Europe, like Ireland, is facing two crises, not one

With all the talk about debt crises last weeek, it is easy to forget that there is a real economic crisis afflicting Europe as well. The 4th quarter GDP numbers were disappointing, and the fact that Eurozone industrial output fell 1.7% in December is alarming. Unemployment is still rising, and the real Eurozone economy is not out of the woods yet. A primary focus of economic policy still needs to be the avoidance of a double dip.

The fact that little Ireland is having to cut expenditure and raise taxes at a time like this will further worsen our own economic problems, but is of no broader consequence. How many Irish people have even noticed what is happening in Latvia? The same could be said of Greece. But if the entire periphery found itself having to fight market panic by cutting in an excessive fashion, simultaneously, that could be very dangerous — especially if Spain, or, God forbid, Italy, became involved as well.

Martin Wolf is very good on this, while those of you of a more temperamental disposition may enjoy Simon Johnson’s latest piece, with Peter Boone. The core Eurozone countries don’t just have to ward off self-fulfilling market panics focussed on the PIIGS, but continue to support aggregate demand in the Eurozone. I understand concerns about government debt, but people focussed on that problem should remember three things. First, deficits will continue to rise if the real economy worsens, and a lack of aggregate demand is still a problem for the real economy. Second, the more the ECB does to loosen monetary policy, the less is the burden which fiscal policy has to shoulder. And third, if we experience another year like 2008-2009 any time soon, the probability of a wave of defaults will rise sharply.

60 replies on “Europe, like Ireland, is facing two crises, not one”

I’ll just say a few more words, to heck with it. Something, that I think could happen, and could be of a lasting kind of damage to a country like Ireland, is where our government fails to take advantage of the talent we possess on the island, which might find ways to get out of our mess. I spoke about it here:

http://www.irisheconomy.ie/index.php/2010/02/12/mortgage-repayment-burdens/#comment-35998

We could end up in a situation, where a certain country suddenly takes the initative to do something – to use its noggin so to speak. You could suddenly get a wave of valuable human resources moving to certain point, where they are able to manage it properly. And conversely, certain regions could be left without the same. I think that could be of lasting damage to some regions.

Frankly, I think that is the difference between the pheriphery, which is used to exporting its workforce to the centre. While running all kinds of ‘scams’ amongst a remaining few who live ‘the good life’ on the edges of Europe. People who live/work in some of the poorer third world areas, tell me, it is a problem also. Much of the trained talent and human resources vacate areas, leaving them with less in the way of human resources to figure out their problems.

Be it the small and medium entrepreneurs leaving parts of the middle east. Or medical professionals leaving parts of Africa, following collapse of a government etc. I mean, in all fairness, Greece and the IMF? What does that tell one about the effectiveness of the European ‘experiment’. I am beginning to think Alvin Toffler had it correct. USSR, USA, China, all tried the big central system experiment in the 20th century. It didn’t work. Europe was late to the game, and tried to replicate all of the same mistakes. Was it worth it?

Like Kevin, I have studied the sustainability and energy indpendence situation in Ireland etc, for the last year. Ireland requires engineering talent, and work to happen on this now. Much more than we are doing. Similarly with many other regions in Europe. Africa the same. It is only barely trying to build electric grids (starting with villages, which might connect together into a grid, as it progresses). In Ireland, we have an old power grid, that doesn’t suit our needs anymore. A lot of these things are big projects to manage. This financial situation, is becoming a real distraction and needs to be sorted quite frankly. It comes at a time, when we should be focussed on so much else in Europe. BOH.

“deficits will continue to rise if the real economy worsens, and a lack of aggregate demand is still a problem for the real economy.”

This is entirely correct.

I would add 2 further points:

1. The EU Commission estimate of the total decline in GDP across the Euro Area of -4% in 2009 (made in late October) may be overly optimistic. The revisions of the Eurostat ‘flash’ estimate published Friday amounted to a small net downward revision. In any event, Euro Area growth is only forecast to be 0.7% in 2010; a recession that may have ended statistically but not qualititatively. Final demand fell by 6.5%, but private consumption contracted by only 1% in 2009, while government consumption rose 2% (the sole recorded fall was in Ireland, down 2.5%). Investment fell by 10.7%, and this is the real driver of the recession. Unless and until investment recovers, the end of the recession is likely to be based on the flimsiest of statistical upturns.

2. The private sector cannot or will not invest. The decline in aggregate demand can be offset by government investment, with the very large multipliers that are attached. Conversely, aggregate demand will only decline further if government spending is cut. We already have a test case; Ireland versus the rest of the Euro Area. Irish government consumption exenditure fell by 2.5% in 2009. The EU Commission forecasts for GDP growth in 2010 are Ireland -1.4% and Euro Area +0.7%. The forecasts for final demand are -1.2% and +0.8% respectively. Of course, these sharply contrasting growth paths feed into projections for the public deficits. From a deficit equivalent to 7.2% of GDP in 2008, the path of Ireland’s general government borrowing is expected to have been 12.5% in 2009 and 14.7% in both subsequent years. By contrast, the Euro Area average deficit was -2.0% of GDP in 2008, detriorating to -6.4% in 2009 and -6.9% in 2010 and retreating to -6.5% in 2011.

Hi Brian. Like the bit about all the ‘talent’ diffusing against the demographic gradient! This has its limits. I think we might be near them. Hard to shake-off old habits though.

The sustainability and energy independence bit: a real critical predicament! But sure our ‘world class’ legislators only have eyes for the date of next Gen. Election. Don’t seek any resolutions of either our energy or financial woes within the precincts of Leinster House. Private sector is insolvent and the taxpayers are moving in same direction. Buy the farm!

The more I read the current ‘learned economic publications’ – the more I am convinced that they are singing and dancing up that Yellow Brick Road! Unbelievable!

B Peter

I appreciate what Kevin and others are doing, to focus us on the various crisis’s. We need more of that. But alternatively, many things were there before the crisis happened and are still there. The talent diffusion problem existed before the financial crisis. I don’t think we should stop working or worry-ing about these problems, because the financial crisis has got in our way. Nothing would give me greater pleasure than to get into a flat, all-out, war with some of the Irish taxation experts in relation to this. In recent times, our latest financial bill treated the talent diffusion problem like it was a war game, between Ireland and other nations that offer better carrot/stick to the ‘talent’. I know that taxation experts have never worked on ‘talent-ed teams’ before, most of them. They fail to realise, that talent-ed people like to be with other talent-ed people and not much else. You can do a certain amount of it remotely, via networks etc. But at the end of the day, being face-to-face daily matters. Talented people will put up with an awful lot, (taxation wise or otherwise) if it means birds of a feather can flock together. This insistence that ‘talent-ed’ people are cold, calculating, homo-economicus people who conduct some sort of arbitrage between one place and another, I believe, confers too much status on these taxation experts, who believe they are conducting some kind of war game with taxation experts in other countries. I.e. That they are doing it for the national good, and by pulling up and down levers, they can alter flows of people. It is a much larger equation than that. There is no reason to believe that ‘talent’ arrived on Ireland’s shores during the first and notably the second phase of the Celtic Tiger years – due to incentives. Heck, if that were true, the ‘talent’ would have run a million miles in the opposite direction. No matter how much they could save on tax here in Ireland, as talent-ed individuals, they were loosing it hand over fist in rents and mortgage payments. Ask a talent-ed guy like Constantin Gurdgiev for instance. He could have his pick. Unfortunately, our tax bureaucracy are excellent at making themselves feel special. The biggest challenge for Europe, by far, is to stop the mobile talent pool, rushing arounnd the EU zone, searching for the next Celtic Tiger – and ending up in Tiger-land(s) where they do jobs, that are way beneath their qualifications. The challenge for Europe, is how to get productive use from its mobile talent pool. It is not about Ireland, in a tax/talent-pool war game with the other EU member states. BOH.

You see, because EU member states no longer have the currency lever to play with, it has conferred new and un-derserved importance/status, on government taxation policy makers. That somehow, they can influence factors decisively. What a blind alley, that will turn out to be. BOH.

As with the debt crisis, where the bailout is for the lender nations, France and Germany in the case of Greece, so it is with the real economy – the producer economies in the eurozone need the stimulus to raise economic activity for the rest of the economy – no?

But it is unreasonable to expect the producer economies to shoulder all the burden of stimulus. So what is the funding mechanism to be? And where is the stimulus to be directed so that it does not create peripheral bubbles?

On the other hand, one can argue that the effects of debt uncertainty will result in a weaker euro effectively devaluing for exporting (outside EEA) nations in the euro and the ERM. It will, probably more importantly, make imports more expensive and lead to substitution from within the euro area. Spanish, Portugese and Greek agricultural produce will become competitive with North African and Israeli. Spanish and Portugese ceramics competitive with Turkish and so on. Will this be enough?

@ Brian O’Hanlon

I’ll just say a few more words…
Maybe I’m slow, but it’s hard to get the drift of all these messages.

@ all

We have on the one hand, a prudent leader in Dr. Angela Merkel. On the other hand, Germany should increase its deficit by boosting demand/ cutting taxes further than planned.

Germany has a particular industry profile led by Siemens, that makes it well placed to take advantage of emerging markets’ growth.

It’s not clear how much a boost in demand would help the PIGs countries rather than say non-Eurozone countries such as Sweden, Denmark and Poland.

German goods exports to Eurozone countries at 38% of the total are less than exports from Ireland.

45% of Germany’s imports come from the euro area and the surplus is 13%.

What is clear is that the German public will not support a significant bailout would seeing concrete evidence of reform.

In Greece, retirement in mid 50s, 90% of taxpayers reporting income of less than €30,000 and according to the Economist a big demand for private schooling.

Spain has just in recent weeks woke up to its crisis and In Ireland, a High Court judge has had to complain about rip-off accountancy fees; there has been no reform worth talking about; most of the McCarthy proposals have been unimplemented.

Before the PIGS start rattling the begging bowl (each of them having been deep in the trough for German funded structural and regional funds in the past), there has to be clear evidence of reform.

The Sunday Independent reports today that George Lee said we should issue a démarche to Europe: “If Europe is not prepared to help us, we should cut the corporation tax rate even further and take in as much money as we want, and if it is a problem for Europe then so be it. Why should we help them out when they are not going to help us out.”

We should also leave the euro.

How self-important we can think we are as if Germany needs us more than we need them. Remember our hubris in the bubble years? We were closer to Boston than Berlin.

Besides, it’s so easy to make these type of proposals without having to provide any detail to support the case and as a journalist, take no responsibility.

BTW, no thanks Mr. Trichet for all your help! Eaten bread is son forgotten!

@Michael Hennigan

“We should also leave the euro.”

Is it you saying that, or George Lee?

Unless my eyesight is going, the way it is typed, it reads as though it is you. It is not in italics, and it is not inside the George Lee ” “. However, based on what you have written elsewhere, I’d be very surprised if it was you saying that, so I assume it must be George Lee saying it.

If so, it confirms my worst suspicions about him. I said when he quit RTE and ran for the Dail that he was a charlatan. It was not a popular view here at the time. But, I’m glad to know that I am being proved correct. FG are infinitely better off without him. No wonder Richard Bruton wouldn’t give him the time of day if he was trying to make leaving the euro a part of FG’s economic policy.

This time last year, David McWilliams was writing every week that Ireland should leave the euro. Eoin Bond reckons it cost us billions in speculation. Now George Lee is apparently saying it. If he’s quoted extensively in the anti-euro UK media tomorrow and the speculators start speculating against Ireland again as a result, George Lee is to blame.

It was madness to be advocating leaving the euro this time last year. But, it is even greater madness now, given that Ireland has survived the worst period of the depreciation of sterling against the euro (early 2009) and competitiveness is now improving rapidly. According to the Sunday Times, inflation in the UK will this week be revealed to be 4.2% in January, which is 6.6% higher than in Ireland. Plus, the euro is down about 5% against sterling compared with a year ago. That combination is producing a massive y-o-y increase in competitiveness against the UK, which ought to kill stone dead any thoughts that Ireland is likely to leave the euro. Lenihan and Bruton should issue a joint statement saying that Ireland is not leaving the euro, either now or in the future, and that George Lee is basically a crank with a chip on his shoulder.

@ JtO

I agree. I was initially disappointed by Lee’s departure but after reading his economic proposals it has become clear that he is woefully detached from reality.

“Better to remain silent and be thought a fool than to speak out and remove all doubt.”

@ Michael Hennigan,

Michael, yeah, I know I veered off to something pheripheral to the discussion. I will not intrude into this discussion, beyond what I uttered above. All am saying, is that given ideal conditions of growth (fake growth, or too much growth or whatever) and prosperity on the island of Ireland – and the fact that so many from Europe migrated here, with lots of different skills – what I am saying, is given the 2 no. ideal conditions of economic wealth and influx of high quality human resources, there is no evidence to suggest that Ireland (with large US multinationals in particular) can even manage the abundant talent resources it has, to any great effect, never mind becoming a destination for young graduates from all over Europe. There needs to be a European wide look at this. How we move human resources around effectively, to solve problems we have successfully in various parts of the EU. Not simply allowing agencies like FAS, or equivalent, to go on hiring sprees for the sake of it. (That is not being good europeans, it wasn’t very cool, on our part, the Irish) BOH.

And the other point, is there is no use in getting into tax incentive wars, to attract ‘talent’ to Ireland from other EU countries – don’t take my word for it, listen to the tax experts, it is a ‘talent’ war – it is a much bigger issue than that. It needs to have a Europe wide scope, any policies to do with moving of human resources here and there within the EU region. This is what is de-valuing Europe as an entity so much. It is trying to work as a monetary union, but doing precious little else. BOH.

This downturn is great for the environment—-I`ll bet that our CO2 emissions are dropping fast.
People can relax, and plan on growing vegetable gardens and try to live a far more sustainable life than hitherto was the case.
We lost the run of ourselves big time, now we must learn to live within our means, both economic and environmental.

@denis

“This downturn is great for the environment—-I`ll bet that our CO2 emissions are dropping fast.”

I wouldn’t be so sure of that. Richard Tol, who knows more than anyone about environmental issues in Ireland, had a thread here a few weeks ago, which mentioned the fact that the fall in carbon emissions in Ireland in 2008 and 2009 was rather disappointing and considrably less than the fall in GDP. My theory (which may or may not be correct) was that this may have been due to the fact that the fall in output in Ireland in the recession was heavily concentrated in construction and that manufacturing output had hardly fallen at all, while the number of households had continued to rise. Manufacturing probably uses a lot more energy than construction. Meanwhile in 2010, new car registrations have risen sharply above last year’s levels since the cold spell ended in mid-January, and electricity demand seems to be rising again (not all of which can be attributed to the weather), having fallen by about 7 per cent in 2008/09.

Ok – leaving the euro voluntarily now is probably not a good idea but we’re probably going to be without the euro in 2014 anyway.
Here’s how it unfolds:
1: Germany gives a limited bailout to Greece
2: the euro weakens
3: inflation up and upward pressure on rates

Germany is not known for its charitable nature. It is well known for separating the weak from the strong! We should be under no illusions as to where Ireland fits here. German dominated empires don’t last long and so it will be with euroland.

There are alot of other scenarios which will ultimately mean either the end of the euro in it’s current form or at least the end of countries like Ireland in it.

We should begin to get ready for life without the Euro.

Some other experts would say, the energy and financial crisises are interlinked and intertwined in some way. I know, because I have been following the recent James Bond movies. The last one, Quantum of Solace, clearly showed evidence of ‘green tech’ coming into the picture. Fancy that eh? BOH.

@Kevin O’Rourke

The Johnson and Boone piece is provocative …… but asks good challenging questions ….. don’t agree with all but a good read ………

“Frankly, it would be a disaster for weaker euro zone countries to leave the bloc. Exiting countries would need to rewrite all their contracts in terms of new currencies, converting as many liabilities and assets as possible into those, and then manage a new monetary policy. There would be legal challenges in international courts to rewritten contracts—some of which would certainly constitute default. Building trust in any new currency is always difficult. But a German exit from the euro zone, in a huff, cannot be ruled out—although its consequences could be equally chaotic. …………………….Ireland is already cutting hard. Such fiscal austerity leads to double-digit declines in GDP, and risks massive political revolts. Ireland’s banks are today probably insolvent. Who can afford to repay their mortgages when wages are falling and unemployment rising? Irish house prices continue to speed downward. This is not an example of a “careful” solution—it is a nation in a financial death spiral. ”

Not sure where they get the ‘massive political revolt’ ……… unless referring to Mr Lee and Ms deBurca ………..

@Michael Burke …. yes …… there aint no stimulus around here – nor is there any real medium/long term policy ……… [Breaking news: Minister O’Dea has consulted with Minister for the Environment and the €1.7 billion for Limerick Regeneration, allegedly, back on table …. and can ‘almost’ meet deadlines……. we will monitor progess …………….

@John the Optimist …… I …er.. agree with you on the Euro. There is hope (-;

@ Micheal Hennigan ….. good to see that clarification on the Euro …… me despair index rattled for a few seconds …….

George L is history politically and his argument on leaving the Euro, and reducing Irish corporate tax rates, suggests that he may also be history in terms of economic credibility – he might get some advice from David McWilliams on diverting into celebrity punting …………… to even think about suggest reduction CorpTax would immediately strengthen moves by Germany/France to move ahead with CCCTB (common consolidated corporate tax base) and the only one of 14 competive advantages [Mr Barrett – ex head of Intel] that we still have would evaporate ………

@All

I’ve always enjoyed a bit of Greek literature – … from Johnson and Boone …..

“Plutus, the Greek god of wealth, did not uhave an easy life. As the myth goes, Plutus wanted to grant riches only to the “the just, the wise, the men of ordered life.” Zeus blinded him out of jealousy of mankind (and envy of the good), leaving Plutus to indiscriminately distribute his favors.”

A Must Read below – Ancient Lit meets Modern Finance etc {look at the name for some of those er… dodgy_deals ….. All Perfectly ‘Legal’ of course ( re ex Irish Commissioners etc and connected others) ……..
Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis

‘One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.’

http://www.nytimes.com/2010/02/14/business/global/14debt.html?th&emc=th.

@All
Great day for the Green Jersey yesterday in …….. Dubai …….. as our cricketers once again qualified for the Twenty20 world cup …… can’t wait ……. as for Paris …… lovely to meet you Ms Legarde …… Non, non, non – Monsieur Lee est un imbecile, un enfant terrible, un provocateur ….. he is not on the front bench, in fact, he is not even on the bench ……… Mes felicitations! ……..

Interesting week for the EU coming up ……….

On the Johnson/Boone piece

The comment on Gemany ‘huffing’ is ridiculous …. Angela does not do ‘huffs’ – but she does take actions.

Mr. Lee denied on the radio this morning that he said anything about leaving the euro. So we can leave that one at the door of the Indo’s fevered imagination.

It doesn’t take away from Mr. Hennigan’s point about hubris, though. I don’t believe Mr. Lee is a charlatan. He is, however, reflective of a view that we punch above our weight. That we only hear reports on what people say in English and that we only have ourselves and the UK to compare with might give us that impression… I have no idea if it is true or not, but even before the crisis had gotten going, Mr. McCreevy was deeply unpopular amongst mittelstand Germans – soft on big business was the view I got from my colleagues.

PS @JohntheO… I agree with you about leaving the euro too! But, like with house prices, I don’t think his or Mr. McWilliams comments about leaving the euro have cost us tuppence. I have never once seen them referenced in the blogs/aggregator sites I read (and I read plenty). Even the nutjobs on tickerforum ignore them as not being credible. The damage is done by ‘intelligence’ (note the quotes) pieces from London investment banks and hedge funds… look up Hugh Hendry for someone who has a lot of weight in a certain popular market view.

@ John The Optimist,

Slightly off topic, but in relation to your comments about Co2 emissions.

With the collapse in the construction industry Co2 emissions should drop as production of cement / concrete produces large amounts of emissions. Unless we were exporting cement instead of consuming it at home.

In relation to new cars being bought in Ireland, the shift is towards smaller less polluting cars (scrappage scheme), so again emissions should reduce.

I believe the Govt has already noticed a change in taxes on VRT and fuel being bought as more efficient cars are now on the road. Its time to raise the price of a Litre of petrol to around the 1.56 E mark so that the proles can’t escape lightly.

In my view, leaving the Euro is unthinkable both from an economic and political standpoint. But even more to the point, it is all but legally impossible, since (i) the EU legal basis does not presently exist and (ii) a constitutional amendment to reverse
the Maastricht Treaty referendum (1992) would also be necessary in
this jurisdiction.

In Ireland, what is striking about those who maintain a grip on the public megaphone or help develop policy – – politicians, senior civil servants, senior journalists and academics – – is the common feature that they are people who have a narrow range of experiences.

Most have never lived abroad and if the senior staff in the State enterprise agencies are as servile to political spin in private as in public, then God help us.

On the business side, IBEC is as compromised as ICTU in contributing to the economic crash and now is restrained by its disparate interests including funding from public bodies, from taking a clear position on such important issues as reform.

In the media the majority of columnists work for rival organisations peddling variations on pet themes, without term limits.

On RTÉ, many of the interviews are with colleagues or cronies.

It’s good to get an input from the likes of Craig Barrett who cannot be dismissed as a begrudger.

Ireland’s situation is likely replicated in the other PIGS countries and it only takes a crisis to have stronger external control.

http://www.tribune.ie/business/article/2010/feb/14/sr-technics-pension-hit/

Knowing nothing of PIPS does not stop me from opining that there is something a little more rotten here than appears in the report! The fund usually is able to sue the emploer for contributions and shortfall. If it does it may then throw the employer into insolvency, triggering PIPS.

But I should not be too surprized at how badly things can be arranged in Ireland.

Was this spun out of Aer Lingus? Could the whole thing be a set up? Moi, a conspiracy theorist?

@Sporthog

Regarding carbon emissions. I am certainly not in any way at all an expert on this subject. So, I will accept what you say. All I’m aware of is that, according Richard Toll here a few weeks ago, the fall in carbon admissions in Ireland in 2008 and 2009 (when GDP fell 10 per cent) was considered disappointing by environmentalists and much less than what would have been expected from a fall in GDP of 10 per cent. I was advancing a possible theory as to why this might have been so, which may well be wrong. But, the fact that the fall in carbon emissions was still less than what would be expected from such a fall in GDP remains. However, I will leave it to environmentalists to work out why.

@Sporthog

Regarding carbon emissions. I am certainly not in any way at all an expert on this subject. So, I will accept what you say. All I’m aware of is that, according Richard Toll here a few weeks ago, the fall in carbon admissions in Ireland in 2008 and 2009 (when GDP fell 10 per cent) was considered disappointing by environmentalists and much less than what would have been expected from a fall in GDP of 10 per cent. I was advancing a possible theory as to why this might have been so, which may well be wrong. But, the fact that the fall in carbon emissions was still less than what would be expected from such a fall in GDP remains. However, I will leave it to environmentalists to work out why.

The issue of how much leverage Europe has over Greece is posed by the article in the FT which suggests that Greece is resisting further austerity measures:
Athens to resist push for greater austerity
http://www.ft.com/cms/s/0/68197e8a-19a8-11df-af3e-00144feab49a.html?catid=2&SID=google

Who a the gun to their head if Greece, or indeed another peripheral Eurozone country, says ‘no’ to the conditions of a proposed bail-out? Who is holding the gun? If Greece defaults then could they cripple the Eurozone? It is interesting that discrete legal problems are again featuring in economic crises.

BTW, if Gerard Hogan is Gerard Hogan SC of TCD then it is great to see his input.

@yoganmahew

Monsieur Lee’s retraction on comments on Euro noted. I simply read some of the Indo …….

My comment on his comment on corporation tax stands – has George retracted this as well?

@all
Breaking news: UK Independent – Goldman Sachs diverts $20 billion in staff bonuses to Greek Gov as a gesture of ‘solidarity’ with the EuroZone ….. I jest of course ……

More on Goldman Sachs and the Greek Connection ……..

http://www.independent.co.uk/news/business/news/goldman-sachs-the-greek-connection-1899527.html

@ John The Optimist,

Indeed I remember the thread in which Richard Toll expressed puzzlement also.

Co2 emissions from cement production varies on several factors, however basically anywhere from 0.5 kg Co2 per kg of cement produced to 1.5KG Co2/ Kg of cement produced. The type of process and efficiency of the plant are factors.

Depending on which figures you look at, but global cement production contributes around 5% of total global Co2 emissions.

Indeed it is puzzling that Irelands emissions have not come down as much as one would expect in this recession.

Unless of course we are exporting cement instead of using it at home, or else most of our cement is imported instead of being home made. In which case some other countries Co2 emissions have gone down.

Perhaps another look at the data, another topic, another time perhaps.

Gerard Hogan: “… leaving the Euro is unthinkable both from an economic and political standpoint. … it is all but legally impossible, since … (ii) a constitutional amendment to reverse the Maastricht Treaty referendum (1992) would also be necessary in this jurisdiction.”

A referendum (or other legislative change) surely is not impossible, thus leaving the Euro is certainly feasible.

@DoD
Interestin comment from the NYT piece:
“The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.”

It seems to me that it is sovereign debt that the really big world problems lie. This is because individuals borrow on behalf of governments, thereby leaving the taxpayers at the mercy of corrupt officials. This is obvious in the third world but not quite so in say Europe, where they are likely to be more sophisticated at covering tracks.

For those interested in the state of play with Europe, I hope that today’s breaking news story in regards to SR Technics and Michael O’Leary, should serve as a very good example. Of the kind of thing, I mentioned above, as an aside. We seem to have this monetary union, or whatever, it is supposed to be. But what we don’t seem to have, is any attempt or ability to stick to good policy, which relates geographic region, to existence of native special skills – today’s example, being aircraft maintenance.

As one of the workers said today, this 5-600 highly skilled workforce will never again be produced here on this island – yet we have a massive fleet stationed here. BOH.

@ Brian O’ Hanlon

Ryanair’s PR offensive is a very good example of what for Europe?

Michael O’Leary hasn’t named his price but is clearly pushing for high public subsidies.

BTW, the DAA has said two operators will provide jobs for more than 250 aircraft maintenance workers at Dublin Airport.

http://www.dailymail.co.uk/news/worldnews/article-1251136/Spanish-intelligence-probe-debt-attacks-blamed-sabotaging-countrys-economy.html

Damnit! Someone noticed. Now who do we pay off and for how much? It’ll take more than a fat job in the IMF……

The SR business is interesting. Will the whole kit and kaboodle be set up again, with less pay and no pension obligations? Shades of chapter 11 in the US. Given the shortage of capital, it may be lost, despite the tax advantages. Shame! Now that would be worth borrowing for, but we can’t cos we are funding NAMA first!

One wonders could the problem of sovereign debt being susceptible to self fulfilling panics and amplifying dynamics be overcome by co-ordinated reform of sovereign debt markets and national laws governing debt instruments.

It looks like Greece is getting its way by being allowed to wait for the IMF report.

Greece ‘faces Europe sanctions without spending cuts’
http://news.bbc.co.uk/2/hi/business/8517499.stm

Mr Juncker – chairman of the 16 nations that share the single currency and also Luxembourg’s prime minister – has said Greece agreed to outline additional cuts in March if necessary.

He added that further measures would be imposed if Greece’s debt reduction plans were not shown to be on target by 16 March.

It should also be noted that Prof Niall Ferguson compares the US with Greece saying that whenever the financial markets move on from Greece, there will be a dollar crisis.

Prof Ferguson’s comments on sovereign debt here,

@ zhou_enlai

‘One wonders could the problem of sovereign debt being susceptible to self fulfilling panics and amplifying dynamics be overcome by co-ordinated reform of sovereign debt markets and national laws governing debt instruments.’

Now that CDS contracts are starting to be centrally cleared it would make sense to enforce trading breaks (in this case a limit bid) similar to what we have in commodity contracts to mitigate against the effect of leverage in creating positive feedback.

If a country were to ‘leave’ the euro it seems to me it would most likely do it in stages or in parts and not through a big bang. It would do it through a dual currency arrangement. The State would begin paying its domestic bills partly or wholly in a new national currency (a sort of giant LETS scheme) or in euro denominated IOUs of some sort. How exactly this currency or quasi currency would interoperate with the euro, we would have to see. I could see the LETS scheme working out well for big economies like Spain but it would provide little help in small outwardly focused economies. In a small economy maybe the IOUs could be made to work if they were attractively structured? A halfway house between a free floating currency and a peg to the euro.

These approaches would avoid redenomination of bank accounts and debt which seems legally and practically impossible.

@ Michael Hennigan,

“Michael O’Leary hasn’t named his price but is clearly pushing for high public subsidies.”

Having thought about it, you are probably right. The point I wanted to make in the blog entry I linked above – I suppose it is just a general point, about business and competition in the EU region. The point is, whether it is Dell moving to Poland, Ryanair to Glasgow or Zoe moving to NAMA, (that is, NAMA as approved by the EU, to ensure fairness of competition across the European wide banking sector) this is the Europe we now live in. These are the big employers. They are the best employers, the best and most efficiently run companies. Why not let Michael O’Leary run the country? But the point is, my experience has led me to understand – there needs to be some counter balance to the Ryanair, Dell, Zoe, Ford approach. Make no mistake about it, these kinds of companies will take full advantage of free movement within the EU region of operations and personnel. But if you want to support real innovation, inventors and creativity – you do need something else. Otherwise, we’ll never get the better wind shield wiper.

It doesn’t really matter whether it is Zoe developments fighting DDDA over North Wall Quay. It doesn’t matter really, if it is Ryanair fighting DAA over Hanger no. six. It always happens with these ‘high volume, low cost’ operators. It always happens with them. Michael Hennigan is correct – they will push it to the limit – they will push for every kind of state subsidy available to them. They thrive on this bargain-ing (on behalf of shareholders). Ford motor company, was probably the original and greatest of them all. And it took the guts of a college professor to sue them over a wind shield wiper! That quote by Charles Lindbergh from the 1930s about Ford Motor company is about as good as you will get.

“Once they got an idea, they want to start in right now and get action tomorrow, if not today. Their policy is to act first and plan afterward, usually overlooking completely essential details. Result: a tremendous increase of cost and effort, unnecessarily.”

BOH.

GK
Doing that would suggest morality has someplace in the market. Has it? How do you stop private deals? What is the sanction for not clearing centrally? It is usually voluntary.

Somehow I do not believe that the Greek government and Gold-in-Sacks used any public market for their “swap” designed to mislead Brussels.

I happen to own the Brooklyn bridge, it is about to be sold for scrap. I can sell it to you for $10,000?

zhou_enlai
Show me an unrigged market and I will see a business opportunity. Do you think reform and regulation work? I will sell you the scrap for $9,000!

@GK

Can you give a little more detail on CDSs. Is it the Stock Exchange rules that govern their form and are they generally governed by the law of the nation where the stock exchange is based? Is this the same for bonds or are bonds traded more widely, governed by more laws and would therefore require greater concerted action amongst nations?

Brian O’Hanlon

“I’ll just say a few more words, to heck with it. ”

Such restraint and modesty, Brian!

“Europe was late to the game”

I don’t agree!

Talent is not to be helped Brian, it is to be suppressed and derided, or haven’t you been reading the posts on this blog? Vested interests are bad for those who are not, Brian! You are not. Liam Carroll was and may be again.

@ Zhou

Government bonds are traded on exchange and ‘over the counter’ in the case of some issues. One must be registered with the stock exchange in order to deal in government bonds in Ireland, this varies slightly with country but it does mean that there is some oversight of the market.

CDS contracts are traded ‘over the counter’ and it is effectively a self regulating market. Standardised contracts were drawn up by the ISDA, and trades are voluntarily submitted to Markit to provide some transparency, but as Pat Donnelly alluded to these are private deals and as such can take any form that is desired.

@ Pat Donnelly

I agree that too much regulation will force trading ‘off exchange’, in fact this is occurring to a certain extent in the commodity markets. However as long as any regulation isn’t excessively prohibitive (and I don’t think my suggestion is prohibitive at all) the benefits of centralised trading will attract liquidity.

I added a couple of more thoughts on European multinationals and how (Irish) governments should approach this issue.

http://designcomment.blogspot.com/2010/02/matters-for-house.html

The more I think about it, the more I think that vanilla politicians of the house, are out of their depth and expertise. Perhaps in future, we should establish a key speciality within the civil service to deal with Europe?

I mean, something that spans across Tourism (minister Cullen), Trade and Employment (minister Coughlan) and state agencies like DAA, EI, IDA etc. I mean, to have parties who do present a credible opposition in the boardroom to competition such as Ryanair.

There was a good comment yesterday, Michael O’Leary asked minister Coughlan how many jobs does Ryanair provide in Ireland, and she had no idea.

BOH.

I mean, the second and important point is as follows. Every time a minister for Enterprise, Trade and Employment messes up some negotiation, with a seasoned and experienced operator, such as Ryanair – or it could be any large national or multi-national – it costs the state an arm and a leg, in time/effort as well as money to spin the perception, back to from the brink of it being a mess.

Would it not be easier at a certain point, simply to establish a ‘European Agency’ within the state – with capabilities to work across several departments and state agencies, to pool resources, information and policy formation? Rather than the normal procedure, which is to sit down at the boardroom table, without info, without preparation and then spend a week or two, on the air waves etc, trying to spin it, so that the mess gets buried? BOH.

@GK/Pat Donnelly

If countries co-ordinate their legislative approach to how certain contracts are enforced then they could regulate them.

As an purely hypothetical example, if all countries said bonds are not enforceable unless they are for a term of atleast 7 years then all bonds would have to be seven years long. Similarly, if they all said that no contract in the nature of a CDS could be enforced unless the buyer had an insurable interest greater than the value of their aggregate swap position and the documents must be traded on an exchange then that would mean the market would have to be regulated.

I think this is part ofthe reason why they think bondholders may have been chastened by Christine Lagarde’s comments.

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