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)
Showing posts with label eurozone. Show all posts
Showing posts with label eurozone. Show all posts
Thursday, 19 July 2012
Tuesday, 10 July 2012
Can the Eurozone be saved?
Tom McDonnell: Spanish 10-year bonds are now over 7.1%. It looks like there will be a Spanish National Asset Management Agency (SNAMA) set up as a bad bank to deal with the bank losses. Those who dont learn from history...
Meanwhile Henning Mayer has a sobering but well worth reading post on the future of the Eurozone here.
Meanwhile Henning Mayer has a sobering but well worth reading post on the future of the Eurozone here.
Tuesday, 12 June 2012
Paul de Grauwe on the need for action
Paul Sweeney: With all the events happening in Europe and the lack of leadership by the Prime Ministers, Finance Ministers, the economic Commissioner s of the Union itself and most of all from the unelected leaders (laggards?) of the ECB, it is refreshing to read a view that gives some ideas on leadership.
Paul De Grauwe, formerly of Leuven University and now of LSE, has been on top of comment and in my opinion, sound solutions for the past three or four years of the crisis.
This is a well-written, clear and concise viewpoint, well worth reading in full.
Paul De Grauwe, formerly of Leuven University and now of LSE, has been on top of comment and in my opinion, sound solutions for the past three or four years of the crisis.
This is a well-written, clear and concise viewpoint, well worth reading in full.
Wednesday, 16 May 2012
So what do the markets think?
The victory of Francois Hollande in the French Presidential contest provides a further insight into the operation of the bond markets. It is frequently argued that there can be no retreat from ‘austerity’, which in reality is simply the transfer of incomes from labour and the poor to capital and the rich, because the bond markets will recoil and long-term interest rates will soar. This is important as significantly higher long-term interest rates could, unchecked, choke off recovery.
As the new French President has made some gestures in the direction away from ‘austerity’, then it should be expected that at least French long-term interest rates would rise as a result. But French government bond yields have fallen since the Socialist victory, by 18bps (basis points, equivalent to one hundredth of a percentage point, or 0.18 per cent). Ten-year French government bond yields declined to 2.79 per cent1, lower than before the election.
Click here to read the rest of Michael Burke's post.
As the new French President has made some gestures in the direction away from ‘austerity’, then it should be expected that at least French long-term interest rates would rise as a result. But French government bond yields have fallen since the Socialist victory, by 18bps (basis points, equivalent to one hundredth of a percentage point, or 0.18 per cent). Ten-year French government bond yields declined to 2.79 per cent1, lower than before the election.
Click here to read the rest of Michael Burke's post.
Tuesday, 15 May 2012
Eurozone crisis: Updated version of Varoufakis' and Holland's 'Modest Proposal'
Yanis Varoufakis and Stuart Holland have reworked their 'Modest Proposal for Resolving the Eurozone Crisis'. Click here for Version 3.0.
Monday, 14 May 2012
European Monetary Union: Doomed to fail or just another stepping stone?
Tom McDonnell: With talk of a Greek exit from the Euro now being treated seriously it can be informative to consider past experiences with monetary union. The normal fate for currency unions has been eventual failure and dissolution, and the history books are full of examples of such failures. By and large having some pre-existing form of centralised political union in place appears to greatly improve the chances of a monetary union succeeding. Classic examples of resilient monetary unions include the USA, the UK and in some respects even the former USSR.
Nineteenth century Europe had the Latin Monetary Union (LMU) based on the French franc and centred on France, Belgium, Switzerland and Italy, as well as the Scandinavian Monetary Union (SMU) between Sweden, Denmark and Norway. Both the LMU and the SMU broke apart because there was no central institution to enforce common monetary policy and because of divergent fiscal policies motivated by domestic concerns.
Perhaps the most famous example of a de facto currency union was the gold standard which developed internationally from 1870 onwards. The gold standard was a system of fixed exchange rates based on convertibility to gold at set prices. The system came under severe pressure following the stock market crash in 1929 and finally came unravelled in the early 1930s when virtually all countries abandoned gold convertibility.
The outlines of a new international monetary system based on the convertibility of certain national currencies into United States dollars was agreed in July 1944 at Bretton Woods. The US dollar was itself backed by convertibility into gold, and this meant all participating currencies were indirectly pegged to gold and therefore to each other. Under the Bretton Woods system countries could devalue their currencies under certain agreed conditions. The Bretton Woods system began to fray in the late 1960s as the United States became increasingly unable and unwilling to sustain the dollar's exchange rate with gold. Eventually dollar convertibility was terminated by the United States in 1971.
The currency instability of the 1970s prompted a series of attempts to stabilise exchange rates in the European Economic Community (EEC). The first of these was the ‘Snake in the Tunnel’ system designed to peg the EEC currencies to one another within narrow bands. The Snake in the Tunnel system had broken down by the mid 1970s. The next major attempt at monetary coordination was made in 1979 with the launch of the European Monetary System (EMS). The EMS was based on a system of narrowly fluctuating exchange rates known as the Exchange Rate Mechanism (ERM). In practice the Deutsche Mark quickly became the anchor currency of the EMS and the system was characterised by repeated devaluations by member states.
Post-reunification expansionary fiscal policy designed to support the rebuilding of the former East Germany, combined with the Bundesbank's ultra-tight monetary policy, forced other countries to keep interest rates at extremely high levels to support their currencies and prevent capital outflow to Germany. A number of European currencies came under speculative attack and Sterling’s membership of the ERM was suspended by the British Government in September 1992. Italy withdrew the following day and the ERM was effectively dismantled in 1993 when the fluctuation band for national currencies was extended to 15 per cent. As with previous failed attempts at fixing exchange rates, the system was undermined by conflicting policy goals in the different countries and by the inability of member countries to harmonise monetary and fiscal policies.
Despite these setbacks, the push for monetary union continued as it was claimed that unpredictable exchange rate fluctuations were incompatible with the EU's fully open and competitive internal market. This perspective drove European Monetary Union (EMU) and policies aimed at convergence between the various EU economies in areas such as inflation and fiscal discipline. These policies were intended to create the conditions for a viable currency union. One lesson drawn from the ERM experience was that systems of fixed exchange rates will eventually buckle under the strain of divergent domestic policies and objectives. Thus, in preference to yet another system of fixed exchange rates, the decision was made to pursue a single currency as well as a single monetary policy under the control of an independent central institution. Eleven national currencies were made convertible to the Euro at established rates in 1998 and the Euro was officially launched the next year, with monetary policy and enforcement falling under the authority of the independent European Central Bank (ECB).
It remains to be seen whether this latest experiment in monetary union will succeed. It is now clear that EMU has major fundamental design flaws and if history is a guide then the odds of success do not look great. On the other hand, Europe's persistence with the idea of monetary union suggests that mistakes will be learned and the attempt renewed.
The real question is whether the mistakes will be learned in time to prevent the currency union from imploding.
Nineteenth century Europe had the Latin Monetary Union (LMU) based on the French franc and centred on France, Belgium, Switzerland and Italy, as well as the Scandinavian Monetary Union (SMU) between Sweden, Denmark and Norway. Both the LMU and the SMU broke apart because there was no central institution to enforce common monetary policy and because of divergent fiscal policies motivated by domestic concerns.
Perhaps the most famous example of a de facto currency union was the gold standard which developed internationally from 1870 onwards. The gold standard was a system of fixed exchange rates based on convertibility to gold at set prices. The system came under severe pressure following the stock market crash in 1929 and finally came unravelled in the early 1930s when virtually all countries abandoned gold convertibility.
The outlines of a new international monetary system based on the convertibility of certain national currencies into United States dollars was agreed in July 1944 at Bretton Woods. The US dollar was itself backed by convertibility into gold, and this meant all participating currencies were indirectly pegged to gold and therefore to each other. Under the Bretton Woods system countries could devalue their currencies under certain agreed conditions. The Bretton Woods system began to fray in the late 1960s as the United States became increasingly unable and unwilling to sustain the dollar's exchange rate with gold. Eventually dollar convertibility was terminated by the United States in 1971.
The currency instability of the 1970s prompted a series of attempts to stabilise exchange rates in the European Economic Community (EEC). The first of these was the ‘Snake in the Tunnel’ system designed to peg the EEC currencies to one another within narrow bands. The Snake in the Tunnel system had broken down by the mid 1970s. The next major attempt at monetary coordination was made in 1979 with the launch of the European Monetary System (EMS). The EMS was based on a system of narrowly fluctuating exchange rates known as the Exchange Rate Mechanism (ERM). In practice the Deutsche Mark quickly became the anchor currency of the EMS and the system was characterised by repeated devaluations by member states.
Post-reunification expansionary fiscal policy designed to support the rebuilding of the former East Germany, combined with the Bundesbank's ultra-tight monetary policy, forced other countries to keep interest rates at extremely high levels to support their currencies and prevent capital outflow to Germany. A number of European currencies came under speculative attack and Sterling’s membership of the ERM was suspended by the British Government in September 1992. Italy withdrew the following day and the ERM was effectively dismantled in 1993 when the fluctuation band for national currencies was extended to 15 per cent. As with previous failed attempts at fixing exchange rates, the system was undermined by conflicting policy goals in the different countries and by the inability of member countries to harmonise monetary and fiscal policies.
Despite these setbacks, the push for monetary union continued as it was claimed that unpredictable exchange rate fluctuations were incompatible with the EU's fully open and competitive internal market. This perspective drove European Monetary Union (EMU) and policies aimed at convergence between the various EU economies in areas such as inflation and fiscal discipline. These policies were intended to create the conditions for a viable currency union. One lesson drawn from the ERM experience was that systems of fixed exchange rates will eventually buckle under the strain of divergent domestic policies and objectives. Thus, in preference to yet another system of fixed exchange rates, the decision was made to pursue a single currency as well as a single monetary policy under the control of an independent central institution. Eleven national currencies were made convertible to the Euro at established rates in 1998 and the Euro was officially launched the next year, with monetary policy and enforcement falling under the authority of the independent European Central Bank (ECB).
It remains to be seen whether this latest experiment in monetary union will succeed. It is now clear that EMU has major fundamental design flaws and if history is a guide then the odds of success do not look great. On the other hand, Europe's persistence with the idea of monetary union suggests that mistakes will be learned and the attempt renewed.
The real question is whether the mistakes will be learned in time to prevent the currency union from imploding.
Tuesday, 10 April 2012
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.
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.
Monday, 2 April 2012
GDP contraction in the crisis Euro area economies
Michael Burke: OECD comparative data for the crisis EU countries highlights the extent of that crisis.
Greece has become a by-word for the effects of ‘austerity’. OECD Greek GDP data has only been published up to Q1 2011. To date Greek GDP has fallen by 9.1% since the final quarter of 2007.
Portugal, whose creditors have also been bailed out by the Troika has seen its GDP fall by 5.1%.
Spain has recently created waves with the Rightist government arguing that it will overshoot the deficit targets set for it externally by the Troika. Formerly, its Socialist government had adopted measures to boost economic activity including increased investment in infrastructure and by increasing the minimum wage. As the chart shows there was a mild economic recovery. Subsequently, ‘austerity’ was imposed and economic activity has begun to contract once more. GDP has fallen by 3.5%.
In Ireland GDP has fallen by 11.6% since the end of 2007. This is a greater contraction than any of the crisis-hit countries in the Euro Area, including Greece. Obviously Greek GDP may have declined even further by the end of 2011. But at the same point of Q1 2011, Irish GDP had fallen by 11.5%- more than Greece. The chart below clearly shows that the total decline in Irish GDP has been much greater than in Greek GDP.
If the final data shows that the Greek economy has contracted by more than the Irish economy, this will owe nothing to any Irish recovery, but solely because the Greek economy has been contracting even faster.
Initially the Greek recession was milder than the EU average, just over2% compared to a decline of just over 4% for the EU as a whole. But no country in the Euro Area has had greater cuts in public spending imposed on it. The result has been an economic slump. But the widely-held belief that public spending cuts in Ireland have been a success is not supported by the facts. It has also produced a slump in Ireland.
Greece has become a by-word for the effects of ‘austerity’. OECD Greek GDP data has only been published up to Q1 2011. To date Greek GDP has fallen by 9.1% since the final quarter of 2007.
Portugal, whose creditors have also been bailed out by the Troika has seen its GDP fall by 5.1%.
Spain has recently created waves with the Rightist government arguing that it will overshoot the deficit targets set for it externally by the Troika. Formerly, its Socialist government had adopted measures to boost economic activity including increased investment in infrastructure and by increasing the minimum wage. As the chart shows there was a mild economic recovery. Subsequently, ‘austerity’ was imposed and economic activity has begun to contract once more. GDP has fallen by 3.5%.
In Ireland GDP has fallen by 11.6% since the end of 2007. This is a greater contraction than any of the crisis-hit countries in the Euro Area, including Greece. Obviously Greek GDP may have declined even further by the end of 2011. But at the same point of Q1 2011, Irish GDP had fallen by 11.5%- more than Greece. The chart below clearly shows that the total decline in Irish GDP has been much greater than in Greek GDP.
If the final data shows that the Greek economy has contracted by more than the Irish economy, this will owe nothing to any Irish recovery, but solely because the Greek economy has been contracting even faster.
Initially the Greek recession was milder than the EU average, just over2% compared to a decline of just over 4% for the EU as a whole. But no country in the Euro Area has had greater cuts in public spending imposed on it. The result has been an economic slump. But the widely-held belief that public spending cuts in Ireland have been a success is not supported by the facts. It has also produced a slump in Ireland.
Wednesday, 21 March 2012
Europe from the periphery
Paul Sweeney: These days, Europe appears to be a cold place viewed from the periphery in Ireland. We are being bailed out and supported in many ways by the Troika of the EU, ECB and IMF, but the terms imposed upon citizens largely reflect the liberal economic perspective. We are four long years into austerity. Indicators are no longer falling, but little is rising, particularly green shoots.
At this inauspicious time, a progressive vision for Europe demands a strong focus by progressive parties and organisations on the European Social Model and a clear understanding what is meant by the abused word “competitiveness.” This small western island hjas been laid low by liberal economics but,with European solidarity and support, rather than punishment and austerity, can rebound as a model member state. As progressives, we also need to consciously set out to restore the wage share in national income to improve equity, social cohesions, personal income distribution, longer term wealth distribution, macroeconomic stability and the composition of aggregate demand.
Persuading Voters that the Post-War European Social Compact is Alive and Well
Economic and social progress in Europe since the war has been remarkable. Living standards and improvements in housing, health and peoples’ security have been excellent. There had been a consensus with conservatives that national income and wealth would be shared, but with the prolonged crisis, growing numbers of conservatives no longer want to share. The cake is no longer growing – thanks to their policies - and they want to keep more of it for themselves.
But the best way to grow national income is though social solidarity, education, investment, efficient public services and equitable incomes.
Re-building the European Social Model must be the priority of all progressive forces in Europe. Many Europeans fear that governments are neglecting citizens and are obsessed by appeasing the financial markets; have a very narrow view of “competitiveness”; and with fiscal rectitude. This means that the Post-War European Social Compact appears to be dying or dead for increasing numbers of European citizens.
Apparent confirmation of its death was given by the key unelected European leader, Mario Draghi, who was quoted in the Wall Street Journal earlier this year as saying that “Europe's vaunted social model is "already gone”." Thus a clarion call for all progressive parties must be that the European Social Model is very much alive. Not alone will it continue to be a core objective in progressives’ policy implementation in government, but we should guarantee that the Social Model will be enhanced in line with economic and social progress.
The prolonged ineptitude of European leaders, predominantly conservatives, in dealing with the crisis effectively has undermined public confidence in the European project. The failure of austerity measures has led the same leaders to pursue them with more vigour, instead of learning from their mistakes. The Fiscal Compact will exacerbate the problem.
Mr. Draghi also argued that “austerity, coupled with structural change, is the only option for economic renewal”. Like ancient Greek priests, appeasing the gods with sacrifices, he wants to feed even more of our living standards to the markets, saying "Backtracking on fiscal targets would elicit an immediate reaction by the market."
On top of this deep crisis, there are great challenges with ageing populations straining pensions, rising health costs, environmental issues and much more. There is a hollowing-out of the middle with the growth in “Cool Jobs and Crap Jobs” worldwide. Solid pensionable jobs like banking, computing, parts of accounting, engineering etc. are being de-skilled and outsourced from Europe. The polarisation of jobs is a vital area which has to be addressed.
Some of these challenges may mean doing things very differently, but all can be overcome. Revitalising the Social Model is the key to rebuilding confidence in Europe. One step in this direction is to have a clear understanding of one of the most abused concepts in modern economics- “competitiveness".
Competitiveness is Poorly Understood
The most abused word in modern political economy is “competitiveness.” It is not just that each economist has a different definition, but even the same economist may define it in several ways. For most of them and for many institutions it is simply a description of short-term movements in wages. A more sophisticated definition is of short run movements in unit labour costs, but both are too often ideological, using easily available data to beat up workers and trade unions. This is now a tired abuse of what can be a helpful concept in modern economics in measuring national economic progress. Unless we all subscribe to the same understanding, we must avoid this abused word/concept.
A good definition (as given in the 2003 European Comission Report on Competitiveness) is: “Competitiveness is understood to mean high and rising standards of living of a nation with the lowest possible level of involuntary unemployment on a sustainable basis.” But this does not inform on how to measure it.
I suggest the complexity of the issue is best understood by examining the work of Ireland’s tripartite National Competitiveness Council, which represents unions, employers and Government (albeit with only one-eighth union representation). It produces an annual Benchmarking or Scorecard report covering Ireland’s competitiveness performance in a comprehensive and coherent way. It has a collection of statistical indicators against a whole-of-economy comparison to 17 other economies and the OECD or EU average. Costs and labour costs are included but they are only a small part of the overall measurement of a country’s competitiveness. It is deeply disappointing that sophisticated analysts such as the OECD, IMF etc. still define competitiveness only in terms of unit labour costs. But perhaps it is deliberately ideological?
It is worth remembering that only 9% of EU GDP is exported (measuring the exports in value added, not gross, terms), which means EU countries are very largely competing with themselves. We do buy European, already! However, competitiveness is worth benchmarking, if done properly.
A View from a Troubled Western Island
It is essential to avoid the core/periphery break up in Europe. Ireland grew from one of the poorest of the poor in Europe to one of the richest in twenty years, thanks in no small part to its membership of the Union. It is facing enormous economic problems at present, but provided we get support in facing our staggering and perhaps insurmountable private banking debts, Ireland will recover and revert to become a net contributor to the Union’s funds.
Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations”. However, these debts are not ours, but those of the private defunct banks, which our sacked government guaranteed, in our name, without our consent.
Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.
Today Irish taxpayers are repaying the bank creditors (EU banks and hedge funds) of the six Irish banks which were socialised. This is an impossible task for 1.8 million people at work, where GDP has collapsed by over 13 per cent between 2008 and 2011, GNP by over 16 per cent and domestic demand by a staggering 24.9 per cent and is still in decline. Unemployment is at 14.6 per cent. When discouraged workers, those who would like to work full time, are included the official figure rises to 25 per cent. Youth unemployment is soaring and long term unemployment is 60.3 of the total.
When the trade unions first met the ECB, EU, IMF Troika in late 2010 when Ireland was placed in Examinership, we pointed out that Ireland has many core strengths, but that the bailout package agreed by the Government with them made the economic recovery very difficult. We said that the deflationary impacts of the measures in the package are such that growth has little chance of reviving. This has been proven to be correct - unless one gives credence to the technical definition of “the end of recession” with a few recent quarters of very weak growth in GDP. It will take many years to makes up for the fall of 13 per cent at current rates, especially with citizens’ taxes diverted to fund the apparently endless private bank bailout.
The previous government tried an experiment in Internal Devaluation because there could be no devaluation in a single currency area. Fortunately, this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. Overall, the average employee who remained in work saw no decline in real hourly earnings from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises. The real losses were the considerable numbers (a huge 14 per cent fall) who lost their jobs. A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours” (see Walsh, Kieran “Wage bill change during the recession: how have employers reacted to the downturn?” Statistical and Social Enquiry Society of Ireland, February, 2012)
This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which averaged 14 per cent) provided there is support for substantial change, which is occurring.
The relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. It is crucial that the core economies which are performing well, act in solidarity and not in punishment to the underperforming peripherals.
Nor should we entertain the idea of a ‘two speed’ Europe, which could allow an inner core to move towards closer economic and political union supposedly “to protect the Union as a whole.” To move in that direction is to abandon solidarity and to miss this opportunity to build a cohesive Europe.
Restoring the Wage Share of National Income
The share of national income going to wages has fallen considerably in most developed countries since the early 1970s. There has been a slight reversal in recent years, but it is forecast to fall back again. One explanation for the falling labour share and rising share to capital might be that there has been an intensification of capital investment. However, against that, there has been a huge improvement in human capital with all countries seeing major increases in educational and skills attainment. It seems that the investment in human capital is not being rewarded by increases in labour’s share of national income. As less national income is going to workers, this has a secular impact on aggregate demand and thus on growth.
The issue of the decline in labour income share involves equity, social cohesion and personal income distribution, longer-term wealth distribution, macroeconomic stability and the composition of aggregate demand.
The “American Dream” of the next generation enjoying a higher standard of living than their parents has been dead since the early 1970s. Since 1975 US workers’ median incomes have not risen. There are hard lessons to be learned from America. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from Asia which reduced the cost of living. It was further masked by the growth in dual-income families, where there had only been one earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class”.
The fall in labour’s share of national income was also driven by globalisation, accelerated by technology, falling prices in transport and instant communications. In turn, these trends were accentuated by liberalisation of borders and markets, especially labour markets.
The value of the fall between 1973 and 2011 is substantial in monetary terms. Even with the smallest decline which as in France of 3.5%, it is still a transfer of €71bn from labour’s share of GDP to capital. For Germany it is €137bn.[Click to enlarge table below].
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Simultaneously, people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. The aversion of many governments and major institutions like the IMF and OECD to progressive income taxes which they now pejoratively term “taxes on labour” means that if acted upon, taxation will fail to be a redistributive mechanism. It also means that the great polarisation of incomes will continue unchecked and citizens will grow even more angry and frustrated.
A Common Fiscal Policy is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash. I would go for tax coordination rather than harmonisation where member states can set rates, within bands, though a common tax base for companies makes sense in a single market.
Conclusion
The real irony in Europe is that this deep crisis was caused by neo-liberal economic policies. Yet it is conservatives who are in power in most member states. They are prolonging the crisis with the same old failed policies and general incompetence. Some are even reverting to narrow nationalism. Instead, bold action with an EU-wide stimulus and policies informed by a longer term vision of European solidarity is required.
There is a lesson in this for us all. That is to replenish our vision by going back to core ideas, sticking to them in a principled way and being innovative in our policy responses.
Part of this post is based on a a presentation given to a meeting of progressive groups, parties and individuals in the French Parliament on Friday March 16th entitled "The Renaissance of Europe". It was sponsored by four EU think-tanks: FEPF, Jean Jaures, Friedrich Ebert Stiftung and Italianieuropei. This event will be followed by seminars in Rome and Berlin in advance of the Italian and German elections.
At this inauspicious time, a progressive vision for Europe demands a strong focus by progressive parties and organisations on the European Social Model and a clear understanding what is meant by the abused word “competitiveness.” This small western island hjas been laid low by liberal economics but,with European solidarity and support, rather than punishment and austerity, can rebound as a model member state. As progressives, we also need to consciously set out to restore the wage share in national income to improve equity, social cohesions, personal income distribution, longer term wealth distribution, macroeconomic stability and the composition of aggregate demand.
Persuading Voters that the Post-War European Social Compact is Alive and Well
Economic and social progress in Europe since the war has been remarkable. Living standards and improvements in housing, health and peoples’ security have been excellent. There had been a consensus with conservatives that national income and wealth would be shared, but with the prolonged crisis, growing numbers of conservatives no longer want to share. The cake is no longer growing – thanks to their policies - and they want to keep more of it for themselves.
But the best way to grow national income is though social solidarity, education, investment, efficient public services and equitable incomes.
Re-building the European Social Model must be the priority of all progressive forces in Europe. Many Europeans fear that governments are neglecting citizens and are obsessed by appeasing the financial markets; have a very narrow view of “competitiveness”; and with fiscal rectitude. This means that the Post-War European Social Compact appears to be dying or dead for increasing numbers of European citizens.
Apparent confirmation of its death was given by the key unelected European leader, Mario Draghi, who was quoted in the Wall Street Journal earlier this year as saying that “Europe's vaunted social model is "already gone”." Thus a clarion call for all progressive parties must be that the European Social Model is very much alive. Not alone will it continue to be a core objective in progressives’ policy implementation in government, but we should guarantee that the Social Model will be enhanced in line with economic and social progress.
The prolonged ineptitude of European leaders, predominantly conservatives, in dealing with the crisis effectively has undermined public confidence in the European project. The failure of austerity measures has led the same leaders to pursue them with more vigour, instead of learning from their mistakes. The Fiscal Compact will exacerbate the problem.
Mr. Draghi also argued that “austerity, coupled with structural change, is the only option for economic renewal”. Like ancient Greek priests, appeasing the gods with sacrifices, he wants to feed even more of our living standards to the markets, saying "Backtracking on fiscal targets would elicit an immediate reaction by the market."
On top of this deep crisis, there are great challenges with ageing populations straining pensions, rising health costs, environmental issues and much more. There is a hollowing-out of the middle with the growth in “Cool Jobs and Crap Jobs” worldwide. Solid pensionable jobs like banking, computing, parts of accounting, engineering etc. are being de-skilled and outsourced from Europe. The polarisation of jobs is a vital area which has to be addressed.
Some of these challenges may mean doing things very differently, but all can be overcome. Revitalising the Social Model is the key to rebuilding confidence in Europe. One step in this direction is to have a clear understanding of one of the most abused concepts in modern economics- “competitiveness".
Competitiveness is Poorly Understood
The most abused word in modern political economy is “competitiveness.” It is not just that each economist has a different definition, but even the same economist may define it in several ways. For most of them and for many institutions it is simply a description of short-term movements in wages. A more sophisticated definition is of short run movements in unit labour costs, but both are too often ideological, using easily available data to beat up workers and trade unions. This is now a tired abuse of what can be a helpful concept in modern economics in measuring national economic progress. Unless we all subscribe to the same understanding, we must avoid this abused word/concept.
A good definition (as given in the 2003 European Comission Report on Competitiveness) is: “Competitiveness is understood to mean high and rising standards of living of a nation with the lowest possible level of involuntary unemployment on a sustainable basis.” But this does not inform on how to measure it.
I suggest the complexity of the issue is best understood by examining the work of Ireland’s tripartite National Competitiveness Council, which represents unions, employers and Government (albeit with only one-eighth union representation). It produces an annual Benchmarking or Scorecard report covering Ireland’s competitiveness performance in a comprehensive and coherent way. It has a collection of statistical indicators against a whole-of-economy comparison to 17 other economies and the OECD or EU average. Costs and labour costs are included but they are only a small part of the overall measurement of a country’s competitiveness. It is deeply disappointing that sophisticated analysts such as the OECD, IMF etc. still define competitiveness only in terms of unit labour costs. But perhaps it is deliberately ideological?
It is worth remembering that only 9% of EU GDP is exported (measuring the exports in value added, not gross, terms), which means EU countries are very largely competing with themselves. We do buy European, already! However, competitiveness is worth benchmarking, if done properly.
A View from a Troubled Western Island
It is essential to avoid the core/periphery break up in Europe. Ireland grew from one of the poorest of the poor in Europe to one of the richest in twenty years, thanks in no small part to its membership of the Union. It is facing enormous economic problems at present, but provided we get support in facing our staggering and perhaps insurmountable private banking debts, Ireland will recover and revert to become a net contributor to the Union’s funds.
Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations”. However, these debts are not ours, but those of the private defunct banks, which our sacked government guaranteed, in our name, without our consent.
Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.
Today Irish taxpayers are repaying the bank creditors (EU banks and hedge funds) of the six Irish banks which were socialised. This is an impossible task for 1.8 million people at work, where GDP has collapsed by over 13 per cent between 2008 and 2011, GNP by over 16 per cent and domestic demand by a staggering 24.9 per cent and is still in decline. Unemployment is at 14.6 per cent. When discouraged workers, those who would like to work full time, are included the official figure rises to 25 per cent. Youth unemployment is soaring and long term unemployment is 60.3 of the total.
When the trade unions first met the ECB, EU, IMF Troika in late 2010 when Ireland was placed in Examinership, we pointed out that Ireland has many core strengths, but that the bailout package agreed by the Government with them made the economic recovery very difficult. We said that the deflationary impacts of the measures in the package are such that growth has little chance of reviving. This has been proven to be correct - unless one gives credence to the technical definition of “the end of recession” with a few recent quarters of very weak growth in GDP. It will take many years to makes up for the fall of 13 per cent at current rates, especially with citizens’ taxes diverted to fund the apparently endless private bank bailout.
The previous government tried an experiment in Internal Devaluation because there could be no devaluation in a single currency area. Fortunately, this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. Overall, the average employee who remained in work saw no decline in real hourly earnings from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises. The real losses were the considerable numbers (a huge 14 per cent fall) who lost their jobs. A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours” (see Walsh, Kieran “Wage bill change during the recession: how have employers reacted to the downturn?” Statistical and Social Enquiry Society of Ireland, February, 2012)
This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which averaged 14 per cent) provided there is support for substantial change, which is occurring.
The relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. It is crucial that the core economies which are performing well, act in solidarity and not in punishment to the underperforming peripherals.
Nor should we entertain the idea of a ‘two speed’ Europe, which could allow an inner core to move towards closer economic and political union supposedly “to protect the Union as a whole.” To move in that direction is to abandon solidarity and to miss this opportunity to build a cohesive Europe.
Restoring the Wage Share of National Income
The share of national income going to wages has fallen considerably in most developed countries since the early 1970s. There has been a slight reversal in recent years, but it is forecast to fall back again. One explanation for the falling labour share and rising share to capital might be that there has been an intensification of capital investment. However, against that, there has been a huge improvement in human capital with all countries seeing major increases in educational and skills attainment. It seems that the investment in human capital is not being rewarded by increases in labour’s share of national income. As less national income is going to workers, this has a secular impact on aggregate demand and thus on growth.
The issue of the decline in labour income share involves equity, social cohesion and personal income distribution, longer-term wealth distribution, macroeconomic stability and the composition of aggregate demand.
The “American Dream” of the next generation enjoying a higher standard of living than their parents has been dead since the early 1970s. Since 1975 US workers’ median incomes have not risen. There are hard lessons to be learned from America. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from Asia which reduced the cost of living. It was further masked by the growth in dual-income families, where there had only been one earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class”.
The fall in labour’s share of national income was also driven by globalisation, accelerated by technology, falling prices in transport and instant communications. In turn, these trends were accentuated by liberalisation of borders and markets, especially labour markets.
The value of the fall between 1973 and 2011 is substantial in monetary terms. Even with the smallest decline which as in France of 3.5%, it is still a transfer of €71bn from labour’s share of GDP to capital. For Germany it is €137bn.[Click to enlarge table below].
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Simultaneously, people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. The aversion of many governments and major institutions like the IMF and OECD to progressive income taxes which they now pejoratively term “taxes on labour” means that if acted upon, taxation will fail to be a redistributive mechanism. It also means that the great polarisation of incomes will continue unchecked and citizens will grow even more angry and frustrated.
A Common Fiscal Policy is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash. I would go for tax coordination rather than harmonisation where member states can set rates, within bands, though a common tax base for companies makes sense in a single market.
Conclusion
The real irony in Europe is that this deep crisis was caused by neo-liberal economic policies. Yet it is conservatives who are in power in most member states. They are prolonging the crisis with the same old failed policies and general incompetence. Some are even reverting to narrow nationalism. Instead, bold action with an EU-wide stimulus and policies informed by a longer term vision of European solidarity is required.
There is a lesson in this for us all. That is to replenish our vision by going back to core ideas, sticking to them in a principled way and being innovative in our policy responses.
Part of this post is based on a a presentation given to a meeting of progressive groups, parties and individuals in the French Parliament on Friday March 16th entitled "The Renaissance of Europe". It was sponsored by four EU think-tanks: FEPF, Jean Jaures, Friedrich Ebert Stiftung and Italianieuropei. This event will be followed by seminars in Rome and Berlin in advance of the Italian and German elections.
Tuesday, 14 February 2012
Guest post by Martin O'Dea: Rebalancing the power
Martin O'Dea lectures in Management and Human Resource Management at the Dublin Business School: There are many levels at which to assess the current financial crisis in Europe. One of those at the higher level involves the discord between political bodies and financial markets and how this power battle is playing out. There has been talk of financial transaction taxes from Angela Merkel and finance ministers from Austria and Belgium as well as France. The concept is seen to originate with John Keynes in 1936 and was applied particularly in 1972 by Nobel winning economist Jim Tobin. There have been alterations in the interim as analysts try to find ways to minimise the impact on market activities and to dissuade companies from fleeing to destinations where any such tax does not exist. There seems a reasonable chance developing over the last decade or so that a global financial transaction tax could be employed to attempt to bridge growing income inequality, somewhat, and also to provide a fund to deal with many major social issues; though, of course, this remains to be seen.
European countries have pushed hard for the introduction of a F.T.T. tax since 2008 and, in fact, Sarkozy of France has recently introduced a 0.1% on certain transactions (though not on bonds) in the hope that others will follow. The G20 did not reach agreement on a universal Tobin Tax, and so Europe proposed to move ahead within its own ‘borders’. The proposed E.U. F.T.T. will apply to the country where the financial operator is based, and so for example a German bank could not avoid the tax by having transactions take place from a different base. The U.K., despite two-thirds support for this type of tax among its citizens has opted out, and so the outcome of this issue remains unresolved. In as much as the ‘market’ can be seen as a singular entity, there must be disquiet at this concept and some of the negotiations around indebted sovereigns must hinge on some brinkmanship in this battle. The investors and fund managers, in the most, whose jobs entail achieving maximum return for their clients will naturally look at this tax as an unwelcome proposal for their balance sheets. They also look at burden sharing on debts in a similar way
It is easy enough to feel that the markets have all the cards here – it is certainly what the Irish government state quite openly; i.e. that they have no choice but to follow instructions from the ECB and commission and that they are behaving in the only way that they can as markets would not allow any deviation; and so ‘Armageddon’, ‘bombs going off’ etc is the language that is suggested if we force the issue of debt clearance with Europe or if Europe generally pushes the issue with the markets.
There is a very strong argument of logic put forward by David McWilliams and others for a long time now that, in fact, this position is inherently wrong, that markets can only invest in what is coming and so would quickly reinvest in countries that shed unbearable debt burdens, because this gives them a chance to grow and makes them more worthy of investment. Iceland seems to provide some support to this argument, as they took a massive hit when declaring bankruptcy and saw fairly immediate growth thereafter as the issues were ‘dealt with’ and the country and economy reeled but then began to move on.
There are obviously many others who say that this is too big a risk and what happens if the speculators bring down the house. It is easy to sit and think, how did we come to this, how did we find ourselves in a system where the markets dictate to the politicians.
The context of all of this is truly of astounding proportions now. Even a cursory glance at twentieth century politico-economic history shows the dangers in economically disenfranchising a people and how when all moderate options point to economic oblivion there is provided a breeding ground for extremism. These arguments seemed extreme themselves just a few years ago, but an objective look at Europe and Greece particularly as well as the local Irish example of incredibly damaging social impositions under the somehow surreal stipulation to pay banking debts with taxpayers money to a value such as currently taking place, one can see the potential hazards. Anger will continue to mount as the drip feeding of the shocks of 3.1 billion to Anglo promissory notes comes again in March and again and again for a decade. And, of course, in the context of a comment from a slightly heady Taosieach at Davos implying that ‘we all went “mad with borrowing”’ and people reel from the frustration that whatever they have borrowed they have to pay back while also covering these banks borrowings, really makes it beyond a serious issue for Europe, and an imperative one for the maintenance of order at this point.
Regarding this seeming stranglehold of the markets then - this is one of the major difficulties, but it can also be the source of the solution, for we seem to have collectively forgotten that politicians (representing us the majority) actually hold the strongest hand. They make the laws. They have national judiciaries, police and militaries ensuring their ability to do so as well as many international fora with domestic popular support to resist the market influence (and if McWilliams etc are right – even the markets themselves would support governments eventually standing up for themselves).
So bearing in mind all of this, what could politicians do? Well, they might put the following financial logic forward to the key financial institutes as matters of fact. It is already planned by the European commission that there will be a financial transaction tax in 2014. It will be 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts. It is forecasted to raise €55 billion per anum. A European treaty must allow governments to tell markets that if massive write downs of government debts are not now taken as we dictate the financial transaction tax will be 0.3% against the exchange of shares and bonds and 0.03% across derivative contracts.
Markets are not really thinking entities; people go to work and do what their bosses wish in an attempt to continue to pay their own mortgages and care for their dependents as well as progress in their own careers. Their bosses pressurise them for return as a means of passing on the systemic pressure that comes on their jobs and performances from shareholders. Shareholders can be a whole myriad of personas often financial institutes themselves and pension, insurance funds etc. So it is clear that markets cannot, as currently constructed, grow social consciences. By definition there is only one motive that markets can comprehend. The future of technological development and better informed and educated populations and the peace and prosperity that can arise from that await resolution of this crisis. The resolution of the crisis awaits massive write down of debts, and in the Irish case the allowing of bankrupt banks to go bankrupt. European leaders must speak the language of the markets but explain in that language that they are in charge and that they will not allow continuing social collapse on their watch.
European countries have pushed hard for the introduction of a F.T.T. tax since 2008 and, in fact, Sarkozy of France has recently introduced a 0.1% on certain transactions (though not on bonds) in the hope that others will follow. The G20 did not reach agreement on a universal Tobin Tax, and so Europe proposed to move ahead within its own ‘borders’. The proposed E.U. F.T.T. will apply to the country where the financial operator is based, and so for example a German bank could not avoid the tax by having transactions take place from a different base. The U.K., despite two-thirds support for this type of tax among its citizens has opted out, and so the outcome of this issue remains unresolved. In as much as the ‘market’ can be seen as a singular entity, there must be disquiet at this concept and some of the negotiations around indebted sovereigns must hinge on some brinkmanship in this battle. The investors and fund managers, in the most, whose jobs entail achieving maximum return for their clients will naturally look at this tax as an unwelcome proposal for their balance sheets. They also look at burden sharing on debts in a similar way
It is easy enough to feel that the markets have all the cards here – it is certainly what the Irish government state quite openly; i.e. that they have no choice but to follow instructions from the ECB and commission and that they are behaving in the only way that they can as markets would not allow any deviation; and so ‘Armageddon’, ‘bombs going off’ etc is the language that is suggested if we force the issue of debt clearance with Europe or if Europe generally pushes the issue with the markets.
There is a very strong argument of logic put forward by David McWilliams and others for a long time now that, in fact, this position is inherently wrong, that markets can only invest in what is coming and so would quickly reinvest in countries that shed unbearable debt burdens, because this gives them a chance to grow and makes them more worthy of investment. Iceland seems to provide some support to this argument, as they took a massive hit when declaring bankruptcy and saw fairly immediate growth thereafter as the issues were ‘dealt with’ and the country and economy reeled but then began to move on.
There are obviously many others who say that this is too big a risk and what happens if the speculators bring down the house. It is easy to sit and think, how did we come to this, how did we find ourselves in a system where the markets dictate to the politicians.
The context of all of this is truly of astounding proportions now. Even a cursory glance at twentieth century politico-economic history shows the dangers in economically disenfranchising a people and how when all moderate options point to economic oblivion there is provided a breeding ground for extremism. These arguments seemed extreme themselves just a few years ago, but an objective look at Europe and Greece particularly as well as the local Irish example of incredibly damaging social impositions under the somehow surreal stipulation to pay banking debts with taxpayers money to a value such as currently taking place, one can see the potential hazards. Anger will continue to mount as the drip feeding of the shocks of 3.1 billion to Anglo promissory notes comes again in March and again and again for a decade. And, of course, in the context of a comment from a slightly heady Taosieach at Davos implying that ‘we all went “mad with borrowing”’ and people reel from the frustration that whatever they have borrowed they have to pay back while also covering these banks borrowings, really makes it beyond a serious issue for Europe, and an imperative one for the maintenance of order at this point.
Regarding this seeming stranglehold of the markets then - this is one of the major difficulties, but it can also be the source of the solution, for we seem to have collectively forgotten that politicians (representing us the majority) actually hold the strongest hand. They make the laws. They have national judiciaries, police and militaries ensuring their ability to do so as well as many international fora with domestic popular support to resist the market influence (and if McWilliams etc are right – even the markets themselves would support governments eventually standing up for themselves).
So bearing in mind all of this, what could politicians do? Well, they might put the following financial logic forward to the key financial institutes as matters of fact. It is already planned by the European commission that there will be a financial transaction tax in 2014. It will be 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts. It is forecasted to raise €55 billion per anum. A European treaty must allow governments to tell markets that if massive write downs of government debts are not now taken as we dictate the financial transaction tax will be 0.3% against the exchange of shares and bonds and 0.03% across derivative contracts.
Markets are not really thinking entities; people go to work and do what their bosses wish in an attempt to continue to pay their own mortgages and care for their dependents as well as progress in their own careers. Their bosses pressurise them for return as a means of passing on the systemic pressure that comes on their jobs and performances from shareholders. Shareholders can be a whole myriad of personas often financial institutes themselves and pension, insurance funds etc. So it is clear that markets cannot, as currently constructed, grow social consciences. By definition there is only one motive that markets can comprehend. The future of technological development and better informed and educated populations and the peace and prosperity that can arise from that await resolution of this crisis. The resolution of the crisis awaits massive write down of debts, and in the Irish case the allowing of bankrupt banks to go bankrupt. European leaders must speak the language of the markets but explain in that language that they are in charge and that they will not allow continuing social collapse on their watch.
Monday, 13 February 2012
Guest post by Arthur Doohan: Loose lips sink ships
Arthur Doohan: The "grown-up's" will remember the opening sequence to the 'Mission Impossible' TV series, where the tape self destructs a few seconds after being played.
I have sad news for you. That technology has not been perfected.
So ... There is no way for Draghi, Barroso, Van Rompuy or Merkozy to make your Euro notes or those in the bank's ATMS disappear in a puff of smoke.
As we teeter on the brink of a possible debt crisis, there is a lot of loose talk flying around about the death of the Euro and about Ireland being thrown out of the "Euro". Such talk is ill-informed, ignorant and, at a time of distress and fear, it is scaremongering, if not actually amounting to "shouting 'Fire!' in a crowded cinema".
Money is …..whatever people deem it to be. In the past money has been: cowrie shells, temple vouchers, unopened packs of "fags" and bits of metal. Today, money is mainly electrons, some paper and a few bits of base metal "dressed as lamb". We worked hard, jointly with our European partners, to re-denominate our money into a jointly held and managed currency called the Euro.
And now, there is nothing, NOTHING, that can stop the Euro being our currency.
Firstly, we are an equal partner in the Target2 payments system that the ECB uses as a clearing house for the Central Banks of the Euro-system to make and receive payments. Further, no authority in either the EU or the ECB has said that anyone can or will be kicked out of the Euro. There is no process for so doing and there can not be under the current treaties. Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro.
Secondly, when Argentina defaulted on her US dollar debts it did not stop the dollar being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in US dollars. It weakened the Argentinian Peso and made the overall debt burden greater. But that can't happen to us because our debts are denominated in our own currency (the Euro). Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to your usage of the currency or to a German person's usage of it or to the French Government's usage.
Finally, the concept of 'leaving the Euro' is often referred to as some form of solution, as if our troubles would be over if we cast off the yoke of Euro-usage. Nothing could be further from reality and the truth.
If we left the Euro we would have to 1) print and distribute a new currency, 2) institute capital controls (in a vain attempt to stop money leaving the State, and which might now be un-Constitutional), 3)attempt to establish and then defend a value in Euro terms for this currency (with all the interest rate volatility that implies and requires), 4) institute import and export controls in order to prop up the capital controls (with all the extra costs and delays for business that implies).
Further, just who would be leaving the Euro? Probably just the State in terms of redefining exactly what 'legal tender' would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be changed to 'NewPunts' or whatever. So we would become like Argentina with a weak official currency for State and tax related transactions and civil service pay and an external currency (Dollars for them, Euros in our case) for 'real stuff'.
And what would we get in exchange for all that trouble? Only the opportunity to say 'We can't pay you back everything we owe you'.
I am not recommending, in this post, any particular course of action. I just want to see an end to the loose talk and the propagation of fear, uncertainty and doubt as a means for ill informed politicians to bludgeon people into agreeing with them. I have in mind particularly suggestions that our ATMs would 'run dry' if there were to be a default.
To suggest that anyone in Europe would attempt or even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work, and to the people and the Commission of the EU.
The Euro is not the problem. The Euro works, and works tremendously well as its endurance of the upheavals and stresses of the last few years have shown.
The design of the 'Growth and Stability Pact' is not the problem. Since it was never enforced (and Germany was the worst and longest rule breaker) it cannot be said to have failed and all of the debt problems we now have are the exact things the GSP was designed to prevent.
The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can't do that. But a debt 'haircut' amounts to the same thing.
So, can we please take a haircut now before we all go bald?
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
I have sad news for you. That technology has not been perfected.
So ... There is no way for Draghi, Barroso, Van Rompuy or Merkozy to make your Euro notes or those in the bank's ATMS disappear in a puff of smoke.
As we teeter on the brink of a possible debt crisis, there is a lot of loose talk flying around about the death of the Euro and about Ireland being thrown out of the "Euro". Such talk is ill-informed, ignorant and, at a time of distress and fear, it is scaremongering, if not actually amounting to "shouting 'Fire!' in a crowded cinema".
Money is …..whatever people deem it to be. In the past money has been: cowrie shells, temple vouchers, unopened packs of "fags" and bits of metal. Today, money is mainly electrons, some paper and a few bits of base metal "dressed as lamb". We worked hard, jointly with our European partners, to re-denominate our money into a jointly held and managed currency called the Euro.
And now, there is nothing, NOTHING, that can stop the Euro being our currency.
Firstly, we are an equal partner in the Target2 payments system that the ECB uses as a clearing house for the Central Banks of the Euro-system to make and receive payments. Further, no authority in either the EU or the ECB has said that anyone can or will be kicked out of the Euro. There is no process for so doing and there can not be under the current treaties. Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro.
Secondly, when Argentina defaulted on her US dollar debts it did not stop the dollar being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in US dollars. It weakened the Argentinian Peso and made the overall debt burden greater. But that can't happen to us because our debts are denominated in our own currency (the Euro). Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to your usage of the currency or to a German person's usage of it or to the French Government's usage.
Finally, the concept of 'leaving the Euro' is often referred to as some form of solution, as if our troubles would be over if we cast off the yoke of Euro-usage. Nothing could be further from reality and the truth.
If we left the Euro we would have to 1) print and distribute a new currency, 2) institute capital controls (in a vain attempt to stop money leaving the State, and which might now be un-Constitutional), 3)attempt to establish and then defend a value in Euro terms for this currency (with all the interest rate volatility that implies and requires), 4) institute import and export controls in order to prop up the capital controls (with all the extra costs and delays for business that implies).
Further, just who would be leaving the Euro? Probably just the State in terms of redefining exactly what 'legal tender' would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be changed to 'NewPunts' or whatever. So we would become like Argentina with a weak official currency for State and tax related transactions and civil service pay and an external currency (Dollars for them, Euros in our case) for 'real stuff'.
And what would we get in exchange for all that trouble? Only the opportunity to say 'We can't pay you back everything we owe you'.
I am not recommending, in this post, any particular course of action. I just want to see an end to the loose talk and the propagation of fear, uncertainty and doubt as a means for ill informed politicians to bludgeon people into agreeing with them. I have in mind particularly suggestions that our ATMs would 'run dry' if there were to be a default.
To suggest that anyone in Europe would attempt or even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work, and to the people and the Commission of the EU.
The Euro is not the problem. The Euro works, and works tremendously well as its endurance of the upheavals and stresses of the last few years have shown.
The design of the 'Growth and Stability Pact' is not the problem. Since it was never enforced (and Germany was the worst and longest rule breaker) it cannot be said to have failed and all of the debt problems we now have are the exact things the GSP was designed to prevent.
The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can't do that. But a debt 'haircut' amounts to the same thing.
So, can we please take a haircut now before we all go bald?
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
Thursday, 5 January 2012
Crisis 2012
Tom McDonnell: A couple of quick links
Daniel Gros sets the scene for the Euro zone in this New Year's post. 2012 looks to be a critical and memorable year in the Euro debt crisis. Hopefully lessons have been learned. According to Gros:
" The resources are there. Europe (just) needs the political will to mobilize them."
I agree. Though I have no confidence in the political decision makers on whom we depend.
Meanwhile Charles Wyplocz offers some solutions and considers here whether official policy making, including that of the ECB, is captured by special interest groups.
Daniel Gros sets the scene for the Euro zone in this New Year's post. 2012 looks to be a critical and memorable year in the Euro debt crisis. Hopefully lessons have been learned. According to Gros:
" The resources are there. Europe (just) needs the political will to mobilize them."
I agree. Though I have no confidence in the political decision makers on whom we depend.
Meanwhile Charles Wyplocz offers some solutions and considers here whether official policy making, including that of the ECB, is captured by special interest groups.
Monday, 12 December 2011
Euro lacks a government banker, not a lender of last resort
This article by Thomas Palley, of the New America Foundation's Economic Growth Programme, was published in the FT Economists' Forum on December 9th
Sinéad Pentony: It crunch time (again) for the Eurozone, so this article by Thomas Palley is timely, as he articulates the causes of the Eurozone debt crisis and the solutions that are needed, differently from many of the other voices in the debate.
Palley argues that the euro has a lender of last resort – the ECB – but what’s lacking is a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. Thus explaining why the US and UK can borrow at lower rates than countries such as Spain, which has a similar deficit and debt profile, but its under speculative attack.
Palley points the finger at the “euro’s neoliberal birthmark”, which laid the foundation for a diminished role of the state and enhanced power of the market. He goes on to argue that previously, national banking systems were masters of the bond market, but the euro’s architecture makes bond markets masters of national governments – and this is the problem that must be solved through the creation of a government banker.
Sinéad Pentony: It crunch time (again) for the Eurozone, so this article by Thomas Palley is timely, as he articulates the causes of the Eurozone debt crisis and the solutions that are needed, differently from many of the other voices in the debate.
Palley argues that the euro has a lender of last resort – the ECB – but what’s lacking is a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. Thus explaining why the US and UK can borrow at lower rates than countries such as Spain, which has a similar deficit and debt profile, but its under speculative attack.
Palley points the finger at the “euro’s neoliberal birthmark”, which laid the foundation for a diminished role of the state and enhanced power of the market. He goes on to argue that previously, national banking systems were masters of the bond market, but the euro’s architecture makes bond markets masters of national governments – and this is the problem that must be solved through the creation of a government banker.
Thursday, 17 November 2011
Embracing "Deadly Sins"
Tom McDonnell: Eurointelligence is reporting that Wolfgang Franz, chairperson of the group of economic counsellors to the German government, is warning that...further ECB purchases of government bonds from the crisis countries would be “a deadly sin".
At a time when rational technocratic responses to the crisis are required, it is disturbing that this is the type of language being used by senior advisers. It may well be a sin to impose tens of billions of private banking debt on a workforce of 1.8 million people. And it may well be a sin to unleash chaos by allowing the Euro to fall because of a dogmatic and intransigent interpretation of the role of the ECB. But changing the mechanisms and protocols of the broken machine that is the currency union is not a sin.
The ECB is now the most important institution in the EU. Its ‘discretion‘ over when and how much it will buy sovereign bonds in the secondary market provides it with the power to topple democratic Governments. Its foolish decisions to increase interest rates earlier this year increased instability, and showed a willingness to put narrow price stability concerns above the wider health of the Euro zone economy and the well being of its citizens. The interest rate increases betrayed a breathtaking failure to understand the seriousness and systemic nature of the debt crisis. The bank has consistently blocked the write down of Irish banking debt. It argues against creating moral hazard and 'dangerous precedents'. Yet it refuses to acknowledge the moral hazard it itself is engendering, by dogmatically insisting reckless lenders escape the consequences of their own actions in contravention of the basic rules of the market. ECB policy effectively reduces the expected ‘cost’ of bad lending and therefore encourages less prudent lending in the future. It is one thing to have an independent central bank. It is quite another to have an incompetent central bank with the power and willingness to threaten and take down Governments it dislikes.
Turning the ECB into a guaranteed lender of last resort for sovereigns would greatly erode its discretionary power and would help end the short-term crisis by ensuring a guaranteed supply of affordable funding for troubled sovereigns. While this could arguably be accomplished through the express wish of the European Council in the short-run (under certain provisions of the Lisbon Treaty), it would almost certainly require treaty change in the medium to long term. Even in the short-run it is clear there is immense hostility to the idea. Jens Weidmann of the Bundesbank gives the German position here, and it is reflective of the view of many core countries. There is little appetite for a changed ECB mandate in the core.
This has existential implications for the Euro because the whole make-up of the Euro zone as it is currently designed is incoherent, fundamentally flawed, and ultimately unsustainable. Even if the ECB was transformed into a normal central bank tomorrow, that in itself would be insufficient to end the crisis. We would still require mechanisms to ensure the survival of systemically important financial institutions, while in the medium term we would need centralised and tighter regulation of the financial sector as well as protocols for winding up insolvent financial institutions.
If the currency union is to work successfully for all member countries in the long term there has to be mechanisms in place for the Europeanization of banking debt, as well as mechanisms for a centralised counter cyclical fiscal mechanism funded from a Euro zone wide tax, for example a Financial Transaction Tax. In a non-optimal currency area such as the Euro zone there must also be a mechanism for compensating less competitive economies for enduring the millstone of a too-strong currency they cannot devalue. This means fiscal transfers. These necessary changes are deeply unpalatable for many in Europe.
The quid pro quo to all these changes would be deeper fiscal integration, more intrusive fiscal oversight for all 17 countries and the creation of a Euro zone finance ministry. Governments could still, as they saw fit, retain the freedom to pursue a low tax/low spend agenda or a high tax/high spend agenda. However they would be required to refrain from running structural deficits. Sustainable fiscal policy should be a goal of Government in any case. Thus as long as a centralised fiscal mechanism is securely in place at the Euro zone level, both to counter-cyclically combat recessions and to provide funding for strategic investment, these fiscal constraints ought not be a major burden for a responsible Government.
Of course deeper integration within the Euro zone will force us to finally address head on the fraught political issue of the trilemma. That issue is beyond the scope of this particular blog post, but for an excellent discussion of the trilemma facing Europe you can read Kevin O'Rourke here and here.
At a time when rational technocratic responses to the crisis are required, it is disturbing that this is the type of language being used by senior advisers. It may well be a sin to impose tens of billions of private banking debt on a workforce of 1.8 million people. And it may well be a sin to unleash chaos by allowing the Euro to fall because of a dogmatic and intransigent interpretation of the role of the ECB. But changing the mechanisms and protocols of the broken machine that is the currency union is not a sin.
The ECB is now the most important institution in the EU. Its ‘discretion‘ over when and how much it will buy sovereign bonds in the secondary market provides it with the power to topple democratic Governments. Its foolish decisions to increase interest rates earlier this year increased instability, and showed a willingness to put narrow price stability concerns above the wider health of the Euro zone economy and the well being of its citizens. The interest rate increases betrayed a breathtaking failure to understand the seriousness and systemic nature of the debt crisis. The bank has consistently blocked the write down of Irish banking debt. It argues against creating moral hazard and 'dangerous precedents'. Yet it refuses to acknowledge the moral hazard it itself is engendering, by dogmatically insisting reckless lenders escape the consequences of their own actions in contravention of the basic rules of the market. ECB policy effectively reduces the expected ‘cost’ of bad lending and therefore encourages less prudent lending in the future. It is one thing to have an independent central bank. It is quite another to have an incompetent central bank with the power and willingness to threaten and take down Governments it dislikes.
Turning the ECB into a guaranteed lender of last resort for sovereigns would greatly erode its discretionary power and would help end the short-term crisis by ensuring a guaranteed supply of affordable funding for troubled sovereigns. While this could arguably be accomplished through the express wish of the European Council in the short-run (under certain provisions of the Lisbon Treaty), it would almost certainly require treaty change in the medium to long term. Even in the short-run it is clear there is immense hostility to the idea. Jens Weidmann of the Bundesbank gives the German position here, and it is reflective of the view of many core countries. There is little appetite for a changed ECB mandate in the core.
This has existential implications for the Euro because the whole make-up of the Euro zone as it is currently designed is incoherent, fundamentally flawed, and ultimately unsustainable. Even if the ECB was transformed into a normal central bank tomorrow, that in itself would be insufficient to end the crisis. We would still require mechanisms to ensure the survival of systemically important financial institutions, while in the medium term we would need centralised and tighter regulation of the financial sector as well as protocols for winding up insolvent financial institutions.
If the currency union is to work successfully for all member countries in the long term there has to be mechanisms in place for the Europeanization of banking debt, as well as mechanisms for a centralised counter cyclical fiscal mechanism funded from a Euro zone wide tax, for example a Financial Transaction Tax. In a non-optimal currency area such as the Euro zone there must also be a mechanism for compensating less competitive economies for enduring the millstone of a too-strong currency they cannot devalue. This means fiscal transfers. These necessary changes are deeply unpalatable for many in Europe.
The quid pro quo to all these changes would be deeper fiscal integration, more intrusive fiscal oversight for all 17 countries and the creation of a Euro zone finance ministry. Governments could still, as they saw fit, retain the freedom to pursue a low tax/low spend agenda or a high tax/high spend agenda. However they would be required to refrain from running structural deficits. Sustainable fiscal policy should be a goal of Government in any case. Thus as long as a centralised fiscal mechanism is securely in place at the Euro zone level, both to counter-cyclically combat recessions and to provide funding for strategic investment, these fiscal constraints ought not be a major burden for a responsible Government.
Of course deeper integration within the Euro zone will force us to finally address head on the fraught political issue of the trilemma. That issue is beyond the scope of this particular blog post, but for an excellent discussion of the trilemma facing Europe you can read Kevin O'Rourke here and here.
Wednesday, 26 October 2011
Martin Wolf's open letter to Mario Draghi
"You must choose between two paths: the orthodox one leads towards failure; the unorthodox one should lead towards success.
The eurozone confronts a set of complex longer-term challenges. But the members will not get the chance to make needed adjustments and implement required reforms if it does not survive. The immediate requirements include putting Greece on a sustainable path; avoiding a meltdown in public debt markets of several large countries; and preventing a collapse of banks. Of these, it is the last two that matter." You can read the rest of Martin Wolf's open letter to Mario Draghi here.
The eurozone confronts a set of complex longer-term challenges. But the members will not get the chance to make needed adjustments and implement required reforms if it does not survive. The immediate requirements include putting Greece on a sustainable path; avoiding a meltdown in public debt markets of several large countries; and preventing a collapse of banks. Of these, it is the last two that matter." You can read the rest of Martin Wolf's open letter to Mario Draghi here.
Thursday, 6 October 2011
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.
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.
Tuesday, 13 September 2011
When we have shuffled off this Greek coil
Tom McDonnell: The sounds out of Germany are becoming more confused by the day. Increasingly there is a growing expectation of a Greek default. Yanis Varoufakis asks whether Greece is finished over at the Social Economic Journal.
While a Greek default may be inevitable Yanis argues that Germany will not allow Greece to default before the Germans have put in place a plan for splitting Greece’s monetary system from that of the surplus countries. He fears the German plan will precipitate an uncontrolled disintegration of the Eurozone leading to a hard recession across the continent.
While a Greek default may be inevitable Yanis argues that Germany will not allow Greece to default before the Germans have put in place a plan for splitting Greece’s monetary system from that of the surplus countries. He fears the German plan will precipitate an uncontrolled disintegration of the Eurozone leading to a hard recession across the continent.
Monday, 5 September 2011
Euro Bonds are not enough, says Thomas Palley: Eurozone countries need a government banker
This article by Thomas Palley, of the New America Foundation's Economic Growth Programme, was published in the FT Economists' Forum on August 31st. Thomas Palley visited Dublin last year to speak at the FEPS/TASC Autumn Conference.
The eurozone’s public finance crisis continues to fester, reflecting both political and intellectual failure. The intellectual failure is the crisis has been interpreted exclusively as a debt crisis when it is also a central bank design crisis resulting from the euro’s flawed architecture. The flaw is the inability of eurozone governments to harness the central bank’s power to assist government finances. This systemic weakness explains why U.S. and U.K. government bonds are weathering the storm, whereas Spain confronts default rumors despite having roughly similar debt and deficit profiles.
The euro solved the problem of exchange rate speculation by creating a single currency but in doing so made countries vulnerable to bond market speculation. That is because European Central Bank (ECB) support buying of member country bonds is prohibited under the “no bail-out” provision. This prohibition is appropriate as buying one country’s bonds would subsidize it relative to others. However, it means country governments lack access to central bank help to ward off speculative bond market attacks; to finance budget deficits; and to conduct quantitative easing (QE) programs of the sort conducted by the Federal Reserve and Bank of England.
One proposal to address the crisis is the idea of a “blue bond”. Countries would have the right to issue blue bonds up to sixty percent of their GDP that would be guaranteed collectively by euro member countries. This would significantly lower interest rates charged to troubled countries, helping them attain solvency. In effect, financially strong countries would de facto lend their creditworthiness to weak countries.
The blue bond proposal would undoubtedly help solve the current crisis. However, there are two problems. First, it relies on an implicit transfer from the strong who take on a guarantee liability but get nothing in return. That is a political non-starter. Second, it does not solve the structural problem of lack of a government banker. That leaves eurozone governments vulnerable to future crises, and it also maintains persistent market pressure on government finances that will ultimately destroy Europe’s social democratic project.
A second proposal is a “euro bond”. The ECB would issue euro bonds and countries could elect to have the ECB use the proceeds to buy their existing debt up to sixty percent of their GDP. Individual countries would then be responsible for their share of the interest on euro bonds. This proposal would also help solve the current crisis but it too has problems. First, it would violate the “no bail-out” clause because all countries would pay the same interest rate on euro bonds but the ECB would be responsible for the higher interest rate on debt it purchased. Second, perversely, higher income countries could transfer relatively more debt under the sixty percent of GDP rule. Third, and most importantly, the scheme fails to address the government banker problem.
I have advanced a third proposal that solves both the debt crisis and government banker problems. Stage one would have eurozone countries establish a European Public Finance Authority (EPFA) that would be governed by member countries, with votes allocated on a per capita basis. EPFA would then issue bonds that the ECB can buy and sell through standard open-market operations. These bonds would be collectively guaranteed and countries would cover EPFA’s interest on a per capita basis. Bond proceeds would be used to buy existing country debt, again on a per capita basis. Countries with low levels of existing debt (like debt-free Luxembourg) would simply receive their share of EPFA proceeds as cash and they could buy EPFA bonds to cover their EPFA interest obligation. This debt swap would solve the debt crisis; create conditions for the ECB to engage in open-market operations to manage government bond interest rates; and create conditions for QE policies.
Stage two would have EPFA annually issuing new bonds to help finance government budget deficits. The amount issued would be democratically decided by EPFA’s governing council, presumably acting on instructions from national governments. New issue proceeds would be deposited with governments to spend as they wish. Those wishing to run surpluses could retire debt or create a sovereign wealth fund. Three features are important. First, EPFA would never spend money and all spending would be determined by governments. Second, the ECB could assist budget financing by managing bond interest rates just as the Federal Reserve and Bank of England do. Third, the eurozone would have a democratic financial union but no fiscal transfer union.
The critical feature is EPFA bonds have no taint of “national identity”, enabling the ECB to trade them without violating its “no bail-out” clause. Moreover, there are no financial transfers between countries and the per capita rule means all countries are treated equally.
The EPFA proposal solves both the debt crisis and government banker problem, and it does so without imposing unfunded obligations or unilateral transfers on any country. It therefore meets all German objections. Moreover, the EPFA proposal creates the financial space for eurozone countries to grow and continue with their social democratic projects should voters choose. This makes it more democratic than existing arrangements which impose financial constraints that restrict space for democratically determined social and economic policy.
The eurozone’s public finance crisis continues to fester, reflecting both political and intellectual failure. The intellectual failure is the crisis has been interpreted exclusively as a debt crisis when it is also a central bank design crisis resulting from the euro’s flawed architecture. The flaw is the inability of eurozone governments to harness the central bank’s power to assist government finances. This systemic weakness explains why U.S. and U.K. government bonds are weathering the storm, whereas Spain confronts default rumors despite having roughly similar debt and deficit profiles.
The euro solved the problem of exchange rate speculation by creating a single currency but in doing so made countries vulnerable to bond market speculation. That is because European Central Bank (ECB) support buying of member country bonds is prohibited under the “no bail-out” provision. This prohibition is appropriate as buying one country’s bonds would subsidize it relative to others. However, it means country governments lack access to central bank help to ward off speculative bond market attacks; to finance budget deficits; and to conduct quantitative easing (QE) programs of the sort conducted by the Federal Reserve and Bank of England.
One proposal to address the crisis is the idea of a “blue bond”. Countries would have the right to issue blue bonds up to sixty percent of their GDP that would be guaranteed collectively by euro member countries. This would significantly lower interest rates charged to troubled countries, helping them attain solvency. In effect, financially strong countries would de facto lend their creditworthiness to weak countries.
The blue bond proposal would undoubtedly help solve the current crisis. However, there are two problems. First, it relies on an implicit transfer from the strong who take on a guarantee liability but get nothing in return. That is a political non-starter. Second, it does not solve the structural problem of lack of a government banker. That leaves eurozone governments vulnerable to future crises, and it also maintains persistent market pressure on government finances that will ultimately destroy Europe’s social democratic project.
A second proposal is a “euro bond”. The ECB would issue euro bonds and countries could elect to have the ECB use the proceeds to buy their existing debt up to sixty percent of their GDP. Individual countries would then be responsible for their share of the interest on euro bonds. This proposal would also help solve the current crisis but it too has problems. First, it would violate the “no bail-out” clause because all countries would pay the same interest rate on euro bonds but the ECB would be responsible for the higher interest rate on debt it purchased. Second, perversely, higher income countries could transfer relatively more debt under the sixty percent of GDP rule. Third, and most importantly, the scheme fails to address the government banker problem.
I have advanced a third proposal that solves both the debt crisis and government banker problems. Stage one would have eurozone countries establish a European Public Finance Authority (EPFA) that would be governed by member countries, with votes allocated on a per capita basis. EPFA would then issue bonds that the ECB can buy and sell through standard open-market operations. These bonds would be collectively guaranteed and countries would cover EPFA’s interest on a per capita basis. Bond proceeds would be used to buy existing country debt, again on a per capita basis. Countries with low levels of existing debt (like debt-free Luxembourg) would simply receive their share of EPFA proceeds as cash and they could buy EPFA bonds to cover their EPFA interest obligation. This debt swap would solve the debt crisis; create conditions for the ECB to engage in open-market operations to manage government bond interest rates; and create conditions for QE policies.
Stage two would have EPFA annually issuing new bonds to help finance government budget deficits. The amount issued would be democratically decided by EPFA’s governing council, presumably acting on instructions from national governments. New issue proceeds would be deposited with governments to spend as they wish. Those wishing to run surpluses could retire debt or create a sovereign wealth fund. Three features are important. First, EPFA would never spend money and all spending would be determined by governments. Second, the ECB could assist budget financing by managing bond interest rates just as the Federal Reserve and Bank of England do. Third, the eurozone would have a democratic financial union but no fiscal transfer union.
The critical feature is EPFA bonds have no taint of “national identity”, enabling the ECB to trade them without violating its “no bail-out” clause. Moreover, there are no financial transfers between countries and the per capita rule means all countries are treated equally.
The EPFA proposal solves both the debt crisis and government banker problem, and it does so without imposing unfunded obligations or unilateral transfers on any country. It therefore meets all German objections. Moreover, the EPFA proposal creates the financial space for eurozone countries to grow and continue with their social democratic projects should voters choose. This makes it more democratic than existing arrangements which impose financial constraints that restrict space for democratically determined social and economic policy.
Wednesday, 17 August 2011
The Merkozy Summit
Link to Karl Whelan's analysis of the latest developments in the Eurozone Crisis. 'The Merkozy Summit - Bad Politics, Bad Economics'.
Monday, 25 July 2011
All roads lead to Berlin
Michael Burke: The details of the latest EU Summit remain sketchy and on the surface overwhelmingly relate to Greece alone. The Agreement reached by the Euro Area heads of state only relates directly to both Ireland and Portugal via the cut in interest rates being applied. At the same time, there was great emphasis laid on the declaration that the other measures, including ‘haircut’ for bondholders was a wholly unique event, applying to Greece once and once only, and never to AN Other EU member state.
President Sarkozy was particularly adamant on this point. But it should also be clear that he doesn’t run in the EU, nor does M Trichet. Chancellor Merkel does, and what she says goes.
This is because the EU and especially the Euro Area is a project which allows a tremendous development of production across a continental scale. In a host of industrial sectors, even the German economy alone is too small to compete with key international rivals, the US, Japan and now China. The creation of a single market facilitated the development of transnational industries within Europe and the single currency deepened that integration not least by ruling out competitive devaluations.
Germany is the main beneficiary of that increased potential, even if it and others fail to realise it. The leadership of the main German political parties were all united that the Euro Area would not be broken up because German industry has the most to lose.
As a result, Mrs Merkel got her way that the private sector would take the haircut, against the fierce opposition of Messrs Trichet and Sarkozy, who represent the EU banks and the French banks exposed to Greece respectively. This is a start, a small beginning in rational policymaking in Europe.
At the time of writing, the heavens have not fallen in and the world still turns on its axis. This is despite claims both in Ireland and in continental Europe that similar calamities would follow any losses for the banks. In addition, the Agreement initiates a preventative measure to recapitalise ailing banks in the non-crisis countries. The banks in this jurisdiction are long past saving, and this State is very much in the thick of the crisis. But what the measures (of unspecified size) mean is that default can take place without bringing down the whole of the European banking system.
Trichet and Sarkozy may regard Greece’s selective default as equivalent to The Fall. But the political and banking systems cannot return to a pre-lapsarian state. Default is now on the table.
The actual size of the cut in the interest rate for Ireland is the subject of much heated debate over at Irish Economy. Karl Whelan has come in for some particularly harsh criticism merely for pointing out that the interest rate reduction owes nothing to the prostrate negotiating position of the Dublin government. He is correct. Instead, it arises from the fact that Italy was being drawn into the maelstrom and Chancellor Merkel does not want to allow the break-up of the Euro Area.
Separately, Michael Taft has a series of very useful suggestions as to how the possible €800mn to €1bn annual windfall could be used to stimulate economic growth and thereby increase tax revenues and reduce welfare outlays.
Clearly, that too would be a rational innovation. We shall see, but point 4 of the Agreement refers to the need to stimulate growth and create jobs. Unfortunately, this remains couched in terms of competitiveness, which for the EU Commission usually means deregulation, privatisation and wage cuts- which are the opposite of a growth and deficit-reduction strategy. What is clear is that deficits are rising in all the ‘bailed-out’ economies. Public spending cuts have had the opposite effect to that claimed- the deficit has risen as the economy has deteriorated.
So will this package work for Greece and stop contagion? In my judgement, not a chance.
First, while bondholders get an estimated 21% haircut on the face value of their bonds (if they participate - the FT reports that many won’t) Greece will only see an estimated 7% reduction in its total debt. This arises because Greece will participate in the recapitalisation of its own banks and from other measures. If a 7% debt reduction were enough, there would have been no crisis.
Second, the growth-sapping cuts remain in place. They will be joined by privatisations, leading to lay-offs and bigger welfare outlays, while removing revenue streams from the government’s accounts (but probably not the state-owned enterprises’ debts). The latest Italian cuts will only produce weaker growth and higher deficits. Spanish and Italian yields are still pushing up towards 6% again.
After Britain (equivalent to US$ 135bn) German banks have the highest exposures to Irish debt (US$118bn). Leaving the Euro and disorderly default would be a disaster for this economy. We know that the British Tory ‘friends of Ireland’ insisted their bilateral loan at punitive rates could only be repaid in Euros, and no other currency. It seems likely that others have as well. Irish indebtedness would soar with a Euro exit.
But the same scenario could equally prove disastrous for German banks; a lose-lose calamity. Chancellor Merkel is willing to face down powerful opponents to ensure that does not happen. A government of the Irish Republic worthy of the name would use all these new developments to the advantage of its own citizens: negotiated default, an end to cuts, stimulus measures, job-creation.
President Sarkozy was particularly adamant on this point. But it should also be clear that he doesn’t run in the EU, nor does M Trichet. Chancellor Merkel does, and what she says goes.
This is because the EU and especially the Euro Area is a project which allows a tremendous development of production across a continental scale. In a host of industrial sectors, even the German economy alone is too small to compete with key international rivals, the US, Japan and now China. The creation of a single market facilitated the development of transnational industries within Europe and the single currency deepened that integration not least by ruling out competitive devaluations.
Germany is the main beneficiary of that increased potential, even if it and others fail to realise it. The leadership of the main German political parties were all united that the Euro Area would not be broken up because German industry has the most to lose.
As a result, Mrs Merkel got her way that the private sector would take the haircut, against the fierce opposition of Messrs Trichet and Sarkozy, who represent the EU banks and the French banks exposed to Greece respectively. This is a start, a small beginning in rational policymaking in Europe.
At the time of writing, the heavens have not fallen in and the world still turns on its axis. This is despite claims both in Ireland and in continental Europe that similar calamities would follow any losses for the banks. In addition, the Agreement initiates a preventative measure to recapitalise ailing banks in the non-crisis countries. The banks in this jurisdiction are long past saving, and this State is very much in the thick of the crisis. But what the measures (of unspecified size) mean is that default can take place without bringing down the whole of the European banking system.
Trichet and Sarkozy may regard Greece’s selective default as equivalent to The Fall. But the political and banking systems cannot return to a pre-lapsarian state. Default is now on the table.
The actual size of the cut in the interest rate for Ireland is the subject of much heated debate over at Irish Economy. Karl Whelan has come in for some particularly harsh criticism merely for pointing out that the interest rate reduction owes nothing to the prostrate negotiating position of the Dublin government. He is correct. Instead, it arises from the fact that Italy was being drawn into the maelstrom and Chancellor Merkel does not want to allow the break-up of the Euro Area.
Separately, Michael Taft has a series of very useful suggestions as to how the possible €800mn to €1bn annual windfall could be used to stimulate economic growth and thereby increase tax revenues and reduce welfare outlays.
Clearly, that too would be a rational innovation. We shall see, but point 4 of the Agreement refers to the need to stimulate growth and create jobs. Unfortunately, this remains couched in terms of competitiveness, which for the EU Commission usually means deregulation, privatisation and wage cuts- which are the opposite of a growth and deficit-reduction strategy. What is clear is that deficits are rising in all the ‘bailed-out’ economies. Public spending cuts have had the opposite effect to that claimed- the deficit has risen as the economy has deteriorated.
So will this package work for Greece and stop contagion? In my judgement, not a chance.
First, while bondholders get an estimated 21% haircut on the face value of their bonds (if they participate - the FT reports that many won’t) Greece will only see an estimated 7% reduction in its total debt. This arises because Greece will participate in the recapitalisation of its own banks and from other measures. If a 7% debt reduction were enough, there would have been no crisis.
Second, the growth-sapping cuts remain in place. They will be joined by privatisations, leading to lay-offs and bigger welfare outlays, while removing revenue streams from the government’s accounts (but probably not the state-owned enterprises’ debts). The latest Italian cuts will only produce weaker growth and higher deficits. Spanish and Italian yields are still pushing up towards 6% again.
After Britain (equivalent to US$ 135bn) German banks have the highest exposures to Irish debt (US$118bn). Leaving the Euro and disorderly default would be a disaster for this economy. We know that the British Tory ‘friends of Ireland’ insisted their bilateral loan at punitive rates could only be repaid in Euros, and no other currency. It seems likely that others have as well. Irish indebtedness would soar with a Euro exit.
But the same scenario could equally prove disastrous for German banks; a lose-lose calamity. Chancellor Merkel is willing to face down powerful opponents to ensure that does not happen. A government of the Irish Republic worthy of the name would use all these new developments to the advantage of its own citizens: negotiated default, an end to cuts, stimulus measures, job-creation.
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