The Travails of EMU

Landon Thomas has an article on the fragility of EMU in today’s New York Times: you can read the article here.


L’impôt carbone

The carbon tax was ruled to be in conflict with the constitution of France. The proposed French carbon tax is very similar to the Irish carbon tax (but 2 euro higher). The stated reason (IN THE GUARDIAN) is that emissions already regulated under the EU ETS would be exempt from the carbon tax. This is exactly as it should be. Anything else would be double regulation. In fact, as I argue here, a domestic tax on an internationally traded permit would not reduce total EU emissions (it would reduce French emissions and increase emissions elsewhere in the EU) but it would increase costs in France and the EU as a whole.

[DELETE: A bad decision, so.]

This may well have ramifications for EU climate policy, probably in the form of a renewed call for an EU wide carbon tax.

ADDITIONs: translated press release, original press release by the Constitutional Court

The court’s decision seems to rest not so much on the fact that some will pay taxes and others need permits, but rather that the permits are given away for free. The court did not rule in favour of double regulation, but against grandparenting for some.


Courtesy of Sarah Parlane, a new translation

Press release
Decision n° 2009-599 DC – December 29, 2009.
Finance Act for 2010.

On December 29, 2009, the Constitutional Council, by its decision n ° 2009-599 DC, ruled on the Finance Act 2010 which had been seized by over sixty members and over sixty senators. Applicants challenged the reform of the business tax which will be substituted by a territorial economic contribution. They also challenged some propositions relative to the carbon tax plan, the per diem work injury, the increase of the
domestic consumption tax for fuels and the extension of the active solidarity income to some young people under twenty-five years.


Secondly, the Council found that, in relation to the carbon tax, the broadly applicable authorized exemptions were contrary to the objective of reducing global warming and generated some “tax discrimination” in relation to public contributions. As a result it has censored the whole policy regime relative to the carbon tax (articles 7, 9 and 10).

II – Contribution carbon.
Article 7 of the law introduced a carbon tax. The parliamentary analysis outlined that the objective of this measure is to introduce a mechanism capable of reducing greenhouse gas emissions significantly in order to reduce global warming. To achieve this, it advocated “to impose an additional tax on fossil energy consumption” to induce businesses, households and governmental agencies to reduce their emissions.

However, Articles 7 and 10 of the Act also stipulated some exemptions, discounts, partial refunds and specific rates. According to these, the following emissions were not subject to the carbon tax:
– those of the thermal generating plants producing electricity,
– those of the 1018 most polluting industries such as refineries, cement producers, coke and glass factories,
– those of chemical industries relying heavily on energy,
– those of double-use products,
– those of energetic products used in electricity consumption,
– those of air and public transportations.
Furthermore, a discounted rate applies to the emissions issued from agricultural production, fishing, road freight and shipping.

Economic Performance

The Irish Economy in 2010

You can find my views in this article for Business & Finance.

Economic Performance

Hyun Shin: New Advisory Position

Hyun Shin of Princeton has been among the most insightful analysts of the global crisis.  He now has taken on a new role: helping Korea in its presidency of the G20 during 2010, as chief advisor on international economics to the President of Korea .

You can learn more about his research here.

The announcement of the new position is here.

Banking Crisis

Cowen on NAMA Getting Credit Flowing

In a year-end interview with Jody Corcoran in the Sunday Independent, the Taoiseach answered questions about NAMA. The relevant passage is below the fold.

Economic Performance

Politics and Economic Policymaking

This field of study addresses issues such as the factors militating against the adoption of growth-enhancing policies, even when politicians themselves might favour them, and the various sources of political cover that might be available to help resist such pressures.  (Some of the bigger questions can be intuited from the way I’ve phrased these particular ones).  A former student of mine emailed me recently to say that she found these topics “ridiculously interesting; it’s almost like reading gossip”.  (Thank you, N!)  I haven’t yet begun to model these processes (spent the semester boning up on game theory with the intention of doing so) but some of my musings on the topic (in the context of the last 50 years of Irish economic history) are available in this recent paper.  I have discussed other examples of available political cover, such as the “golden straightjacket” of EU and WTO rules (to use Thomas Friedman’s phrase from The Lexus and The Olive Tree) , in other recent writings.


Dublin Bikes

he Irish Times has a story reminding us of the runaway success of Dublin Bikes, the bike rental scheme in Dublin city. The question is why is this so popular? It strikes me that Dublin is small enough to cycle but too big too walk, while motorised public transport is inconvenient and taxis too expensive.

Dublin Bikes copies Velo’v in Lyons, which was introduced in May 2005. There is no academic literature on who uses these bikes and why (but there is work on the trips taken). Bike rental is typically presented as a complement to other forms of public transport. A look at the station map suggests that Dublin Bikes are used to get around the city, rather than get into the city. Bike rides would thus replace bus rides and walks. Assuming that Dublin Bus did not respond by changing routes or frequencies, that means that Dublin Bikes does not reduce emissions and increases congestion by putting more bikes on the road.

Banking Crisis Economic Performance

Morgan Kelly on the Irish economy

Morgan has an op-ed in the Irish Times describing the jobs and debt crises in Ireland: you can read it here.


FT on Imbalances in the Euro Area

This FT editorial outlines the challenges facing the euro area.

Fiscal Policy

A Christmas Present for Senior Civil Servants

On budget day, the Minister for Finance announced that civil servants earning between €165,000 and €200,000 would take pay cuts of 12% while those earning over €200,000 would take pay cuts of 15%. Yesterday, with the public focusing on their pre-Christmas preparations, the government announced that this would not be happening after all.

These pay cuts have been rolled back for two reasons. First, the government announced that it was going to take into account the elimination of “performance-related awards” which had averaged ten percent of their salary. As a result it reduced the new pay cuts for some civil service grades to reflect the loss of this ten percent.

Second, it was decided that the differential rates of adjustment, with higher cuts for those over €200,000 would introduce anomalies in which there would be overlaps such that those on higher points in lower scales would have better salaries than those on lower points of a higher scale.

The statement points out the implications of the decisions taken:

The resulting adjustments including the effect of the termination of the scheme of performance-related awards produce reductions in remuneration of 14% in the case of the grade of Deputy Secretary and 11.8% in the case of the grade of Assistant Secretary.

Or, in other words, given that the bonuses were gone already, these measure will imply a cut of only 3% for Assistant Secretaries and only 5.4% for Deputy Secretaries (based on 0.882*1.1= 0.97 and 0.86*1.1= 0.946).

The Irish Times reports that a government statement said that it would have “been unfair” to these grades not to make these adjustments.

A couple of comments about this.

First, these performance-related awards were, as their name suggests, not guaranteed but (at least in theory) related to performance.  This move appears to be an effective admission from the government that these payments were not in fact performance-related bonuses but part of the core pay of these civil servants. For a government that claims to be keen to introduce reform into the civil service (something that should include bonuses as incentives for good performance) this is a very unfortunate precedent.

Second, these bonuses were not pensionable. Because civil servants’ pension obligations are still based on the full pre-pension-levy salaries, this means that the pensionable salary of an Assistant Secretary has only fallen 1.8% this year. Senior civil servants close to retirement have been almost completely protected from the consequences of the fiscal crisis.

Third, the Review Body on Higher Remuneration, whose recommendations the Minister had claimed to be implementing, explicitly made its recommended cuts in terms of regular salary. This is not because they were unaware of bonuses. They stated:

the continuation of performance-related awards cannot be justified in the current climate. Having said that, it remains our view that such awards will have an important role to play in the future when economic stability has been restored.

In other words, their recommended cuts were in addition to the suspension of bonuses, which they recommended re-introducing at some point.

Fourth, it appears that senior civil servants are the only group in Irish society that get to count earlier cuts as part of their current cuts. For instance, the cuts to social welfare payments announced in the budget are in addition to the 2% cut related to the elimination of the Christmas bonus. Would the government consider changing its cuts in social welfare rates to take account of this?

Finally, perhaps it is cynical to suggest that this information was released just prior to Christmas in the hope that the public would not notice. If this was indeed the intention, somehow I don’t think it’s going to work.

Economic Performance

Ireland’s Capital Stock

The CSO has released new estimates of Ireland’s capital stock, which makes for very interesting reading: see the press release here and the detailed file here.

Economic Performance

ESRI Quarterly Commentary

The executive summary of the ESRI’s latest Quarterly Economic Commentary is available here.


Economic and Social Review: Winter 2009

The latest edition of the Economic and Social Review is now available online here. The papers in the edition are as follows.

Modelling Credit in the Irish Mortgage Market
Diarmaid Addison-Smyth, Kieran McQuinn and Gerard O’Reilly

Politics and Fiscal Policy Under Lemass: A Theoretical Appraisal
Frank Barry

The Impact of Fiscal Shocks on the Irish Economy
Agustin Benetrix and Philip R. Lane

Language and Occupational Status: Linguistic Elitism in the Irish Labour Market
Vani K. Borooah, Donal A. Dineen and Nicola Lynch

A Code of Practice for Grocery Goods Undertakings and an Ombudsman: How to Do a Lot of Harm by Trying to Do a Little Good
Paul K. Gorecki

Income Inequality and Public Policy
Brian Nolan

Economic history Economic Performance Trade

The dynamics of Smithian decline

À propos of nothing in particular, I can’t resist posting a link to this.

Banking Crisis

Masterfully Vague?

A busy day at the Department of Finance as desks get cleared before Christmas. The Department has released its regulations regarding the determination of long-term economic value for assets. These regulations formalise draft regulations that were released here in September. Much of this was published before. One new bit is that the September draft said that assets would be valued using a discount rate such that

“NAMA discount rate” means the Irish 10 year Government Bond rate at the establishment date plus * per cent;

Today’s regulations tell us what the mysterious * is:

“NAMA discount rate”, for bank assets denominated in euro, means the Irish 10-year Government Bond Irish Stock Exchange quoted closing yield at the establishment date plus 0.8 per cent;

For those unfamiliar with asset pricing formulae, the lower the discount rate used, the higher will be the estimate of the asset value. I always suspected that a low discount rate would be part of the NAMA pricing strategy. For instance, just before the draft NAMA legislation was released I wrote:

My point here is that it will be very easy for any NAMA official who wanted to do so, to pluck out an appropriate set of assumptions about the future that will end up delivering whatever haircut is deemed desirable. In particular, I suspect it is possible that the valuations will completely ignore the risk premium element in pricing these assets and will make highly positive assumptions about future cash flows.

Interestingly, the Department’s new best friend, Mr. Seelig from the IMF had suggested to the Department of Finance that they use market rates for property investments or adjust NAMA’s cost of capital to reflect the risks associated with the assets being acquired. The 0.8 percent adjustment is, by any reasonable assessment, well short of the appropriate risk adjustment.

Mr. Seelig would undoubtedly approve of the masterful vagueness of the rest of the document, which is full of stuff about NAMA taking into account “in such manner as it thinks fit, by reference to such of the following as it considers relevant” various factors, i.e. doing whatever the hell they feel like.

One bit I didn’t understand was the following. Having defined the NAMA discount rate, page 6 then states:

The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs, incurred or likely to be incurred by NAMA over its lifetime in the discharge of its functions.

I couldn’t figure out when this rate would be applied rather than the NAMA discount rate defined above.

Banking Crisis

Morgan Kelly: “The Irish Credit Bubble”

Morgan Kelly has released a new working paper “The Irish Credit Bubble” – it is available here.

Banking Crisis

NAMA Board Appointed

The board of the National Asset Management Agency has been announced. The announcement from the Department of Finance is here. Newstalk have information on the board members here.

Banking Crisis

Seelig Email to Department of Finance

Simon Carswell reported last Saturday on an email from Steven Seelig, who holds the position of Advisor in the IMF’s Monetary and Capital Markets Department, to the Department of Finance commenting on the draft NAMA legislation. The Irish Times obtained this email, along with other communications on NAMA, via a Freedom of Information request and there has been some discussion of it in the comments on this site.

Because the newspaper article only partly reported the text of the email, I asked Simon Carswell would he be willing to pass it on and he has kindly agreed. So here’s the full text of the communication. (Here’s the draft of the legislation he was commenting on )

For conspiracy theorists, the apparently blacked-out word on the second page is “excellent” – Simon had highlighted it in the copy he scanned.

Economic Performance

Earnings Data for Ireland

The CSO has released a new and comprehensive survey on earnings patterns in the economy: you can find the release here.  The new Earnings, Hours and Employment Costs Survey (EHECS) results are comparable across sectors and include more detail on components of earnings and labour costs than is currently available. The data show interesting sectoral variation in earnings patterns and the relative roles of adjustment in hourly earnings and total hours worked in determining aggregate earnings dynamics in each sector.  Still, the survey still only relies on aggregated data for each participant in the survey, such that it does not reveal the precise earnings dynamics for specific worker types or occupations.

Banking Crisis

Prime Time Investigates: The Bankers

Congratulations to Oonagh Smyth and the team at Prime Time Investigates for producing an excellent documentary on what went wrong with the Irish banks. The programme, which has insightful contributions from a number of people including Governor Honohan, is now available online here. The programme is likely to increase the pressure on the government to have an official inquiry.


Dublin’s waste

There are three pieces on waste policy in today’s Irish Times.

According to the first, poor households in Dublin will no longer be exempt from waste charges. This makes a lot of sense. If one is worried about the impact of waste charging on household budgets, then one should increase benefits/tax credits. The present, to-be-abolished system mixes environmental and social policy, both of which are badly served as a result.

According to the second piece, the High Court ruled in favour of competition in household waste collection and against Dublin’s county councils who are both regulators of and operators in this market.

According to the third piece, Minister Gormley talks about the implications for the Poolbeg incinerator.


Inflation in 2000

Following on from Philip’s recent post on domestic demand, I dug out this paper I wrote in 2000 with Rodney Thom to see what I was saying at the time. Philip suggested I post the link as part of our ‘nostalgia series’, so here it is.

I’d say about 5 people read the paper. We got some things right and some things wrong.

The context was the incipient inflationary pressures already building up in the economy. Some thought inflation was due to one-off supply side shocks. Rodney and I argued that the inflation was due to excess demand, and that the correct response (given that the first best policy — raising interest rates — was no longer available to us) was restrictive fiscal policy.  We did recognise the political difficulties of cutting demand through restrictive fiscal policies at a time when the economy was booming. Sadly, that proved all too correct, but I don’t suppose that either of us anticipated the extent of McCreevy’s pro-cyclical folly.

We identified the risk of overshooting, followed by a hard landing, and I seem to recall that a few people at the time were worried about that — cf. the brief snippet of Krugman on this evening’s Prime Time. That wasn’t prescience, just basic macroeconomics.

One thing we got badly wrong was our assumption that if overshooting occured, and a hard landing ensued,  social partnership would provide the means for reducing wages and other costs right across the economy in a coordinated manner. (This was based on the late 80s/early 90s experience. It hasn’t happened. Rather than all jumping together, we have jumped or been pushed one group at a time, which is economically ineffective and politically corrosive.)  Worse, social partnership would soon become an important driver of pro-cyclical fiscal policy.

My conclusions from having gone down memory lane in this way is I guess a pretty obvious one: we don’t have either the fiscal or the labour market institutions that are required given EMU membership.


What Kind of Banking Inquiry, and Why?

Why have an inquiry?

1. The fiscal cost of the banking collapse is likely to be so substantial as to dwarf any similar event that has occurred since the foundation of the State. This is not e-voting machines, or the cost over-run on Luas, not that these were undeserving of investigation.

2. There has been a systemic collapse of the Irish banks – all of them. This is not a cock-up comparable to the DIRT/offshore accounts episode, or Mr. Rusnak, nor is it a failure of a rogue bank, or of small banks. 

3. The absence of a public explanation from the authorities or from the banks themselves has fed public perceptions that fiscal austerity is being pursued in order to bail out the banks. There would be fiscal austerity right now even if the banks were tickety-boo, but the absence of a factual public narrative on the banking collapse is damaging the credibility of the fiscal adjustment programme. Most economists regard this programme as necessary and desirable, at least in broad terms. It will take another three or four years, and it needs public acceptance.

4. Bank boards and bankers remain in situ with limited exceptions. The lack of contrition, given what has happened, fuels public anger and could damage the willingness to honour debts.

5. International capital markets have drawn their own conclusions about the extent of the fiscal cost, about the credibility of Irish regulatory authorities and about the probity of Irish business. The absence of a full narrative runs the risk of less favourable assessments than are actually warranted.  

Inquire into What?

6. Inquiries are under way, mainly concerning Anglo, into doctoring of accounts, loans to directors, share-support operations and other matters which may lead to criminal prosecutions. But several banks, including the two largest, appear to have lost most or all of their capital through mismanagement, without benefit of any criminal behaviour. An inquiry into boards and management is justified for the simple reason that these are banks, and have had to be rescued at taxpayer expense. The behaviour of auditors, and the efficacy of accounting standards, should also get a mention. A true and fair view would be that the Irish banks have made no profits at all for many years. 

7. There have also been major failures of regulation and supervision. How did a building society , for example, end up with a loan book 80% of which is headed for NAMA? Balance-sheet expansion, loan concentration and excessive exposure to funding risk on the liability side were permitted to proceed unchecked year after year.

8. Any inquiry should focus on these (non-criminal) issues – bank management, the performance of the regulatory authorities, auditors. The criminal investigations will take care of themselves.

9. Regulatory and supervisory functions are delegated to the Central Bank and its offshoots. The DoF and former Finance Ministers ought not to be in the firing line, on the principle that if you hire a dog, you don’t have to bark yourself. The media, and the Dail opposition parties, sometimes muddy the waters by seeking to pin the tail to the wrong donkey. So far as I am aware, the CB had adequate powers at all times, and never sought additional powers only to be refused.

How to Organise an Inquiry?

10. As a result of the Abbeylara episode, there may need to be special legislation to facilitate a parliamentary inquiry. There would be no public support for a ten-year extravaganza overseen by m’learned friends. Deputy Pat Rabbitte has apparently prepared a bill to deal with the Abbeylara fall-out, and Judge Yvonne Murphy appears to have done a competent job, quickly and at low cost, on the Dublin Archdiocese.

Banking Crisis

Honohan Interview on RTE

Governor Honohan gave an extensive interview on last night’s The Week in Politics on RTE. A podcast of the interview is available here. I would note that the reaction from the government to Governor Honohan’s comments on an inquiry into the causes of the banking crisis has been disappointing, though perhaps predictable. The Irish Times reported:

In the Dáil yesterday, Brian Cowen said he had read what Dr Honohan had to say.

“From my point of view, the resources of the State are currently involved in ensuring banking stability and that we can deal with the economic and financial issues that arise.

“I am sure there will be economic historians and economists who will continue to talk about the failure of the regulatory system in this and other countries regarding the challenge faced by us.

“However, I would have to carefully consider such an inquiry before giving any commitment. As we know from the Abbeylara case, there are limitations on Oireachtas committees being able to inquire into questions of fact.’’

The “resources of the state” argument is weak. Essentially, this is the can’t-chew-gum-and-walk theory of government.  The “economic historians and economists” comment also has the suggestion that these are matters for academics to worry about while practical men like the Taoiseach worry about the present and the future (going forward). Still, I suspect that the government may end up having to yield to pressure for an inquiry and the foot-dragging will just mean that they will get no credit for having done so.

Banking Crisis

Debt Default in a Developed Country

John Dizard writes in the FT on this interesting topic: you can read it here.

Banking Crisis

Basel Committee’s New Proposals

The Basel Committee on Banking Supervision have released consultative proposals for changes in international banking regulations. Summaries and two detailed documents are available here. I haven’t had the time yet to read these in detail but it’s worth flagging them for people because the proposals put forward in these documents are likely to have an important impact on the future of the Irish banks.


Profile of this Blog

Stephen Price has written a profile of this blog in the Culture section of today’s Sunday Times. So far as I can tell, this section is not available online – you will have to go the traditional route of buying the paper in order to read it.

There is also an article by John Burns on blogging in Ireland – that is available here.

Environment Uncategorized

The Copenhagen Accord

The ultimate aim of science is to predict, preferably something that can be falsified. In 1994, using tools that were much older, Scott Barrett predicted that an international treaty on the provision of a global environmental good (say, greenhouse gas emission reduction) would be either narrow (that is, ratified by a few countries only) or shallow (that is, have lenient targets). That prediction was not entirely correct. The Kyoto Protocol was both narrow and shallow: Western Europe signed up to targets that will be met by virtue of lacklustre economic growth.

Since 1994, game theorists have shown that while meaningful global treaties are unlikely, regional treaties may well be feasible and effective. That prediction seems to be accurate. In Copenhagen, five nations (Brazil, China, India, South Africa, USA) came together in something of a deal. (The other 188 agreed to take note.)

The EU had put all of its cards on the table well before the meeting, and was thus sidelined from the negotiations.

As an academic, one should be happy if predictions stand up to observations. As a taxpaying citizen, one may have a different opinion. Why did 45,000 people travel to Copenhagen for a meeting that was widely predicted to fail, and indeed did?

The short answer is: bad policy advice. The debate on climate policy is not open. Group think dominates, and people who have a slightly different opinion are ignored or smeared. Policy advise is often manipulated, and decisions are regularly made in complete ignorance of the consequences. The Intergovernmental Panel on Climate Change, which is supposed to synthesize the academic literature to inform decision makers, has deliberately ignored or downplayed politically inconvenient parts of the literature such the large body of game theory.

The literature on the provision of global public goods has two straigthforward recommendations:

1. Forget about legally binding targets. Use pledge and review instead. International law is weak, and countries are reluctant to sign away part of their sovereignty.  Treaties with legally binding targets tend to codify what signatories plan to do anyway. Discussion about binding targets and sanctions tend to be acrimonious, as some countries feel threatened and “binding” has different meanings in different jurisdictions. So, countries should meet every so often to discuss their domestic plans.

Such an information exchange is important because climate policy inevitably raises the price of energy. Dearer energy implies a loss in competitiveness. A country would therefore be more inclined to unilaterally raises its energy prices if it knew its trade and investment partners would do the same.

2. Focus on policy instruments. Emission reduction is much cheaper in some places than in others. So there needs to be a mechanism through which a country can purchase emission reduction in another country. The simplest way to do this is by linking up domestic markets for emission permits. (Permits are licences, rather than commodities, so international trade is not automatic.) An international treaty should regulate international trade only. (Current attempts seek to micro-regulate both international and domestic policies.)

One could hope that the failure in Copenhagen will lead to a fundamental re-think of international climate policy. I’ve hoped that for over 15 years now, and I’m not holding my breath this time.

Banking Crisis

Safe and Sound Banking: A Role for Counter-Cyclical Regulatory Requirements?

During the Autumn term, we have had the pleasure of hosting Jerry Caprio as a Fulbright Scholar.  He has written a very interesting paper on this topic: it is available here.


Withdrawal and Expulsion from the EU and EMU

This is an interesting paper from the ECB on the legal dimensions of these scenarios.