The economics of the Lisbon vote

In this post, I want to raise the economic consequences of the vote on the Lisbon Treaty on October 2nd, not the economic consequences of the Lisbon Treaty itself. The post is prompted by my amazement at hearing the comments of Professor Ray Kinsella of the Smurfit Business School when debating the economic consequences of a No vote with Pramit Ghose of Bloxham on Morning Ireland this morning.

Ghose argued that the financial markets will exact a price if there is No vote on October 2nd. Noting that 80% of Ireland’s debt is owned by international investors, he argued that a No vote would raise uncertainty for these investors who would consequently seek an extra premium for lending to Ireland. Going back to the experience in January–February earlier this year when Anglo-Irish bank was nationalised, he suggested that this premium could be an extra 1% on the borrowing rate the Irish government would have to pay.

This view of an adverse financial fallout from a No vote was disputed by Ray Kinsella, essentially on the basis of efficient market theory. His argument essentially is that the markets are already pricing in the possibility of Ireland saying No, so that if we actually say No, there will be no effect on the premium paid over German Bunds. As evidence for this, he noted that the yield premium over Bunds has been narrowing in recent months, again underlining the complacency with which the markets are viewing a No vote.

Now, Ray Kinsella went on to say that he did not think that the Treaty was good for either Ireland or Europe, so presumably he will be a No voter himself. But, from where I sit, there is a big difference between factoring in the probability of a No vote and the actual reality of a No vote. If markets are reading the opinion polls, they might assess the probability at, say, 40%. If voters do reject the Treaty, the probability ex post is 100%. This is surely not an insignificant difference.

More generally, I was interested to learn that there are economists prominent in public debate who are advocating a No vote on 2nd October. This seems to fly in the face of the Indecon survey which reported that Ireland’s economists are strongly in favour of a Yes vote, though their survey was confined to academic and research institute economists and specifically excluded economists working in the media and banks or other financial institutions. Their findings indicate that 91% of the economists surveyed believed that, taking all factors into account, Ireland’s overall economic interests would be best served by a ‘Yes’ vote.

As I was on holiday at the time, I did not respond to the Indecon survey, but I am a strong supporter of a Yes vote on October 2nd. Perhaps, given the understandable attention to NAMA in these posts over recent weeks, we have not given enough attention to debating the issues at stake in the Lisbon Treaty referendum. Although I want to confine this thread to what readers think is riding on the outcome of the referendum for the economy, if demand is there a thread could be opened on the economic implications of the Treaty provisions themselves. While financial markets are one channel whereby the referendum vote will affect the economy, there are clearly other channels as well, including foreign investment inflows as was highlighted at the benefit bash in Farmleigh over the weekend.

Certainly, Ray Kinsella’s comments were a wake-up call for me that Yes supporters can leave nothing to chance for referendum day.

New Global Financial Stability Report from IMF

The analytical chapters from the latest GFSR have been released

Chapter II. Restarting Securitization Markets: Policy Proposals and Pitfalls

Chapter III. Market Interventions during the Financial Crisis: How Effective and How to Disengage?

These are available here.

Distributional implications of a carbon tax

In a paper just published in the ESR, Verde and Tol study the implications of a carbon tax across the income distribution. The paper by and large confims previous work (Callan and others being the most recent). A carbon tax is markedly regressive. It disproportionally hits poorer households. That said, the scale of the carbon tax is modest (euros per week) and small relative to income taxes and benefits. That means that the distributional damage can easily be repaired (should our dear leaders be so inclined).

The paper adds to previous research by also quantifying the indirect effects of a carbon tax. (This was last done by Cathal O’Donoghue for 1987.) A carbon tax increases the price of energy (direct effect) and thus of everything else (indirect effects). The paper shows that the indirect effects are small relative to the direct effects, and thus hardly affect the regressivity of the tax. The paper also shows that a carbon tax abroad would have a similar impact on Irish households again.

Benoit and Marsh on excellence (or not)

In a paper just published in the ESR, Benoit and Marsh confirm that research excellence is measurable — even for political scientists, some of whom argue that reality is constructed. They show that research quality varies considerably. Should research budgets be cut, there is now a basis for cuts that minimise damage to quality.

Some of you will want to bitch that Benoit and Marsh feature as the numbers 1 and 3 on their own ranking. This is nonsense. The correlation between the various indices is high. The same people are top regardless of the quality measure used, and people-in-the-know already roughly knew who would do well. This exercise primarily serves the community — and the authors invested time that they could have used to publish in a more prestigious journal.

ESR Paper on Public Sector Pay

The new edition of the Economic and Social Review is now available online. The edition contains two policy papers. One is this paper by Eilish Kelly, Seamus McGuinness and Philip O’Connell on public sector pay rates. I think Richard Tol is going to open a thread on the other paper which focuses on the carbon tax.

The three regular papers in the edition (David Audretsh on entrepreneurship, Ken Benoit and Michael Marsh on political science in Ireland, and Vahagn Galstyan and Philip Lane on fiscal policy and competitiveness) are also, in my opinion, very interesting contributions.