Bad news from Brussels

Eurointelligence kicks off today with an FT story which makes depressing reading: European finance ministers appear to have turned down Larry Summers’ eminently sensible call for a coordinated global macroeconomic stimulus package. The eurozone is not the gold bloc, to be fair, but one wonders whether a political generation that has invested so much political capital in the SGP will be capable of averting the disaster that faces Europe. (And even if individual policy makers do understand what is needed, European fiscal fragmentation appears an almost insuperable obstacle to the Europe-wide Keynesian policies that are needed now, as events in our own little country dramatically illustrate.)

Europe may be a second class political power on the world stage, but it is a first class economic power, and so all of this is very bad news indeed. Has the April conference failed before it even opens?

ECB on Asset Support Schemes

The ECB released what looks to me like an important document on Friday.  In response to a February 26 Communication from the European Commission,  it sets out the ECB’s recommended guidelines on “asset support schemes”, i.e. over-priced purchases of impaired assets by the state or under-priced state insurance of these assets.  I have described my objections to these proposals a number of times and won’t go into them again here.  A quick look at the ECB document didn’t reveal anything that made me more convinced of the merits of these proposals (though I may report back after I’ve had a bit more time to read the document in detail).

In the Irish context, my concern is that the EU and ECB documents seem likely to convince the government that these schemes should be pursued.  However, there are other ways to go about dealing with our banking problems and a broader debate needs to be had than simply focusing on the details of how asset support schemes should be implemented.

Colm McCarthy on the Fiscal Position

Colm McCarthy’s presentation to the Green Party conference this weekend is available here.
McCarthy Green Conference March 7th 2009

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Don’t make the children of Sub-Saharan Africa pay for the failures of northern hemisphere bankers.

The lack of exposure to the international banking system had led many to hope that the Developing world would be somewhat sheltered from the fallout of the financial crisis. However it is becoming clear that this will not be the case.

 The global economic downturn has already pushed 100 million people back into poverty, and the developing world is likely to experience a growing crisis of external finance over the coming months. Commodities prices (on which most of the developing world’s economies rely) have already begun to fall, and there are predictions of a 20% drop in non-oil commodities over the coming year. Similarly, as access to credit in the developed world contracts, sources of foreign direct investment and commercial lending to the developing world will dry up. So too will remittances which totalled an estimated $24 billion last year, and in Lesotho’s case, one quarter of its GDP.  Household donations to NGOs are falling dramatically.

 Worst of all, though is the risk that developing governments will begin curtail their foreign aid budgets. For sub-Saharan Africa, foreign assistance accounts for approximately half of all its external financing. Ireland was the first donor to cut its foreign aid budget. If other donors follow suit the developing world will be facing an economic downturn of massive proportions. History shows us that even the most resilient of donors, such as the Nordic Countries, can cut back greatly on Foreign Aid during a banking crisis. In the years after the Nordic Banking Crisis in 1991 we see the Aid budget, in real terms, falling in Sweden, by 17 per cent, in Finland by 62 per cent and Norway by 10 per cent.  

 Already economists are predicting that the effects will lead to significant human costs, with average life expectancy in Africa dropping by three years, and child mortality rising by up to 700,000 annually. Such volatility of aid supply will causes untold economic and fiscal difficulties for countries in the developing world, at a time when they need financial stability most. All the recent good work of Governments, Private Companies and NGOs will be lost.

 It was only a few months ago we saw rising food costs as a real threat to our standards of living. Africa’s potential in agriculture was seen to be part of a global solution.  The global problems around water, energy, food security and infectious diseases have not gone away but will get worse and haut us well after the current crisis is over. 

Let’s maintain our commitment to Overseas Development Aid. Irish Aid has earned a massive international reputation for its work and the world has a lot of respect for the Irish Taxpayer and her drive to reaching ODA of .7 of GNP by 2012.  
 
Niall Morris and Patrick Paul Walsh,
 UCD SPIRe  & Geary Institute

 

 

Tax breaks for pensions

The Sunday Independent reports that an important debate is taking place within the Commission on Taxation:

“But its report may also call for a reduction in tax relief for ordinary private sector pension-holders and a “fierce argument” is raging within the commission over the €2.9bn cost of this relief versus the incentives that it gives to provide for the future.”

The idea of limiting tax breaks on pension contributions has received a good deal of attention, with Fintan O’Toole a notably vocal advocate (see here).  This focus is understandable given that the better off are the primary beneficiaries of the tax breaks.  

The fact remains that many households – even better off ones – are not saving enough to sustain their living standards in retirement.  This is compounded by staggering losses in both defined contribution and defined benefit pension plans.  (See Brendan Walsh’s post from December on the crisis in occupational pension plans.) 

The tax incentive can be viewed as a device to overcome the inertia that keeps people from making adequate pension provision.  As such, I would agree that it is not particularly efficient.  But it is encouraging to see that at least some on the Commission believe it is important to approach pension reform in a comprehensive manner rather than simply eliminating the existing incentive.

The Green Paper on Pensions looked at the possibility of moving to some sort of mandatory or “soft mandatory” (with default) contributions to retirement savings accounts.   Unfortunately, with households being squeezed from so many different directions, it is hard to see from where they would find the money.  In a post a few weeks back, I proposed the idea of a Swedish-style system of unfunded – or “notional” – defined contribution accounts that could at least reduce the pressure for other tax increases.

What is most important is that reforms take place in the context of an overall plan for the retirement income system.   The complexities and importance of pension reform are such that it should not be driven solely by short-term fiscal considerations.