Ireland’s New Capital Investment Plan and its New Industrial Strategy

Paul Sweeney: A major speech made by the Taoiseach last Thursday 16^th February on proposed changes in Irish economic policy was lost in the chatter about his departure.  

The Taoiseach set out two major economic plans: a ten year capital investment programme and the development of a new industrial strategy. 

Taoiseach appears to seek Increased Public Investment, as does OECD.

Paul Sweeney: The leak in the Irish Times (13^th June 2016) that the Taoiseach has written to Mr Juncker, President of the EU Commisson, on the need for greater investment in Ireland is welcome, but appears somewhat disingenuous. 

His letter appears to quote the report published by TASC last December which pointed out that Ireland’s level of investment was at its lowest level ever and was the lowest in the Union. Mr Kenny said investment in infrastructure in Ireland was at its “lowest level for many years, and also represents the lowest level of any member state at present” – the two points emphasised by TASC.

International tax avoidance - an update

In advance of the G8, it might be useful to update what’s happening with the main international movers on the question of international tax avoidance. For a primer in this, see this earlier post.

The OECD at the end of last month formally reaffirmed their commitment to address tax base erosion and profit shifting (BEPS - of which more here). Again, their motivation is mainly economic, arising from the damage done to tax revenue and the integrity of the system by tax avoidance, and the impact this might have on growth and employment. This time they specifically mention the damage done to emerging and developing economies also, which marks a move by the OECD to be more inclusive on this process. The next BEPS report is now due in July, and this will set out a timeline for the full project. At this stage, it’s anticipated that concrete changes will be coming in perhaps two and a half years.  In the meantime, there is a commitment on the part of OECD ministers, including our own, to collaborate more; to work on transfer pricing rules with a specific focus on intangibles; to consider revising treaties to take account of digital goods and services and to address arbitrage. The idea of a multi-lateral tax treaty to replace the many bilateral treaties is still on the table. 

The OECD is not, of course, as inclusive a body as the UN, and in fact the UN has observer status at OECD meetings on tax. The UN itself is starting work on the taxation of mining, oil and gas companies, with a particular focus on how this impacts development in the global south. They have also officially launched their Practical Manual on Transfer Pricing for Developing Countries, and continue to work on capacity-building for taxing authorities in less-developed economies. They do serious work, and are also seriously under-funded.

The EU continue to work on their action plan published last December, the main recommendations of which include blacklisting non-compliant jurisdictions, and including a clause on double non-taxation in new treaties. They also work with the UN on supporting capacity-building for the Global South. The EU specifically note that aggressive tax avoidance contravenes the principles of corporate social responsibility, which is interesting in the context of recent comments by, for example, Apple’s Steve Wozniak on the ethics of tax avoidance. 

Meanwhile, David Cameron has summoned the leaders of Britain’s overseas territories, asking them to sign up to information-sharing. This is an effort to address so-called “secrecy havens” such as Jersey and the British Virgin Islands, which not only form a key part of the global tax avoidance chain, but are also potentially used in money-laundering more broadly. None of this addresses domestic UK tax rules. Cameron has said he aims to make tax transparency a key theme of the G8 summit. 

These are interesting times. Some very senior tax planners of global 

multinationals spoke to me last week of their reaction to the outrage about Apple’s tax affairs. They could see that very aggressive tax planning was becoming unacceptable, but having built successful careers in the practice, were mostly taken unawares at the force of change. As one put it: “Suddenly all this is supposed to be wrong?” The wind of regulation is shifting. Both multinational companies and countries which seek their international investment need to work hard to keep up. 

Sheila Killian

@islandtotheleft

Taking stock

Michael O'Sullivan: We are likely not yet even halfway through the euro-zone crisis. The latest episode in this soap opera brought a reasonably happy outcome for Ireland but there will be some many more drama’s and tragedies ahead. In this respect any resetting of our bank related national debt is going to be small beer compared to the greater costs that the crisis will inflict on our economy and society. In this respect we have to diligently and very single mindedly for more dramatic options. A comparison of the Iran hostage crisis with ‘Neptune Spear’ is a good way of illustrating the benefits to very careful planning. With Europe in mind, our end goal should be a sustainable debt balance, and sustainable growth after that. Below is the text of an opinion piece I wrote for the Sunday Business Post on this issue.

During Operation Neptune Spear - the US mission to kill Osama bin Laden - its mission leader, vice-admiral Bill McRaven, compiled a thick dossier of the attack options, and nearly all possible responses to scenarios where "something goes wrong".

In the eurozone, something has been going very wrong which is unlikely to be put right by the recent EU summit and the series of meetings that will follow it.

On the plus side, the summit showed that the fallout from the first attempt to fund Spain's banks has been digested, and that the urgency of the situation in the eurozone is forcing the likes of Mario Monti to the fore. However, many pitfalls lie ahead.

The summit has crystallised a north-south political divide. The ESM, the proposed new rescue fund, is simply not big enough to do all of the things that the periphery countries now expect of it. In addition, the creeping mutualisation of periphery debt will soon run into political (German) opposition, and brings few of the benefits - such as market confidence - that formal mutualisation (ie, euro bills) might bring.

The ongoing risk is that, having muddled themselves into a quicksand of unambitiously low growth and near-permanent financial market stress, Europe's politicians may not find an escape from the crisis.

Many economic indicators demonstrate how Europe is being surpassed by Asia, and how, within the eurozone, the core has split from the periphery.

More importantly, global growth is slowing to such an extent that it recently forced unexpected interest rate cuts from central banks in countries as diverse as South Korea, Denmark, Brazil and China.

The realities of low growth and financial market stress continue to lie in the way of Ireland's path to economic recovery and solvency. In effect, we are locked in the eurozone, conscious of the damage its constraints inflict our economy and society but unable to manoeuvre out of it.

The necessary response to the deepening of the eurozone crisis is to adopt a more strategic, independent approach, and one that mirrors McRaven's level of preparedness. This kind of preparedness served Ireland well during the EU summit. However, it must be taken to a radically different level, and be broadened to a range of scenarios.

We must now think through the consequences and limits of a potential review of Ireland's bailout. In the past, there has been a blind willingness to accept the gifts of outsiders as a means of supporting our economy, with little thought of the consequences, Accepting the wisdom and apparent benevolence of others may help us in the short term, but it limits our independence.

The latest promise to 'look again' at Ireland is not the end of our problems, but a narrow opening to a long march back to recovery.

Even if we get a deal on our banking debt, disentangling the financial elements of our sovereign bailout will be extremely difficult. What we now know about the proposed Spanish bailout - and the outline of a possible Irish deal - carries serious timing and implementation risks.

For Ireland, the danger is that the debt write-down associated with a 'look again' option would be too small, and all that the core countries would be prepared to grant us. If we are very lucky, we may be able to reduce our debt burden by 15-20 per cent of GDP.

If so, then a resulting reworking of the bailout may still leave Ireland perilously close to insolvency territory, especially in the face of private sector deleveraging.

A number of policy-makers and commentators have expressed the view that a debt-to-GDP level of close to 90-100 per cent is workable for Ireland. But this will not happen.

For a small, weak, constrained economy in a low-growth, indebted world, a sustainable debt to GDP level would likely be closer to 70 per cent or even less. That is why we need to prepare for scenarios beyond the 'look again' option offered by the EU.

Our policy-makers should analyse and prepare for a range of events that many consider 'unthinkable'. Chief among these is the need to assess the ways in which a restructuring of our sovereign debt could be undertaken. This is a task of multi-layered complexity.

For example, could a restructuring be unilateral or multilateral? What are the consequences for our banking system of these approaches? How would a restructuring affect our relationship with the ECB? What knock-on effects could there be for Italy? Confronting and assessing these issues will bring home the truth of our situation to policy-makers, and will prepare the state for a deepening of the eurozone crisis.

The ensnaring of Spain into a full sovereign bailout, a deeper breakdown in trust between European governments and a very likely Greek exit are other scenarios that require careful consideration by the likes of Portugal and Ireland.

We must also develop our own view of the future of Europe, if only to use it as a roadmap of where not to tread. Eurostat surveys regularly highlight the Irish as being the continent's most pro-European citizens, though there is a temptation to read a certain blindness into this optimism.

Europe, as we consider it, will change dramatically in the next five years. Ultimately, the most positive and necessary outcome of the crisis is a full acceleration towards fiscal, financial and political union. But, under this scenario, the components of our world view of Brussels would be torn apart.

For example, the role of 'our' EU Commissioner would have to change significantly. More invasive fiscal surveillance, a European Parliament with legislative initiative and more concerted moves toward a better coordinated and more active common defence policy are just some other components of our 'world view' that may change.

Viewed in this respect, the result of the last summit is not only a chance for the eurogroup to re-examine Ireland, but for Ireland to re-examine every aspect of its relationship with the eurozone.
Michael O'Sullivan is author of Ireland and the Global Question (Cork University Press)

Europe's crisis: market competition instead of social bonds

TASC today issued a new discussion paper by James Wickham in which he argues that the elites dominating Europe have abandoned any commitment to 'Social Europe' and have instead turned European institutions in what he terms 'market-making' mechanisms. A PDF of Europe's Crisis: Market Competition instead of Social Bonds is available for download here, and a digital version is available here.

Changing the way companies are taxed

Sheila Killian: As reported by the Irish Times, yesterday, the European Parliament approved a resolution proposing amendments to the CCCTB (the common consolidated corporate tax base). So what is this all about? Well, the CCCTB aims to streamline the basis on which companies pay tax in the different countries in the EU, and to allow companies established in any EU country to make a single tax return covering all EU states. The tax base would then be allocated among the countries on the basis where the assets are located, where the payroll bill is, or where the sales are made. So if a company made most of its sales in France, for example, and had all its assets and payroll in Ireland, then France would be entitled to tax some of the company’s tax base at French rates, while Ireland would tax the remainder at Irish rates.

This is a fundamental change from our current residence rules, which allow a company resident and operating here in Ireland, but making sales all over the EU to pay all of their tax in Ireland. The idea behind it is to streamline administration for companies operating in the EU, eliminate double taxation and double non-taxation more efficiently than bilateral treaties would, and essentially make irrelevant intra-group transfer pricing arrangements within the EU.

Not surprisingly, the CCCTB is seen in Ireland as a threat to our ability to raise taxes from companies operating here. More significantly it’s seen as damaging to our policy of seeking foreign direct investment on the basis that our 12.5% rate will apply to all their profits.

Up until now CCCTB has been proposed by the European Commission as a voluntary system: companies could opt-in to the system at their discretion. Furthermore there was a sense that the relatively slow process of decision-making at EU level would mean a long lead-in to the operation of the CCCTB. Yesterday, however, the European Parliament passed a vote to make the CCCTB mandatory for all but the smallest companies within the next five years.

The resolution passed by the Parliament also had three other interesting aspects, which were less widely reported. Most importantly, they recommended a change to the weighting between the three factors – assets, payroll and sales. The European Commission's original idea was that these three would be equally weighted. The Parliament proposes putting a 45^ weight on each of assets and employees, and only 10% on sales. This amendment would be good for Ireland, and seems fair in the sense that most profit is generated through the workforce and assets. http://www.blogger.com/img/blank.gif

Parliament also proposed that if some countries were not ready to embrace CCCTB, then others could move ahead without them. This is an idea that would have seemed far more radical a few years ago, before the Fiscal Compact. Finally, the parliament’s amendment specifically includes a review of the usefulness of corporate tax harmonisation when the CCCTB comes up for review after five years.

The vote means that the interesting times promised by the CCCTB are more immediate than before. A focus on the relative weightings of the three criteria for apportioning the tax base – assets, workforce and sales – is now of critical importance. There may be scope for making the CCCTB both more politically palatable and more fair with an increase in the weightings of assets and workforce.

Germany in and with and for Europe

Nat O'Connor: As noted in an earlier post, it is useful to see that there is lively debate going on in Germany about Europe and alternatives to austerity. This is an important counterbalance to the 'Austerity Germany' we see presented in much of the media, which creates the illusion that the German people are united in a desire to punish Ireland and other peripheral EU states for our economic and fiscal woes. On the contrary, Helmut Schmidt makes a major contribution to the debate by pointing out Germany's benefit from ensuring solidarity between the centre and periphery of the EU.

Helmut Schmidt was the Social Democratic Chancellor of West Germany from 1974 to 1982. In a key speech to the German Social Democrat party conference in 2011, he outlines the importance of Germany's integration with the other countries of Europe and proposes "radical regulations" for the EU's financial markets as well as the "financing of growth-enhancing projects" to help EU member-states achieve balanced budgets.

The Foundation for European Progressive Studies (FEPS) has recently republished this speech in 15 other European languages in order for Schmidt's message to be widely heard across Europe. An online, English version of the speech is here.

Born in 1918, Schmit takes a long view of the challenges of the 21st Century, as well as the failures of the 20th. He notes that there has been conflict between the centre and periphery of Europe since the Middle Ages - and it most often ended in war. The founders of the European Coal and Steel Community were explicitly motivated to bind Germany into an integrated Europe and to avoid further conflict.

At the same time, Schmidt argues that German strategic interests are also better served by integration into Europe. By 2050, European nations will each constitute "just a fraction of one per cent of the world's population." ... "That is why the European nation states have a long-term strategic interest in their mutual integration."

Schmidt points to recent German budget surpluses as a "very undesirable development". ... "as in reality all our surpluses are the deficits of other countries." (There is a lesson there for those who claim that Ireland can restore its economy on the back of exports alone).

Schmidt supports some sort of fiscal transfer at EU level. In terms of contributions to the EU's budget, he notes: "It is a fact that, for decades now, Germany has been a net contributor. ... And of course Greece, Portugal and Ireland have always been net recipients."

Schmidt identifies the weakness of the EU's institutions in addressing the financial crisis. "Umpteen thousands of financial traders in the USA and Europe, plus a number of ratings agencies, have succeeded in turning the politically responsible governments in Europe into hostages." ... "In 2008/2009, governments the world over managed to rescue the banks with the help of guarantees and the taxpayers' money. Since 2010, however, this herd of highly intelligent, psychosis-prone financial managers has gone back to its old game of profits and bonuses."

He argues that the EU or Eurozone could and should "introduce radical regulations for the common financial market in the euro currency area. These regulations should cover the separation of normal commercial banks from investment and shadow banks; a ban on the short selling of securities at a future date; a ban on trading in derivatives, unless they have been approved by the official stock exchange supervisory body; and the effective limitation of transactions affecting the euro area carried out by the currently unsupervised rating agencies."

Various other policies are also required, including "monitoring mechanisms, a common economic and fiscal policy as well as a series of tax, spending, social and labour market reforms in the different countries." However, despite the need for closer coordination in a range of area, Schmidt argues that the EU will not become a federation any time soon.

"A common debt will be inevitable too. We Germans should not refuse to accept this..."

"We should also avoid advocating an extreme deflationary policy for the whole of Europe. On the contrary, Jacques Delors is quite right to insist that a balancing of the budgets should be accompanied by the introduction and financing of growth-enhancing projects. No country can consolidate its budget without growth and without new jobs. Those who believe that Europe can recover solely by making budgetary savings should take a close look at the fateful effects of Heinrich Brüening's deflationary policy in 1930/32. It triggered depression and intolerable levels of unemployment, thus paving the way for the demise of the first German democracy."

In short, Helmut Schmidt's speech is a reminder that, taking the long view, not only are there alternatives to austerity - but austerity on its own is not a solution at all. Solidarity and leadership are needed to bring about recovery, led by an integrated EU, with centre and periphery working together for their mutual benefit.

The data being sent to IMF and EU bodies should be public

Nat O'Connor: The latest IMF report on Ireland has an important annex: Annex 1. Provision of data (pages 81-82), which gives a list of "indicators and reports" that "shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis." A unit within the Department of Finance will "coordinate and collect" the relevant "data and information". (It is an update on a list that formed part of the original agreement with the IMF and EU bodies; pages 33-34 here).

A lot of this data is very valuable for understanding and analysing the Irish economy and the effects of Irish Government policy. It is reasonable for the IMF, EC and ECB to seek this data to monitor Ireland's ability to repay the money we borrowed from them. Indeed, it is valuable to have their expertise on what data is required to monitor our economy and national debt. However, now that this data is being collected, it should as a matter of course be made publicly available within Ireland as well.

For clarity, the entire Annex is repeated at the end of this post. There are 22 sets of data referred to: F1 to F11 are from the Departments of Finance and PER; N1 to N5 are from the NTMA; and C1 to C6 are from the Central Bank.

First of all, it should be noted that some of this data is already available, but the majority of it is not. Secondly, it is not clear that all of the required information will exist at the time when it is supposed to be submitted. Thirdly, it should be acknowledged that there may, in a limited number of cases, be legitimate reasons for not publicly releasing some of these datasets. For general principles on what might be legitimate reasons for not releasing data, I would refer to the guidelines given in the Freedom of Information Act 1997. However, just because the release of some information can be blocked, does not mean that it should be. Certainly, any refusal to publish a dataset should be explained by the relevant Minister to the Oireachtas.

Conversly, as part of the Government's announced reform of the national Budget process, it may well be their intention to publish this sort of data. Its release would certainly help the Oireachtas to hold the Government to account. Access to this data would also probably be necessary for the new Fiscal Advisory Council to be effective.

F6 is an example of good practice in relation to the budget. It requires the publication of revenue and expenditure plans for the next four years. This original requirement helped open up the Budget process and multi-annual budget planning will hopefully become standard practice even once the agreement with the IMF and EU concludes.

Much of the data being required refers to the national debt. The sustainability of Ireland's debt is crucial to whether or not the economy can recover, or whether a prolonged period of stagnation - or indeed some form of default - is inevitable. There are periods in the history of most states when political discourse is dominated by the debt and the deficit. This is certainly the case in Ireland today. There is a pressing need to ensure that this discussion is grounded in accurate facts and figures, and does not lead to wrong information being spread in public.

The implication of F10 is worrying. The data required here is "Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes." One one level that is useful data. However, it is not balanced by other data in the list, and may give a distorted picture of the Irish economy. Labour activation is to be welcomed, but priority should be given to ensuring that jobs exist in the first place, before putting pressure on people who are unemployed.

The Government has signalled that we will make use of our crisis by improving our systems of oversight and scrutiny, to make sure that a similar crisis does not happen again. An important step in that direction would be the regular release of these datasets, on a single website, in machine readable format, at the same time (if not before) they are sent to the IMF and EU bodies. For example, the website of the Fiscal Advisory Council could be used for this purpose.

The extent of the national crisis requires the Government to repeatedly ask the public's patience and understanding for the difficult decisions it has to make. But confidence in those decisions is eroded when access to the relevant data on the economy and national debt is denied. Genuine reform of economic and budgetary policy should begin with a new openness in relation to data, including the full set of data currently being sent to the IMF and EU bodies.

...

Annex 1. Provision of data
During the programme, the following indicators and reports shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis. The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to all external programme partners.

Ref.
Report
Frequency

To be provided by the Department of Finance in consultation with the Department of Public Expenditure and Reform as appropriate

F.1
Monthly data on adherence to budget targets (Exchequer statement, details on Exchequer revenues and expenditure with information on Social Insurance Fund to follow as soon as practicable).
Monthly, 10 days after the end of each month

F.2
Updated monthly report on the Exchequer Balance and General Government Balance outlook for the remainder of the year which shows transition from the Exchequer Balance to the General Government Balance (using presentation in Table 1 and Table 2A of the EDP notification).
Monthly, 20 days after the end of each month

F.3
Quarterly data on main revenue and expenditure items of local Government.
Quarterly, 90 days after the end of each quarter

F.4
Quarterly data on the public service wage bill, number of employees and average wage (using the presentation of the Pay and Pension Bill with further details on pay and pension costs of local authorities).
Quarterly, 30 days after the end of each quarter

F.5
Quarterly data on general Government accounts, and general Government debt as per the relevant EU regulations on statistics.
Quarterly accrual data, 90 days after the end of each quarter

F.6
Updated annual plans of the general Government balance and its breakdown into revenue and expenditure components for the current year and the following four years, using presentation in the stability programme's standard table on general Government budgetary prospects.
30 days after EDP Notifications

F.7
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for Non-Commercial State Agencies
Quarterly , 30 working days after the end of each quarter

F.8
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for local authorities
Quarterly, 30 working days after the end of each quarter

F.9
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months for State- owned commercial enterprises (interest and amortisation)
Quarterly, 30 working days after the end of each quarter

F.10
Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes.
Quarterly, 30 working days after the end of each quarter.

F.11
Report on progress achieved towards interim PLAR targets and actual and planned asset disposals.
Quarterly, 10 working days after the end of each quarter.

To be provided by the NTMA

N.1
Monthly information on the Government's cash position with indication of sources as well of number of days covered
Monthly, three working days after the end of each Month

N.2
Data on below-the-line financing for central Government.
Monthly, no later than 15 days after the end of each month

N.3
Data on public debt and new guarantees issued by central Government to public enterprises and the private sector.
Monthly, 30 working days after the end of each month

N.4
Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for central Government.
Monthly , 30 working days after the end of each month

N.5
Updated estimates of financial sources (bonds issuance, other financing sources) for the banking and Government sectors in the next 12 months
Monthly, 30 working days after the end of each month

To be provided by the Central Bank of Ireland

C.1
The Central Bank of Ireland’s balance sheet.
Weekly, next working day

C.2
Individual maturity profiles (amortisation only) for each of the domestic banks will be provided as of the last Friday of each month.
Monthly, 30 working days after each month end.

C.3
Detailed financial and regulatory information (consolidated data) on domestic individual Irish banks and the banking sector in total especially regarding profitability (P&L), balance sheet, asset quality, regulatory capital; PLAR funding plan forecasts
Quarterly, 35 working days after the end of each quarter

C.4
Detailed information on deposits for the last Friday of each month.
Monthly, 30 working days after each month end.

C.5
Data on liabilities covered under the ELG Scheme for each of the Covered Institutions.
Monthly, 30 working days after each month end.

C.6
Deleveraging committee minutes and deleveraging sales progress sheets, detailing pricing, quantum, and other relevant result metrics.
Monthly, reflecting committee meetings held each month

The Future of Europe?

Nat O'Connor: What do the following people have in common? Tony Blair, Marek Belka, Jacques Delors, Felipe González, Jakob Kellenberger, Mario Monti, Gerhard Schröder, Matti Vanhanen, Guy Verhofstadt, Nicolas Berggruen, Juan Luis Cebrián, Mohamed El Erian, Niall Ferguson, Anthony Giddens, Alain Minc, Robert Mundell, Nouriel Roubini, Michael Spence and Joseph Stiglitz.

They are all members of the Council for the Future of Europe and they have signed up to a four-page statement titled: Europe is the Solution, Not the Problem.

They argue for:
1. A expanded European stabilisation fund to be established by 2012;
2. Appropriate bank recapitalisation;
3. Fiscal union in Europe - including eurobonds;
4. Orderly debt resolution - for private and public debt;
5. Macro-economic policy to avoid undermining short-term recovery while pursuing long-term reforms;
6. A growth strategy using EU funds to stimulate growth and job creation;
7. Preparation of social security systems to accommodate an aging population;
8. A vision for a Federal Europe with a mandate across common security, energy, climate, immigration and foreign policy;
9. Broad and deep engagement of the public in the process of further integration.

Despite the high profile of the group's membership, I can only find two references in Irish online media (at the bottom of this RTÉ business news article, and on the online Hibernia Times).

Apart from at least one Guardian article, there seems to be a lack of UK media coverage either.

Greek economist, Yanis Varoufakis, offers a critical review of the nine proposals on his blog.

Meanwhile, the BBC reports another possible breakthrough in the EU crisis involving something similar to three of the proposals made above: "quadrupling...Europe's main bailout fund, the European Financial Stability Facility (EFSF)", "strengthening of big eurozone banks" and debt write-down of 50 per cent for Greece.

The BBC's Paul Mason reported a couple of weeks previously on the 'war games' conducted by another think tank, Brueghel, which involved 100+ policy experts in running simulations of different possible solutions for the eurozone crisis. This was apparently influential in Washington DC (where the IMF is based).

What all these proposals for solving the eurozone crisis illustrate is the need for more public discussion and engagement with the question of Europe's future. There is little doubt that some major changes are coming at EU level, whatever the exact nature of the economic arrangements that are made to address the eurozone crisis. It seems highly likely that any such arrangements could quickly result in new political institutions that have not gained public trust, much less a democratic mandate. This suggests that any solution will have to be both political and economic in combination; including credible ways of strengthening democratic control of decision-making at the heart of Europe.

Q&A at the doorsteps

Slí Eile: There is a distinct possibility that you will be getting more callers to the front door in the next few weeks. Be conscious that there may be a link between recent and prospective events, on the one hand, and on the other the 'Presentation of the National Recover Plan' update on the Department of Finance website here. Nothing obviously new there. It just says: 'This document relates to the National Recovery Plan 2011-2014 published on 24 November 2010.
However, the information within takes into account later data in 2010 as well as measures taken in Budget 2011.' Perhaps it a reminder to the Markets, IMF, EU, Political Parties - and voters - that the national authorities mean business. Take page 38 - composition of expenditure savings. Now you may wish to ask those friendly canvassers some questions including:
Will your party go with the broad parameters of the IMF-EU deal and the National Recovery Plan which envisages a cumulative four year 2.8billion cut in social welfare on top of the 0.9bn this year (2011)?
If not, will your party cut something else instead (public sector pay by an additional 2.8bn on top of savings already envisaged?)
If not cut other areas will your party seek negotiate the entire Plan and deal?
If the Markets, the IMF and the EU say no what is your party's 'Plan B'?
Please straight answers to straight questions. Time is of the essence.

EU 2020 Strategy

Paul Sweeney: The European Commission’s Europe 2020 Strategy is an important long term plan. It replaces the Lisbon Agenda, another long term plan. The latter had the ambition of making Europe the most competitive economy in the world. While there was much success, most commentators agree that the Lisbon Agenda did not meet its targets and that new priorities kept being added, deflecting from the achievement.

It is good that the 2020 Strategy is long term: we need to revert to planning to help sweep up the debris of short-termism.

The 2020 Strategy recognises:

- the depth of crisis
- the importance of the state in the economy – if only to bail out the banks
- the Social Market economy
- the need for reduction in unemployment
- environmental issues
- importance of education & technology
- the Green economy
- the need for a Common Vision & agreed priorities in Europe.

It is worth reminding ourselves that this deep crisis throughout the West was caused by economic fundamentalism. This was only challenged by a few, and even Social Democratic Parties fell under the spell of the market fundamentalists, under which many of these parties still find themselves. It was de-regulation, privatisation, and in Ireland’s case, pro-cyclical tax-cutting, tax-shifting and tax-subsidies to wealthy property investors which caused our deep recession.

Ireland had one of the largest falls in GNP in the world. It will fall by a staggering one-fifth or 19.9% this year, on 2007. This is a €32bn cut in national income in just 3 years.

The successful “exit strategy” can only be achieved by a stimulus.
Not by deflationary regressive policies like this Irish government pursuing, i.e.:

- wage cutting,
- welfare cutting,
- public services slashing,
- pouring cash into Zombie banks - which could be used as a stimulus

The speech to the Institute of Taxation by Mr Lenihan on Friday 26th February, in which he claimed that European stimulus packages were failing, was chilling. It was chilling in that he was declaring that he is a true believer in deflationary policies. Below the front page report of his speech in the Irish Times was a report on retail job losses and firm wipe-outs – partly the result of this government’s policies to date.

The proposal in the Strategy to “empower people in inclusive societies” is welcome but flexicurity should mean that workers’ rights must be strengthened, not reduced, especially with regard to precarious work. A Fair Labour Market must mean good wages, stable contracts and good benefits for those unemployed. The reference to Atypical jobs should spell out that they are to be the exception, not the rule, in the EU. Investment in skills and the elimination of poverty and exclusion should be key.

The plan recognises the need to create “a competitive, connected and greener economy, with greater productivity.” However, as most economists on this blog have pointed out, “competitiveness” is not just about short term movements in wages. This is in contrast to the restricted view of the subject of too many influential Irish economists.

Per the 2020 Strategy:

1. Creating value by basing growth on knowledge

- well-resourced European Research Area
- digital economy.
- innovation and creativity

2. Empowering people in inclusive societies

- Flexicurity – but as stated above, workers rights must be strengthened especially around precarious work
- A Fair Labour Market – must mean good wages stable contracts and good benefits for the many out of work.
- Atypical jobs should be the exception not rule in EU
- Skills
- Deals with poverty and exclusion. In my view, there should be a major 'make poverty history' drive by 2020. Why not?

3. Creating a competitive, connected and greener economy

- Productivity
- Competitiveness - not just short term movement in wages
- Broadband: the ideologically driven privatisation of Eircom has been a disaster
- Invest in Public transport
- Energy
- Industrial policy – indigenous industry

4. Fully exploiting the single market

- Does this mean that there will be tax coordination? What are the implications for Ireland’s myopic obsession with its maximum 12.5% CT rate?

Reading the Europe 2020 Strategy plan, I wondered - does it have a major flaw? When it said it was “supporting growth through full use of the Stability and Growth Pact”, I thought - what??

Has not a coach and four been driven through the Stability and Growth Pact by many states, including this one? Will Ireland still meet its 3% target by 2014? Especially with deflationary policies? Have the EU Commission and institutions like the ECB not recognised that, in a deep recession like this, the pact is, in practice, suspended.

Without some form of fiscal union, such as an EU tax body, is monetary union – the euro and ECB - not akin to one hand clapping? The major fiscal crises in the Eurozone, especially the Greek crisis, have exposed this flaw.

Can Monetary Union work if we do not have greater political union? Surely we must now raise much more taxes centrally (to bail out the banks after the next crash, to bail out the odd country and to meet other crises, e.g. climate disasters)? Thus we must go further than mere EU tax coordination. And even that idea causes palpitations in Merrion Street and in Irish corporate boardrooms. Low company taxes represent virtually the only industrial strategy in the cupboard of many Irish conservative policymakers.

We don’t even have a European Bank Regulator. We don’t have “a mechanism to safeguard the financial stability of the Euro area as a whole” as was stated by Ecofin recently. What about a Eurobond for Euro countries?

A major issue in the next decade, the period of the plan, should be radical reform of Corporate Governance. This means a shift from shareholder value to stakeholder interests, in company law, in EU law and in corporate morality - if that is not an oxymoron. This must be sooner rather than later, and must and be in both the private sector (especially), but also in the public sector. Subsidiarity must be the priority in public sector governance, combined with modern management information and people managment systems.

On the issue of governance, there are some hopeful signs. An international agreement on the Transaction Tax is likely at the G20 in June. Further international rule-making and cooperation on finance and banking is on the cards. It is imperative that it is not “back to business as usual” in firms and in Governments, otherwise, we will soon be back to recession.

It seems to me that we need more effective EU institutions. We also need EU leadership which is more responsible to its people. Neither are in this plan. But the European people gave the conservatives the majority – even after the collapse of a virulent form of liberalism espoused by those conservatives.

President Barroso said that “we need a new much stronger focus on the social dimensions in Europe at all levels of government.” This is not, regrettably, reflected in this 2020 vision.

Spring Alliance ...

Paul Sweeney: In 2009, the Spring Alliance was established with the four key civil society groups within the European Union: the European Environmental Bureau, the European Trade Union Confederation, the Social Platform and CONCORD, the body representing NGOs in Europe.

Spring Alliance has set out an agenda for the next decade, laid down in their Spring Alliance Manifesto. It has already had two debates with President Barroso on the results, and this manifesto formed the background for many contributions to the consultation on the EU-2020 Strategy being debated by the Commission.

The see five major challenges facing Europe:

The first challenge: climate change and loss of biodiversity and natural resources.

The second challenge: global inequalities between North and South are growing, and fundamental rights violations remain widespread.

The third challenge: the EU’s focus on competitiveness and deregulation has failed to serve the public good.

They argue that, since 2005, the EU has made a push to increase the deregulation of its markets, including its labour market, in accordance with its “Lisbon” growth and jobs strategy. This has had a detrimental effect on European society, causing a rise in low-quality work and failing to reduce poverty. The Lisbon strategy, with its strong emphasis on competitiveness, also had an adverse effect in the environmental domain, by halting or slowing down the adoption of legislation, including in the area of climate change.

In addition to these trends, today we’re facing a global economic crisis that has been triggered by the same philosophy of deregulation, which gave rise to irresponsible lending and negligence on the part of weak regulatory bodies. As a consequence, unemployment is now rising, and public debt is increasing.

The fourth challenge: inequalities in wealth distribution are increasing, putting the cohesion of our societies at risk.

The Spring Alliance notes that “79 million people in the EU are living in poverty, affecting one child out of five. Although many of these people have full-time jobs or receive pensions or benefits, their income is still too low to stop them from falling into poverty.”

Finally: the gap is widening between the EU and its citizens

It is stated by Spring Alliance that “The majority of the EU population feels disconnected from EU decision-making processes. National politicians often consider “Brussels” as an external power, and sometimes use it as scapegoat for unpopular decisions. This further undermines the EU’s credibility and its capacity to lead its citizens through difficult times.”

The Spring Alliance suggests ways in which these challenges can be addressed with the EU taking a lead. Further information is available on their website.

Mythbusters 201: Are Social Welfare Rates in Ireland high compared to elsewhere?

Slí Eile: A popular view that finds its way into pub conversations, page 4 of the ‘tabloids’, agonising phone-in shows, Dáil debates and elsewhere is that Irish social welfare rates are very high and cannot be ‘afforded’ (OK the claim that they were ‘the highest in Europe’ has been killed even if some people still pursue that untruth). Never let the data get in the way of a good story line. So apologies to anyone concerned if I am going to deflate the argument somewhat.

The sources are chiefly published OECD and EU Commission/Eurostat data on the web. There are a number of ways of approaching this question. The simplest is to examine typical welfare benefits using OECD tax-benefit models to compare net incomes of different family types. This can be further refined to contrast the results within each country with some cut-off levels used to measure income poverty (e.g. 40, 50 and 60% of median household income).

Benefits average to below average in Ireland

Taking unemployment benefits, first, and focussing on single persons Michael Taft has shown that out of EU15 (15 member states of the EU prior to the accession of 10 and 2 additional states in 2004 and later), unemployment benefit (excluding housing benefits) for a single person was €8,622 in 2006. This was ahead of the UK (€4,437) and Greece (€3,951). However, the average for the 14 States other than Ireland was €12,053. It could be argued that it makes sense to compare Ireland to the EU15 rather than EU27, since levels of income and publicly taxable production are higher in the former.

Looking at pensions (OECD Pensions at a Glance) and ranking on the value of ‘Net replacement rates by individual earnings level, mandatory pension programmes’ for men, we can see that Ireland comes in the bottom 4 OECD countries for which data are available. This measure shows individual pension entitlement ‘net of taxes and contributions as a percentage of individual pre-retirement earnings net of taxes and contributions’. In regard to individuals with half of average earnings, the Net Replacement Rate is close to 66% for Ireland compared to 133% in Denmark and 50% in Mexico. Furthermore, as Michael Taft has pointed out, ‘In Ireland, an average income earner can expect 38 percent of their pre-retirement income as a pension; the OECD average is 70%’

Relative poverty of social welfare recipients

The latest OECD data show ‘Net incomes of social assistance recipients in percent equivalent of median household income’ up to the year 2005. For a couple with two children and without housing benefit, the data show a welfare income of nearly 45% of ‘Median Household Income’ in 2005 – compared to 33% across 26 OECD countries for which comparisons were made. This placed Ireland in fifth place on this measure. With housing benefits the proportion rises to 58% compared to an OECD-26 average of 40%. On this measure as well as others, there has been a marked improvement in the relative position of various family types (single, lone parent, couple with children/without) – relative that is to the OECD average as well as median household income. This is a good outcome.

Relative poverty of those on minimum wage

Another way of looking at relative income poverty, here, is to compare on ‘Net incomes at statutory minimum wages, in percent equivalent of median household income’. Comparing on 18 countries for 2005, couples with 2 children and with housing benefit in Ireland are at 60% of the statutory minimum wage compared to 50% on average across OECD-18. Again a positive outcome.

Net Replacement Rates

Another way of comparing welfare across countries is to contrast the ‘Net Replacement Rate’ for various families (reference year is 2007). There is much debate about the supposed disincentive effects of welfare benefits and the claimed need to lower benefits according to wages (note that moral hazard concerns apply here, unlike in banking). The Net Replacement Rate is the ratio of income while at work to income while out of work. Income is calculated as a % of Average Worker (AW) earnings (average wages of manual production workers in the case of Ireland).
For most family types and different benchmark points (67, 100 and 150% of AW) Irish net replacement rates are below the average for 21 OECD countries for which data are shown. For example, for a couple both earning, with two children and on the average wage, the Net Replacement Rate is 66% of earnings compared to a 21-country OECD average of 73% for this family type. That places Ireland in 16th place out of 21 countries reported. (The corresponding figures for 2001 given by OECD are similar: 66% in Ireland compared to 76% for an OECD 28-country average). This is not a good outcome.

Turning to a family with two earners and two children on 67% AW, the net replacement rate for Ireland is 78% compared to an OECD 21-country average of 82% (Ireland is in 17th position).
(The United Kingdom is at the bottom for comparisons on most family types.). The only exceptions for Ireland are: single earning couples or single earning persons on 67% of AW where the NRP is a bit higher than the OECD 21-country average.

If you are still reading this it's gets too boring – the story goes on and on. To round things off have a look at Population and Social Conditions published recently by Eurostat

It shows that expenditure on social protection is 18.2% of GDP in Ireland and 27.5% for EU15 and 26.9% for EU27. Interestingly, expenditure on social protection per capita at constant prices showed an annual growth of 8.7% over 2000-2006 compared to 1.5% for EU15. In other words, we had begun to start catching up with the rest of Europe – when times were good and social partnership had something good for everyone in the audience. When comparing on the % breakdown across all social benefits by function type (Table 3) Ireland’s ‘old-age and survivors’ category loses out both as % of total social benefits (reflecting in part age-structure) and as % of GDP.

How much can Ireland inc afford to pay those on welfare?

Slí Eile: Irish Times journalist, Sarah Carey, writing on 17 June ('State's own welfare must determine level of payments') has taken up the welfare issue - again. Climbing down from an earlier assertion, in March, that Irish welfare payments were the highest in Europe, she now offers an apology for misleading people. She seems to shift some of the blame on to the Department of Finance for feeding her incorrect information in a briefing. It would appear that the story - like what Churchill once said about a untruth - has gone half ways round the world with Ministerial pronouncements yet again recently on the matter in the Oireachtas - only in the last two weeks.

Michael Taft has dealt with the issue over on Irish Left Review.

However, the issue in the most recent column by Carey is not over the facts about Irish social welfare and how it compares with the rest of the EU (in fact typical payments to a single unemployed person are decidedly bottom of the table and payments to a family with children etc are average in a list of EU15 countries) but rather the amazing assertion that we simply cannot afford present levels of payments and should not seek to match other State welfare systems. Oh Dear. An Béal Bocht - the poor mouth. She writes:

"We should not yearn for another state’s social system – instead we must base payments on what Ireland can afford"

But, what we can afford is a function of what and who we chose to tax. With a below-average (yes, whether you measure it by GDP or GNP or GNI or an average of these ...) you get a lower-than-average take in taxes across EU countries (and that includes low-tax Latvia presently undergoing the economic horrors like its Western neo-liberal cousin). So we chose - implicitly - to spend less on social infrastructure and social protection even in good times. In hard times when we chose to bail out bankers and the banks (and goodness knows why in the case of Anglo-) we hear a chorus calling for welfare cuts. Expect a rising chorus up to the next Budget and beyond.

Sarah Carey rounds off the article as follows:

"Last year, we could afford the early childcare supplement – this year we can’t. Apparently, we can’t afford special needs assistants, but we can afford to recapitalise Anglo Irish. One person’s injustice is another’s pragmatism. The winner of the argument is quite simply the one who happens to be in power. Right now, that power lies in Merrion Street. As harsh as the current regime might seem, the imperative is to prevent that power shifting to Frankfurt or Washington DC. That has to be our focus now and yearning for some other country’s welfare system is a waste of time"

Rather - we should say that the winner of the argument is the side that seeks the common good within available resources with a preferential option for those most vulnerable. It is about morality not just power and stylised, selective facts. (At least Sarah Carey has retracted the earlier assertions.)

A Quantum of Solace

The European Trade Union Institute published a working paper yesterday – entitled ‘A Quantum of Solace’ - examining the effect of stimulus packages implemented throughout Europe.

While Ireland does not feature in this survey, it does include a few interesting conclusions of relevance here. Overall, the paper concludes that “The fiscal packages implemented or announced by European governments are not large enough”, and goes on to argue that “at the prevailing debt and deficit levels in Europe most countries should not be constrained in running counter-cyclical policies. And where they are, the solution should lie in providing European level fiscal support so as to remove those constraints”.

In a passage of direct relevance to Ireland, the authors note that:

“Country size should not, in economic terms, be a factor for the extent of fiscal stimulus. It is easy to understand from a political-economy perspective however: the incentive for smaller countries to free-ride on the stimulus of others is greater than for big countries. On the other hand, despite this clear political-economy incentive, the quantitative importance of the effect is certainly very limited; indeed it cannot be excluded that it is just a statistical artefact”.

In view of calls by IBEC, inter alia, to cut social welfare rates (a call apparently viewed with some sympathy in Government quarters, given Health Minister Mary Harney’s reiteration of the discredited assertion that Irish social welfare rates are among the EU's highest), it is also interesting to note this point made by the authors of ‘A Quantum of Solace’:

“Other things equal, low-income (in the jargon: credit-constrained) households will spend more of any government largesse that comes their way.”

One would, of course, have thought that this insight falls into the blindingly obvious category, but it is worth reiterating in view of the likely pressure to reduce social welfare rates.

Neo-liberalism and the EU: A German perspective

The ZAUBER group in the University of Goettingen in Germany has been examining the future of labour relations and employment in Europe. One of the papers presented at a recent ZAUBER conference, by Klaus Busch, Professor of European Studies at the University of Osnabrueck, offers an interesting perspective on how neo-liberalism came to dominate EU thinking. The paper can be downloaded here. Any comments?

Charting progressive routes to recovery

TASC hosted a seminar today at which Maria Rodrigues, special advisor to the Federation for European Progressive Studies (FEPS), made a presentation based on the discussion paper she drafted earlier this year for the PES, entitled A Matter of Urgency: A New Progressive Recovery Plan for the European Union. The paper can be downloaded here.

Growing up about taxes

James Wickham: Maybe it’s time to grow up about taxes.

One feature of the Celtic Tiger years was the way in which Ireland’s role as a low tax economy became part of the national identity. This led to the absurd situation in which the Labour Party could claim that it supported the ‘right’ of Ireland to have a lower corporation tax rate than other EU member states. In other words, the Irish Labour Party defined itself in Europe as the Social Dumping Party.

There are several important consequences of this low tax mantra.

Most obviously, it contributed to the situation in which the major inheritance of the boom will be just a pile of rusting SUVs – of private goods that will deteriorate, not of public goods that will last. Historically Ireland missed out of the post World War II boom years (the ‘trente glorieuses’). These were marked by substantial social investment and the creation of the physical infrastructure of the European welfare states. By contrast, our boom involved relatively little public investment. Let’s be honest. Compared to ostensibly poorer European countries, our public infrastructure is pathetic. This is most obvious in public transport, but the same is broadly true in health, education, etc.

Because we have accepted that taxation is inherently bad, we have allowed a continual denigration of the notion of public service. On the one hand, we have denied that many people work as nurses, as teachers, as civil servants etc. partly because they actually want to do something more useful than just earning more money for private consumption. On the other hand, we have accepted that the public sector is inherently inefficient. Consequently, despite all the rhetoric of partnership, the public sector unions have never become the champions of an effective public service. All too often, opposition to changes that would produce a better service has come from the unions themselves. Take the current conflict in Dublin Bus. Despite the efforts of some rank-and-file busworkers, the conflict over the cutbacks has been posed entirely as about employment. The unions have not taken any stance about the deterioration of this crucial public service that the cuts will involve.

The rhetoric of low taxation is linked ideologically to that curiously ambiguous person, ‘the taxpayer’. In a market society virtually everyone does, of course, pay tax. However, a discussion of public policy based on ‘the taxpayer’ is rather different to one based on ‘the citizen’. For example, whereas all citizens are equal, taxpayers differ in terms of how much tax they pay. So presumably those who contribute more should have more say in how ‘their’ money is spent. And the belief that taxpayers give ‘their’ money to the state ignores that ‘their’ money could only have been acquired thanks to the state and the wider society. Even the super-rich use public goods and depend on some residual social solidarity for their very existence.

Finally, the low taxation mantra was a crucial part of the PD project to move Ireland closer to Boston than Berlin. One subterranean theme in the Lisbon referendum was that ‘we’ didn’t need those snotty Europeans any more. Whereas, after 1973, membership of ‘Europe’ made Ireland less and less an island behind an island, the boom years then made Ireland more and more firmly part of the Anglo-Saxon world. Maybe it’s time to move again?

Professor James Wickham teaches in the Department of Sociology, TCD