I guess Colm has better things to be doing then putting links up on blogs but for those of you who haven’t seen it, Mr. McCarthy’s column in today’s Irish Times makes for interesting reading. Colm points out that “It would be unfortunate to celebrate the centenary of 1916 with macro-policy dictated from Brussels and Washington.” I wonder whether Martyn Turner had seen this column before producing today’s cartoon.
Amid all the bond (and now equity) market excitement, it’s worth noting some economic news from home that’s not so bad and some news from abroad that’s positively good. Not so bad is today’s Live Register release which shows the standardised unemployment rate steady at 13.4% (though this is subject to all the usual caveats about whether this claims based measure is accurately capturing the underlying trends in joblessness) while the retail sales figures show some sign of stabilisation.
From abroad, the non-farm payrolls figures in the US showed 290,000 jobs added in April. While the unemployment rate from the household survey increased to 9.9%, this is partly due to a reversal of the decline in labour force participation. Payroll growth at this pace, if sustained, would start to reduce the unemployment rate.
The Economics Focus slot in this week’s Economist covers various policy interventions that can help to deflate property bubbles – you can read it here.
The comedy of errors continues.
From a recent Irish Times article by the forensic and understated Colm Keena: “Lenihan said he was going to seek a cap of 500,000 euro on the salaries of the chief executives of Bank of Ireland and AIB… When the then governor of the Bank of Ireland wrote to Lenihan about Boucher’s pay arrangements, he suggested pay of 500,000 euro and a “pension cash allowance” of 123,000 euro. The Minister did not want the new chief executive getting any allowance that had been criticised in the (Covered Institution Remuneration Oversight) Committee report, and the amount ended up being rolled into a salary of 623,000 euro. Ironically, this appears to have been an improvement in Boucher’s terms, as the salary amount is pensionable, while the cash allowance is not”.
There are a variety of perspectives on the EU bailout of Greek sovereigns, but from the perspective of an academic economist (at least this one) the proposed bailout has some potential flaws that are quite fundamental.
There has been much discussion of the potential role of a common euro area bond – Bruegel have released a paper analysing such ‘blue bonds’; you can download it here.
Ken Rogoff reflects on the European sovereign debt crisis in this FT article.
TASC have produced a report on the Finance Act: you can download it here. It covers a mix of: (i) economic efficiency issues – is the tax system efficient?; (ii) process issues – can the process by which the Finance Act is formed and legislated be improved?; and (iii) value issues – the design of the tax system has a fundamental influence on the distribution of income and wealth, with TASC advocating a shift towards a tax system that supports greater equality of outcomes.
I wonder, however, whether evidence of sticking with our plan is quite enough right now to convince skeptical international markets that we can stabilise our fiscal situation. The yield on ten-year Irish government bonds moved out to almost 5.6% today, with the spread over Bunds reaching a new high of 2.7 percentage points. I think the next few weeks would be a good time to start to provide more clarity about the likely composition of this year’s budget, with indications about whether a property tax is likely, about the nature of the “universal social contribution” as well as the nature of further spending cuts.
Minister Ryan will shortly introduce a carbon windfall levy.
Generally, windfall taxes should be avoided as they are arbitrary expropriation of private property. In this case, however, I fully agree with the minister. Property rights on carbon dioxide emissions were created a few years ago. Although these rights used to belong to we the people, the European Union decided to give the permits, for free, to selected companies. This is tantamount to a subsidy worth billions of euros per year. Minister Ryan has now decided, rightly, to claw back this subsidy.
Obviously, it is a bit silly to tax a subsidy. However, the subsidy is cast in stone (an EU directive). So, I even forgive the minister the administrative inefficiency.
Note that a windfall levy on grandparented permits would also remove the legal objections that were raised against the carbon tax in France. Recall that the proposed carbon tax in France was very similar to the actual carbon tax in the Republic of Ireland.
An attentive reader pointed me to the final sentence: “This levy is essential, if we are to reduce Ireland’s overall energy bill. Having discussed it with those in the industry, I am satisfied that it will function effectively.”
Ireland’s overall energy bill will increase because of this tax, because one of its key inputs (capital) has become more expensive.
The EU Commission released its Spring Forecast today. The abstract states that:
The economic recovery is underway in the EU, although it is set to be a gradual one. The economic recession came to an end in the EU in the third quarter of last year, in large part thanks to the exceptional crisis measures put in place under the European Economic Recovery Plan, but also owing to some other temporary factors.
The speed of recovery is forecast to increasingly vary across EU countries, reflecting the extent of the housing-market correction needed, the size of the financial-services sector and the degree of internal and external imbalances.
Once you get beyond the positive start they do admit that there is significant uncertainty. Also it is hard to get excited about an EU unemployment rate of 10% and debt of 80% of GDP.
For Ireland they paint a positive picture for 2011 with 3% GDP growth and a slight reduction in the unemployment rate.
Martin Wolf offers his perspective in this FT article.
I have never really understood the idea that the Greek fiscal crisis is “a threat to the euro” but have generally sensed the tide running against me on this one as serious people warn darkly about the wider repercussions of a Greek default. Still, I find the arguments in this new CEPR Policy Insight paper from Jacques Melitz (“Eurozone Reform: A Proposal”) to be pretty convincing.
Melitz argues that much of the damage to the Euro caused by the Greek crisis has been due to the inaccurate focus by EU officials on the centrality of fiscal discipline. Some quotes:
The European problem is largely self-inflicted. There have been repeated affirmations by the ECB and government officials in Eurozone member countries that fiscal discipline and the Stability and Growth Pact are the very foundation stone of the Eurozone. This can only mean that Greek default is a big problem for the euro. On this view, the Eurozone is partly a victim of its own self representation …
So far as I can see, there is little reason why Eurozone should view government defaults with any greater alarm than any other central bank management in the world would view government defaults within its territory. To the contrary, the Eurozone is particularly well armed to deal with such defaults, since its own central bank has no large central government to contend with, the Maastricht Treaty guarantees the central bank’s independence and member governments are explicitly forbidden to bailout one another …
Accordingly, must not the official doctrine change? Should it not be that nothing so manageable as a Greek government default can upset Eurozone? In the event of a Greek government default, the system would assure the stability of the Greek financial sector, and concern itself with any bank runs or bank failures in the country, but not with the Greek government’s difficulties. In step with this doctrine, government bail-outs will never be contemplated. The Stability and Growth Pact will continue to serve as a code of good fiscal conduct for all members of the EU. But if any individual member government engages in irresponsible fiscal conduct, contrary to the Pact, its taxpayers and the creditors will bear the consequences.
Melitz argues that rather than institutionalising bailouts, there should be EU-level financial supervision of banks under the auspices of the ECB to allow for more efficient containment of the effects of fiscal default on financial stability.
Not quite Irish Economy but of interest to anyone wondering how we got here. Calculated Risk discusses the newly released 2004 transcripts of FOMC meetings. Signs of a housing bubble are already clear. CR digs out a chart presented to the FOMC showing the yield on housing relative to long term real Treasury yields and then extends the chart to show what happened after 2004. CR also shows how the housing yield chart would have looked using the usually preferred Case-Shiller index.
Greece has agreed a deal with the IMF and the EU involving the provision of funds of €110 billion over the next three years. This IMF website has links to the various statements. It summarises the deal as follows:
Negotiators over the weekend wrapped up details of the package, involving budget cuts, a freeze in wages and pensions for three years, and tax increases to address Greece’s fiscal and debt problems, along with deep reforms designed to strengthen Greece’s competitiveness and revive stalled economic growth.
Whether this deal really avoids a Greek default will ultimately depend on whether the fiscal adjustments that are undertaken can, in fact, alter the underlying arithmetic to the point where the Greek debt burden becomes sustainable. Whether the existence of this deal eases further pressure on other European countries with debt problems is, as of yet, unclear.
Harry McGee reminds us that as of today a carbon tax will be levied on selected home heating fuels. Transport fuels were carbon-taxed already, and the remaining home heating fuels (the ones that contribute most to climate change) will follow at an unspecified later date. There are no plans to tax greenhouse gas emissions other than carbon dioxide (e.g., by imposing a methane levy on beef consumption).
The report also gives voice to the opposition. If my predictions are correct, they will now discover that a carbon tax does not really hurt.
McGee also quotes a spokesman of Minister Gormley saying that other taxes were reduced. I had missed that.