The results for the stress tests on 91 European banks were released yesterday evening. A reasonably detailed description of the tests and results is available from the Committee of European Banking Supervisors’ (CEBS) website. The results for AIB and BOI are available from the Irish Central Bank’s website. As Michael Hennigan points out, the overall passing score was 84-7, and so the release of the results has not quite made the waves expected. Both Irish banks passed with a bit to spare despite the relatively high Tier 1 target of 6 percent. However, the results factored in capital raising plans to the end of the year, and the jury is still out on how much of the €7.4 bl. AIB can achieve without additional government help.
Karl Whelan makes a convincing case against the idea that a fiscal stimulus would lower the deficit (see Unpleasant Fiscal Arithmetic). But there is another fiscal free lunch idea that I see as even more influential—and probably just as wrong. This is the idea that discretionary fiscal contractions increase economic growth, which in turn reinforces the improvement in the deficit. The key mechanisms behind what is sometimes called the “German view” are Ricardian-type expectations effects and a reduced risk premium on borrowing (the latter recently emphasised in ESRI Recovery Scenarios paper). I doubt that there are many Irish economists who would claim to hold this view if pushed. However, it seems to me to be implicit in the widely held view that a more front-loaded fiscal adjustment will speed economic recovery. Continue reading “Fiscal Free Lunches”
As has been widely reported the Minister for Finance has established a Review Group on State Assets that is chaired by Colm McCarthy.
The terms of reference are:
While most comments in the media have interpreted the focus on asset disposals to refer only to privatisation, it is perfectly possible that the various state companies hold assets that might not be essential for the efficient running of these businesses and thus could be disposed of without privatisation.
In relation to privatisation it will be important not only to consider the short-run gain in funds through the sale of assets, but the longer-run impact on the competitiveness of the economy. Long-run considerations should include the loss of control of national strategic assets that would result from a sale. This might be addressed by keeping the key infrastructures such as networks in public ownership.
In some cases it might also be useful to consider a long-term lease as an alternative to an outright sale of assets, which will also yield revenue up-front but avoids the ‘selling off of family silver’. Joint ownership is another option.
Looking through the list of assets to be reviewed it is hard to ignore the differences in ownership patterns with many other countries. Electricity generation, ports and airports are private in many countries.
Writing in today’s Irish Times, Ashoka Mody argues for the need to introduce a special resolution regime for banks as well as “fiscal benchmarks and supporting rules, along with a technical voice in the form of “fiscal councils” to evaluate budgetary risks.”
Mr. Mody is assistant director in the European department of the International Monetary Fund and has lead the IMF’s article for team that has visited Ireland in recent years. While Mody’s senior IMF status makes him worth listening to, it’s also worth noting that he has a considerable research record as an economist including this interesting work on the effects of budgetary institutions.
With the publication of the heads of the promised climate change bill now imminent, it is interesting to note that two Oireachtas Comittees, the Joint Committee on Climate Change and Energy Security and the Joint Committee on Agriculture, Fisheries and Food, have just published a report on the role of forests in future EU climate policy. The paper was written in the context of the Committees’ role in responding to EU proposals, in this case an EU Commission Green Paper on Protecting Forests against Climate Change.
The report raises some important issues on the treatment of carbon sequestration by forests in the context of EU climate policy, where arguably Irish interests differ from the rest of the EU. Although its conclusions need further discussion, the report is a good example of how the Oireachtas can contribute to public debate and for this reason alone it should be welcomed. For the record, Andrew Doyle T.D. (FG) was the rapporteur for both committees and he was assisted in preparing the report by EPS Consulting (formerly A&L Goodbody Consulting).
One by-product of Paul Krugman’s latest intervention on Ireland is that it will provide further ammunition for the many people who believe the government should abandon fiscal austerity and provide a stimulus package of new spending to boost the economy. Stimulus advocates believe that budget cuts are self-defeating and that, by contrast, a stimulus package will pay for itself and actually improve our budgetary situation.
I know that the majority of Irish economists don’t agree with this idea but perhaps we’re not doing a very good job at communicating why, so here’s a brief explanation.
What the careless reader might miss, however, is the fact that the policy conclusions are not, in fact, derived from the analysis — they come out of thin air. The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see.
This criticism appears to relate to the paragraph on page 41 of the report starting with “Recent experience ..”
Two aspects of this criticism strike me as unfair.
First, the assertion that Krugman refers to appears to be the following concluding sentence:
It also raises the question as to whether a more rapid fiscal adjustment than currently planned would have a more beneficial outcome for the economy.
This seems to be pretty far from an assertion. Rather it flags this idea as something to consider. Krugman seems to be jumping on the ESRI for what it is little more than a speculative remark.
Second, in relation to the “based on no evidence that I can see” comment, I’d note that the relevant paragraph contains the following sentence:
This means that action to reduce borrowing, which would otherwise still be deflationary, could actually increase domestic activity if it produced a sufficient reduction in the risk premium (Alesina, 2010).
Now I’m guessing that Krugman has no time for the analysis in Alesina, 2010 (and he may be correct in this assessment) but it’s still worth noting that the ESRI did cite evidence from a Harvard economist when making the supposed assertion.
What seems to be happening here is that the ESRI-bashing is just a small element in Krugman’s greater campaign of opposing austerity in the US and Germany (with which I’m sympathetic.) However, it’s worth recalling that last year, Krugman noted about Ireland that “there isn’t much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options” and referred to an “Irish-type fiscal straitjacket.”
I’d be surprised if Krugman’s assessment of the bond market’s attitude to Ireland has changed much since then: The spread over bunds of the Irish ten-year bond was 282 basis points yesterday versus 293 the day Krugman’s Erin go Broke column was published.
So while kicking around a little research institute his readers have never heard of may seem to provide a nice example-de-jour of crazy people advocating Herbert Hoover economics, in truth it’s likely that even Paul Krugman doesn’t really believe Ireland is in a position to abandon austerity.