen by 540bps and the yield spreads have nearly halved over both bunds and BTPs.

Clearly, Irish government debt has participated in a general rally in European government bonds. (In Britain, the post-Iraq BBC is very anxious to support government policy, which it assumes is Eurosceptic and so continues to ascribe stock market declines to the EU debt crisis. It hasn’t noticed either that European debt markets have been rallying while stocks fell or that the current government, fearing a financial apocalypse, has turned Euro-federalist).

Irish Rally

But Irish government debt has also evidently been enjoying a rally of its own, with yields falling more sharply than in other markets and continuing to fall even when others have turned.

It can’t be the ‘recovery’ as the national accounts data, showing a rise in GDP but slump in all categories of domestic demand, was published on June 23- and yields and spreads continued to rise thereafter. It’s tempting to suggest that the all-clear from the Troika was the cause.

But that was released on July 14, and the yields jumped 35bps immediately afterwards. Similarly, much commentary is devoted to the improvement in government finances in the first few months of this year. But the July Exchequer returns (which only provide a partial picture) show the year-to-date deficit at €9bn compared to €7.4bn in the same period in 2010.

There can be little doubt that Ireland has benefited from the ECB’s announcement of bond purchases, which has helped all the crisis-hit countries and now amounts to €116bn. But the announcement was made on August 7, long after the Irish bond rally had begun and so can have only helped it on its way.

Similarly, the reduction in the interest rate on Irish bailout funds will have provided strong support. The summit, 2 weeks after the bond rally began saw the protracted struggles in Greece lead to a reduction in interest rates for both Portugal and Ireland. (The interest rate cut owes nothing to the negotiating skills of the Irish government, as they repeatedly said they weren’t negotiating with EU partners on this point, simply arguing to keep ultra-low corporate taxes). This is the first significant improvement in the fiscal position since the crisis began and will have helped support the rally.

But the catalyst for the rally was something else. The widely-discredited EBA bank stress tests were published on July 15. No matter that the EBA’s entire estimate for European bank recapitalisation was exceeded by the failure of Spanish savings banks just days later, the relief to holders of Irish government debt was the belief that no further state funds would be needed to recapitalise the banks. It was then that the rally began.

Irish sovereign debt is more closely tied to the banks than any other Euro Area economy. So the idea that there will be no further drain from this source underpins the specific rally in Irish government debt. But it might be mistaken. There is an ideological commitment here to placing the interest of the rentiers ahead of those of the economy- the opposite of Keynes’s dictum. And the situation may well deteriorate, as NAMA’s losses tend to indicate. The ‘deleveraging’ process at the domestic banks will leave with an increased dependence on the fortunes of the domestic economy. If the domestic economy fails to recover, bad debts will mount as seems to be happening already in the mortgage market. It is also unclear whether bond investors understand the actual liability to Anglo, where only €3.1n has been borrowed of a projected €47bn requirement to cover promissory notes.

Conclusion

The bond rally was sparked by the idea that no more funds would be needed for the banking system. It has been underpinned by ECB bond buying and the cut in interest rates. But unless the domestic economy recovers, the faith that no further bank bailouts are likely could be misplaced.
Does the rally bring debt sustainability closer? Yes, but it still remains very far away. For debt sustainability the real interest rate minus the real growth rate multiplied by the debt/GDP ratio must be lower than the primary budget balance (primary, meaning before debt interest payments are included). As the debt/GDP ratio is approximately 110% and the primary budget balance approximately -7% of GDP, the current numbers need to go into reverse. What’s needed is 1% yields and 8.7% growth, or a similar gap between the two. Otherwise, rising debt interest payments threaten to overwhelm government finances over the medium-term.

The size of fiscal stimulus vs. the length of fiscal stimulus — Marginal Revolution

The size of fiscal stimulus vs. the length of fiscal stimulus — Marginal Revolution:

'via Blog this'

Dealing with Mortgage Over-Indebtedness

Sinéad Pentony: The issue of mortgage indebtedness has re-emerged. The number of mortgage holders in arrears for more than 3 months has reached 50,000 and this figure will continue to rise. Although we often hear that the level of repossessions in Ireland is low compared to our nearest neighbour the UK, the latest Global Distressed Property Monitor survey from the Royal Institution of Chartered Surveyors published today puts the scale of the problems in the Irish property market in a global context.

The survey finds “that Ireland has the highest projected number of foreclosures and sales by owners who cannot meet rising repayment fees”. The RICS survey also highlights the problems in the Euro periphery (Ireland, Spain and Portugal) where “the property market in these countries is riddled with both a high number of foreclosures and brand new homes which can't attract buyers. To boot, investment funds have lost interest in these markets as their economies try to balance bank bailouts and rising government deficits.”

The issue of mortgage over-indebtedness has been exacerbated by austerity measures, with more and more people going into arrears as their income declines through pay cuts and through unemployment or underemployment. Unsustainable mortgages are not just a problem for individual mortgage holders; they are a problem for the wider economy - given the scale of the debt overhang. Over-indebtedness has a strangling effect on the economy as a growing proportion of spending goes towards trying to service debts from a declining income.

The economy is caught in just such a debt deflation stranglehold. Historical experience has shown that lingering private debt overhangs delay the exit from stagnation because private spending takes longer to recover. The next three years of cuts will amplify this phenomenon.

Although Ireland is not unique in experiencing the problem of unsustainable mortgages the vast scale of the problem requires some fresh thinking and consideration of measures that have been tried and tested in other countries. Debt forgiveness (write-down) and debt restructuring are just two such measures.

In recent months there have been reports of individuals negotiating a write-down of their mortgage debt following the sale of distressed properties. However, these measures need to be part of a robust policy framework that mortgage holders and lending institutions can work within. Radical problems sometimes require radical remedies, and while proper analysis of the likely knock-on effects is required, it makes no sense to take any option off the table at this point.

Irish Success Story

Michael Burke: The Irish economy has ‘turned the corner’ so often now that it must be back where it started. The latest commentators to identify the beginnings of a recovery are professors David Vines and Max Watson.

The article originally appeared in the Financial Times and is reproduced in the Irish Times, ever anxious to find green shoots of recovery. The authors make a striking claim, that “an Irish success story of the kind we think is under way will come to be seen as a crucial trump card for the euro zone debt strategy. It gives the lie to fears about a generalised transfer union.”

The authors may have underplayed the significance of the success story. This economy is beginning to look like a world leader, not just in the Euro zone. In the graphic below from The Economist, this is what the trump card looks like.

Social Impact Bonds - Thinking Outside the Box

Sinéad Pentony: At a time when public and private investment is badly needed it’s important to think outside the box and look at different investment vehicles and the outcomes we want to achieve.

Investment tends to be equated with upgrading and improving our physical infrastructure - such as better roads, school buildings, health centres, and energy and communications infrastructure. Investment in human capital is also essential because economic growth in the 21st century is likely to be built on the exploitation of new knowledge and technology.

While investment in physical and human capital is essential for a sustainable and job-rich recovery, it’s important that investment which is ring-fenced for better social outcomes also forms part of the mix of investment. Social impact bonds (SIBs) have the potential to provide much needed investment in the areas of unemployment, health, housing, etc.

A SIB is a defined as “a contract with the public sector in which the public sector entity commits to pay when significant improvements in social outcomes for a defined population are achieved.” Private capital is raised to fund interventions that aim to deliver these improved social outcomes. Financial returns to investors are dependent on the degree to which these interventions improve the target social outcomes. If the interventions fail, the investors may lose their money. If the intervention succeeds, the public sector pays the investors a return financed from a share of the public sector benefit and/or exchequer savings made as a result of the improved social outcomes.

Further details on how the SIB works is provided by Clann Credo, which is a social investment fund and they have recently put out a call for ideas to identify social issues and interventions that may fit the criteria for SIBs in Ireland. The UK has taken the lead in this area and Social Finance, a non-profit organisation, launched the first SIB in 2010, to reduce re-offending among short-sentence offenders. Social Finance is developing SIBs across a number of other areas including children’s services, drug rehabilitation and health. SIBs are also being developed in the USA and Australia.

At a time when the community and voluntary sector has been decimated by cuts and our public services are being starved of investment, creative responses to financing initiatives that focus on social outcomes are more important than ever.

Guaranteed Lender of Last Resort

Tom McDonnell: The often useful VOXEU resource has produced a number of constructive pieces on the debt crisis in the last week or so.

Paul DeGrauwe does a good job of describing the inherent fragility of the Eurozone as currently designed. His main proposal is the establishment of a guaranteed lender of last resort for government bonds. The ECB being the natural candidate to take on this role.

Charles Wyplosz argues there are really just two possibilities to solve the crisis. The first possibility, echoing DeGrauwe, is to make the ECB perform the function of a guaranteed lender of last resort. In this scenario the ECB would simply guarantee the rollover of maturing sovereign debt at face value. The second possibility is to pursue one of the many variations of the Eurobond option that currently has Merkel and the Bundesbank wailing against the dying of the light. Audio version of Wyplosz is here.

Stefano Micossi argues here that fiscal union is inevitable and urges using the ECB to purchase distressed sovereign debt. Micossi also emphasises the importance of using the EFSF to issue union-bonds backed by the joint guarantee of all Eurozone member states.

Austerity the wrong medicine?

A quick link to Robert Reich's post on Social Europe Journal here.

Austerity plus uncertainty equals more contraction

Slí Eile: Voxeu had an interesting contribution by Miguel Kiguel [Argentina and Greece: More similarities than differences in the initial conditions] here.

Kiguel recounting the experience of Argentina over a decade ago writes:

"The fiscal contraction failed to restore confidence. It made the recession worse, thereby reducing tax revenues. The reaction was to embrace more draconian austerity which deepened the recession and further cut tax receipts. This was a vicious circle with no way out.The fundamental problem was that the fiscal adjustments did not—as had been expected restore solvency and investor confidence, just the opposite. Something similar is happening today in Greece, where fiscal austerity is failing to restore confidence and is making the recession worse. In the end, investors know that growth is the only way to get out of the debt trap and it does not seem that it will happen through reductions in government expenditures or increases in taxes. Deflation is not happening either, and therefore the big question is how and when Greece can grow. ......

A first lesson is that reductions in the fiscal deficit through decreases in nominal expenditures or increases in taxes in the midst of a recession do not work austerity just makes the recession worse.

The second lesson is that when the public sector is large and there are powerful unions, it is extremely difficult to correct an overvalued currency through deflation.

A third lesson is that a devaluation in a dollarised economy (euro-ised in the case of Greece) can be problematic as it can lead to significant balance-sheet problems that need some form of government intervention.

A fourth lesson is that non-convertible quasi-currencies (QCs) can be a roundabout away to restore a limited degree of monetary and exchange rate policies."

Anybody doubting that the Greek Government is not doing enough to deflate the real economy should check the summary of actions on the Greek Ministry of Finance website here. Cuts of over 15% in nominal wages in the public sector, closure of 2,000 schools, across the board cuts in health, social security, privitisation. It is a thorough package to embed debt in a contracting economy and ensure continuing insolvency along with a very limited private sector participation in debt write-downs via a bail-in.

The Merkozy Summit

Link to Karl Whelan's analysis of the latest developments in the Eurozone Crisis. 'The Merkozy Summit - Bad Politics, Bad Economics'.

"This is a system in deep trouble"

Sinéad Pentony: In The Guardian, Larry Elliott argues that “only a new way of managing the global economy can prevent more mayhem in the market and on the streets”.

He identifies a number of ingredients that have contributed to the crisis, namely the US decision to break-up the Bretton Wood system and abandon the ‘gold standard’. While this system wasn’t perfect, it acted as an anchor for the global economy. Its demise paved the way for the liberalisation of financial markets in the 1970’s.

He describes the currency system as “an utter mess”, particularly since almost every country in the world is now trying to manipulate its currency downwards in order to make exports cheaper and imports more expensive. The role of sub-prime mortgage scandal in the current crisis is well documented – the conditions for which were created through the liberalisation of financial markets.

Finally, Elliott points to the breakdown of the social contract under which the individual was guaranteed a job, with decent pay that rose as the economy grew. Over the last 40 years, the benefits from growth have been disproportionately accruing to companies and the wealthy.

This point is reinforced by research recently published by the Resolution Foundation (UK think tank), which found that workers in the bottom half of the earnings scale received £12 out of every £100 rise in national income in 2010, compared with £16 in 1977, while the top 10 per cent received £14 out of every £100 in 2010, up from £12 in 1977.

Elliott says that growing inequality, global imbalances, manic-depressive stock markets, high unemployment, naked consumerism and the riots are telling us something – that the system is in deep trouble and it is waiting to blow.
While we haven’t had any riots in Ireland, we are part of the same system, which is displaying many of the same symptoms. Policies to address these symptoms domestically and globally remain in short support.

Guest Post by Arthur Doohan: "Federalise the Debt" has become a mantra and a “meme” in recent weeks

There are many people in the world who hope that someone else can, with a few waves and strokes of an implement, make all their troubles go away. The vast majority of these people are children and they grow out of believing in fairy-godmothers and genies by the age of eight.

There is no entity that can make our sovereign debt go away, nor is there one that can assume responsibility for it.

The right to borrow money is granted to those who have demonstrated legal and economic capacity to repay it. People (investors, speculators, call them what you will) buy bonds from entities that have:
1) assets that produce an income;
2) a track record of repaying their debts;
3) are not currently overburdened with debt.

There is NO entity in the EU that matches any one of those criteria, let alone all three.

Now, we could create one but that would imply tax gathering powers granted directly to some arm of the EU, probably, the Commission because tax-gathering is the only way for sovereign or supra-national bodies to raise revenue in a reliable or efficient fashion. Other ways have been tried in the past which usually employed the legions of Rome or the divisions of the Wehrmacht but this was not only inefficient but was exactly what the EU was founded to prevent.

Further, such a debt-management body would not have a track record of repayment and would probably be seen as being overburdened with debt and so would worsen the situation rather than improve it.

The history of this entire crisis from American sub-prime mortgages onwards has been one of the commingling of good debt risks with bad ones to the eventual and ever more rapid deterioration of both. "Gresham's Law - red in tooth and fang."

A further lumping of the good with the bad and the ugly will only make it harder for debt-buyers to distinguish good from bad. It would therefore, most likely, cause bondholders to seek a higher return or abandon the Euro altogether.

So, please, would those advocates of 'debt federalization' be so kind as to complete the circle of their prognostication and tell us what institution they see as being in charge, how much of their taxes they want to send to it, what they see happening to the yield on current debts and, lastly, how would they arrange the disbursement of new debt to the huddled masses of the EU?

A suggestion for Summer Schools

Slí Eile: An interesting suggestion is made here. Perhaps it might be extended to reviews of macro-economic policy, conferences think-ins etc. We all need to listen to the people who are taking the brunt of this crisis.

NESC Report on Responses to Unemployment Crisis

Sinéad Pentony: Earlier this week NESC published its latest Report on Supports and Services for Unemployed Jobseekers: Challenges and Opportunities in a Time of Recession. The report states that the labour market will take years to recover and it rightly points out that “the exporting sectors play an indispensible but limited role in attaining high employment rates...until there is a revival of domestic demand, a large proportion of those now unemployed face bleak employment prospects.” Solving the jobs crisis requires interventions that address issues relating to the demand and supply of labour.

On the demand side, the jobs crisis cannot be solved in the absence of maintaining and increasing demand in the domestic economy. The current programme of austerity continues to ravage the domestic economy, which will lead to further job losses, ever-growing queues and accelerated emigration. Efforts to achieve short-term financial gain will have long-term social and economic costs.

In the context of the current phase of the global financial and economic crisis there are renewed calls for measures to stimulate economic activity. Demand can be maintained and increased by protecting incomes, especially those at the lowest level because they have the highest propensity to spend everything they earn in order to meet their basic needs; maintaining and increasing the rates of social spending e.g. Iceland. There are also the old reliables of increasing investment in human and physical capital.

On the supply-side, the NESC report highlights the need for improved activation strategies and acknowledges that changes are underway with the reconfiguration of delivering employment services. However, the report states that further reforms should be guided by a long-term vision of what constitutes an effective unemployment regime in a knowledge-based economy, and be imbued “with greater empathy and less suspicion towards those who have lost their jobs or the misfortune to be seeking a first one” at this time.

A long-term vision of an effective unemployment regime should be informed by a wider goals of achieving strong economic performance and combining it with a welfare state that offers comprehensive protection against social risks and investment in lifelong learning. There is a large body of literature in this area, and a recent paper on Scandinavian Labour and Social Policy provides a useful overview of how it is possible to integrate employment policy with active labour market measures and social services that support families and healthcare policy. Of course all of this comes at a price “...Nordic tax and finance policy extracts enormous sums from the economy and redistributes them in accordance with policy guidelines.” Is it not a price worth paying?

Is Ireland heading into a slowdown, too?

Michael Taft: The global recovery is now expected to ease off in the latter half of this year with a range of data suggesting a slowdown in the manufacturing sectors. This is not good news for Ireland as external demand has been one of the few lights in the recessionary darkness. Exports have held up well during the crisis. However, in line with the global easing, we may find that this section of the economy may not be making the contribution to growth we need to compensate for domestic demand that is still in decline.

The CSO’s recent Industrial Production Index gives some clues. Manufacturing production mirrors goods exports. In 2010 production in the ‘modern’ sector (primarily multi-nationals in the capital intensive sectors such as chemicals/pharmaceuticals) increased by nearly 11 percent in volume, while the ‘traditional’ sector, where indigenous enterprises are strongest, experienced a more sluggish 2 percent increase.

Since December of last year, however, production has been sluggish:

In volume terms there has been little change. When we look at the turnover (or value) index we find as similar small drop-off from December in both the modern and traditional sectors.
The CSO also provides a ‘New Orders’ index which measure trends in new orders accepted in the manufacturing sector, including those received and filled during the last month. Between December 2009 and June 2010, new orders increased by nearly 17 percent, reflecting the strong performance last year. However, for the same period this year, new orders have not increased at all.
For those ‘banking’ on an export-led jobs recovery, it’s not likely to be driven by the goods sector. Looking at the provisional figures for production and employment growth between 2009 1st quarter and 2011 1st quarter we find the following:
• Modern Sector: volume production increased by 6.1 percent but employment fell by 9 percent, shedding over 6,000 jobs
• Traditional Sector: volume production fell back fractionally while employment also fell by 9 percent, shedding over 12,000 jobs in this more labour-intensive sector.

These are all just snapshots of the situation today so we must be cautious in extrapolating over the year. Goods exports are still expected to put in a good performance next year, though its impact on the domestic economy is a little more debatable. But with European, US and global forecasts easing off, we shouldn’t expect Ireland to escape unscathed. Already, the Central Bank is revising downwards its manufacturing output projections for this year and next, compared to what they were estimating six months ago. This mirrors their downward revisions of GDP and GNP growth for next year.

If the European and US recoveries begin to stall (and already the US has experienced the weakest recovery since the Great Depression), our open economy will be affected. And with domestic demand continuing to struggle, the last thing we need is to catch a cold from the sneezes coming from the global economy.

Inequality and the UK Riots

Aoife Ní Lochlainn: Amongst the acres of news coverage devoted to the UK riots, comes an interesting piece of work in the Guardian, ‘Mapping the Riots with Poverty’. Using Indices of Multiple Deprivation which are published by the Department of Communities and Local Government, the researchers mapped poverty and the location of the riots. Unsurprisingly, the majority of the incidents took place in or adjacent to the poorest areas. Elsewhere in the Guardian, Nina Power looks at the riots in the context of child poverty and inequality, writing that Haringey (the borough that includes Tottenham,) has the 4th highest level of child poverty in London. Over at the New Economics Foundation Blog, riot-related discussions centre on inequality and how our ‘materialist economics’ encourages us to work and thus yearn for ‘tat’.

A long malaise

Michael Taft: With years of austerity ahead, resulting in weak growth and high unemployment, freezing interest rates and another round of quantitative easing in the US will do little to solve the crisis, writes Joseph Stiglitz.

We need more investment, more bank lending to SMEs and a determination to use all the fiscal tools at our disposal to create jobs. Without this, all we will have to look forward to is a long malaise.

Different takes ...

These two posts from Social Europe Journal are worth a read. George Irwin bemoans the lack of progressive political leadership, while Zygmunt Baumann examines the concept of 'defective consumers' in the context of the London riots.

Seperately, Paul Krugman summarises the 'power of a stupid narrative' in 84 words here.

Enjoy this weekend if you can

Slí Eile: New research on what might make for happy weekends here !

Panic on world markets

Michael Burke: International business news and other TV channels are offering a Babel-like interpretation of the current slump in world financial markets. European (including British) stations are reporting the Wall Street-led declines as a response to the continued debt crisis in Europe. But this makes no sense. An EU crisis would have been felt first in EU markets, and perhaps not at all in the US - US stocks had been rising over a prolonged period while Europe has been in turmoil. (And, despite what we may think, Greece or Ireland might fall into the sea while causing barely a ripple in the Hang Seng and the other plummeting Asian stock indices).

US channels have no explanation at all for the crisis - and analysis is limited to individual stocks, the scale of losses for investors and a generalised antipathy to Washington.

The Asian networks come closest to identifying the source of the current crisis- which isn't in Europe at all. Their consensus is that markets are plunging because of the slowdown in the US economy.

But, why now? We are repeatedly told that financial markets react instantaneously to new information. The US GDP data for Q2 were truly awful, up just 0.7%. As the BEA annualises quarterly data (multiplies by 4) this means that the US economy grew by under 0.2% from Q1.

On closer inspection the data were even worse. Large downward revisions to both the prior quarter and further back mean that economy fell by 5% in the recession, and has not recovered that prior peak in activity yet, as had been previously thought. This is the weakest US recovery from recession in the post-WWII period. Yet these data were published last Friday. If they were the immediate cause of the panic, it is a slow motion reaction.

No, the new news is the compromise agreement in Congress on Tuesday to raise the Federal debt ceiling in return for large scale cuts in Federal spending. This can only have one consequence - slower growth. Since the anticipated profits derived from growth drive stock prices, it is natural for stocks to fall when growth prospects are lowered. As Wall Streeters say, the US has just suffered a derating.
The crisis is driven by 'austerity'- US austerity.

EU financial markets are caught in the backwash of this, as slower US growth certainly harms global growth prospects. This is felt most keenly in their weakest link, the sovereign debt markets, since these have assumed all the stresses of the EU economies and financial systems. But we should not expect stock and other markets in Europe to remain unscathed, especially bank stocks.

In particular, as reaction to the latest bailout of Greece's creditors shows, bond markets do not reflect any confidence in these repeated prescriptions. Instead a first bailout of the economy is required, in Greece, Ireland and elsewhere.
There was a fondness before for asserting that Ireland was closer to Boston than Berlin. With the German economy recovering far more robustly than the US, we will hear less of that in the years ahead.

It might be wise instead to focus on the German and other answers to the crisis. This was not just short-term economic stimulus, but long-term productive investment.
For too long this economy has been a weigh-station for US companies counting their profits. Instead of listening to their self-serving advice on economic policy (while following German strictures on fiscal policy) policymakers in Ireland should emulate what works, in Germany, Sweden and most of Asia, investment-led growth initiated and guided by the State.

Stiglitz on a 'contagion of bad ideas'

"The Great Recession of 2008 has morphed into the North Atlantic Recession: it is mainly Europe and the United States, not the major emerging markets, that have become mired in slow growth and high unemployment. And it is Europe and America that are marching, alone and together, to the denouement of a grand debacle. A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fueled substantial budget deficits. The response – massive spending cuts – ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years".

You can read the rest of Nobel laureate Joseph Stiglitz's article for Project Syndicate here.

Education cutbacks bad for economy

Sinéad Pentony: Today’s news that class sizes are set to increase highlights the shortsightedness of responses to the fiscal crisis.

As in many areas of public expenditure, Ireland has consistently lagged behind other OECD and EU countries both in terms of spending and performance. Ireland spends 4.7 per cent of GDP on education compared to the OECD average of 6.2 per cent. Even during the boom, education spending remained one of the lowest in the OECD. Our class size average is 24 pupils, compared with an EU average of 20, which is the second largest in the EU. The Minister for Education has said that our education system is not ‘fit for purpose’ and he’s right – our reading levels (OECD/Pisa survey results) have fallen from 5th place in 2000 to 17th place in 209. Our ranking in mathematics tumbled from 16th in 2006 to 26th in 2009. So the proposal to increase class sizes will reduce our low level of spending even further and will undoubtedly have a knock-on effect on our performance. Also, the impact of increased class sizes will be felt disproportionately in schools and communities that are already struggling with reduced resources. These schools tend to be concentrated in deprived areas where there is limited scope for parents to make “voluntary contributions” to their local schools.

However in the medium-long term, cutbacks in education will impact on our ability to compete at a global level in new industries that are driven by innovation. An education system that is ‘fit for purpose’ requires:

• a major reduction in class sizes at all levels in the education system
• proper equipping of all schools with educational technology
• a radical movement away from rote learning and mass testing at all levels of the system towards group-based project work.

Our recovery is predicated on investment in our future – education.

Time to start working on Plan B

Michael Taft: The recent Central Bank quarterly report confirms (as if we needed
confirmation) that the economy remains in slow bleed mode. That they have revised downwards key domestic indicators is in keeping with other forecasters. We have an economy that is spinning its wheels in a deflationary trough, with no sign of relief in the short-term.

You can read the rest of this post here.