Martin Wolf: Ireland Refutes the German Perspective

Martin Wolf analyses the structural flaws in the design of EMU in this article.

40 replies on “Martin Wolf: Ireland Refutes the German Perspective”

The FT aren’t as much sympathetic as tending to speak common sense.

“The crisis is a huge challenge for Ireland, which should surely convert unsecured bank debt into equity rather than force its citizens to bail out all the improvident lenders. ”

That is just stating the bleeding obvious.

“It was not the public but the private sector that went haywire in Ireland and in Spain.”

I get what he’s saying, but one shouldn’t discount the effect of pro-cyclical fiscal policy in Ireland. We would be in slightly better shape were it not for that.

@ Seafoid

Yes it is stating the obvious. I simply mean that it is a kindness not to mention that our clientelist system of politics is as culpable if not more culpable for this crisis as cheap credit.


Our clientelist politicians brought us to Sept 2008 but the ECB delivered us into the pot de merde with the repayment of the Anglo bondholders and the continued insistence on keeping the corpse of AIB on life support.

I feel sorry for the various FF apparatchiks who flail about helplessly on various RTÉ programmes these days. Yes they are incompetent and this goes way above their heads but they do know and yet can’t admit that FF ceded bank crisis decision making to Europe and that Europe made a total mess of it.

By the way …

Some nasty comments on ‘The Irish Economy’ website by Justin O’Brien in today’s Irish Times:

The performance of the Irish academic community has not been much better. The Irish Economy website, which began with such promise, has degenerated into ad hominem rants and self-congratulatory self-promotion. “Oh, I have been quoted by the New York Times , therefore I have credibility”; “Oh I have a blog at the Guardian. How clever”; “Oh, I have a solution: Let’s simply have mass mortgage forgiveness”.

The besterd.

@ Carolus,

Re Justin O’Brien,

So I take it we are not allowed to a sense of humour now?

Ah well here’s to a “hearty damnation” then!

@ Carolus

I thought he had a point about the ad hominem stuff. And where are all the founding economists listed under “contributors” on the main page ?

Where is the economics community today ? Where’s the plan for a way out of the mess now that the car has crashed ? It’s not just about economists though. Where are the accountants? Where are the lawyers? The elites are silent.

Justin O’Brien’s article is very poor. He proposes no constructive solutions that I can see, rather seems to do a lot of patting himself on the back for his keen insights, while doling out abusive criticism to others for being self-congratulatory and abusive.

His remark about this blog is particularly offensive and unfair.

On the main issue, I think the Wolf article Dr Lane refers to in the FT is also reasonably poor. First of all, Ireland’s is a problem of fiscal overindulgence, even if Wolf says it is not. Much of that fiscal overindulgence has been on the revenue side, with boom-dependent property transaction taxes as opposed to a durable tax base.

Even in terms of the private sector excesses, Germany has a right to preach. German financial regulators were tightly controlling mortgage lending practices for the German market, at a time when the Irish Financial Regulator was doing nothing more than running ads about people riding on the bus talking about their mortgages.

There are many ways to run an economy. We can have the government perpetually in hock and allow narrow corporate interests to dictate policy via market flucuations, OR

we could also simply default and impose a new regime in which deficit spending was unconstitutional.

Then, the government would have to build up a surplus fund to finance future deficits. We would never have to look over our shoulders at the bond markets. Wouldn’t that be nice?

Martin Wolf disregards the folly of the peripheral zone countries who spent the money like there was no tomorrow and in our own case, had such lax regulation plus a political and media consensus that any and all measures must be taken to keep the ‘boom’ going. I’m also not sure that he’s right to make such a distinction between ‘private’ and ‘public’ money since the availablity of the latter is dependent on the generation of the former. But teh discussion on what should happen the euro – whether it should be broken up into two zones, the first comprising Germany, Holland and the other strong economies in the Northern EU and a second tier comprising the rest, including Ireland, who would be allowed to devalue their currency or could otherwise swing in the wind – looks set to continue. Meanwhile, news reports of Chancellor Merkel’s determination to show the markets who’s ‘boss’ are disturbing, particularly as she’s committing the Irish as the frontline troops in her war game. If people interpret her remarks thus, then I would fear a lot of civil disturbance about what’s coming down the line.

If there is one positive thing to say about the Bank Guarantee, it is that it is partly a product of simple misfortune: If the ECB had been acting as lender of last resort at that early stage of the crisis, then there would have been no need for the guarantee.

The ECB has acquitted itself terribly throughout this crisis, acting way behind the curve and only when problems had spiralled out of control. While it did come round to acting as lender of last resort (although too late for Ireland, as we had already guaranteed the banks), it should have been doing this much earlier. Indeed, the tightening of lending between banks might never have been so severe if they had known that access to a LOLR was available.

Furthermore, in the run up to the Greece crisis, Trichet’s refusal to countenance Greece going to the IMF was the key factor that aggravated that crisis. By refusing to allow Greece go to the IMF (the sovereign LOLR), and not having any Eurozone lending mechanism in place itself, the poor Greeks were left stranded in a situation where they couldn’t get help from any external actors, and the EFSF had to be rushed through in response.

The responsiveness of this body to the political pressures in the larger MSs is also disgraceful. This is not the standard of service financial systems enjoy in other currency zones. Investors expect strong, supportive, interventionist, impartial and wise Central banks and the ECB can provide none of this.

I too am concerned that we are being pushed to the front of the line in a wider struggle between States and markets. Moral hazard is very nice if you can get another MS to suffer the Hazard.

However, I also agree with the BundesKanzlerin that there is a need to establish the supremacy of democratically elected leaders over and above financiers. I also think the Eurozone will not find a more compelling case for private bond defaults than Ireland, as the levels of private debt we are being asked to assume are almost comedic.

I think Wolfs article is as well measured and lucid as ever. (El-Erian is also ratcheting up pressure on the obvious precarious nature of the ECBs strategy today.)

Perhaps he omits the cronyism / financial hucksterism overtones, but then economics doesn’t seem to have a huge amount of models or metrics based around illegality, the great externality.
Ireland was German bankings dirty little secret for a long time, we’re all aware of Depfa/Hypo et al. even if its low in the public consciousness.
I agree with a lot of what Justin O’Brien says (even if it is ranty, blog standard and self congratulatory, making his swipes at this blog quite ironic)

Came across this this morning:


Absolutely agree with every thing you’ve said there.

The ECB / ESRF etc. mechanisms for crisis seem to have been constructed in a world without history books.

No monetary / regulatory /oversight system is flawless (hah!) but to ignore then side step LOLR obligations is a calamitously dangerous response. If a clod of earth be washed into the sea, Europe is the less.

The ECB and its sister / daughter institutions requires a managerial and organizational shake down and rebirth. Or should that be renaissance.

@Ludwig Heinrich Edler – “Justin O’Brien’s article is very poor” – indeed. He accuses this site of having “degenerated into ad hominem rants and self-congratulatory self-promotion” – I would have thought that such a description fits very well with his article. As a commentator on the IT site noted, quite a few economists stated in a letter that they were unhappy with the government’s approach, so one of his central theses is simply incorrect.

@ Hogan

Oh Jebus,

The Irish Times piece, Justin O Brien article is what I referred to.

However, I would like to congratulate myself on saying this.
Just trying to fit in….

@ Celtic phoenix

The FF website is a fascinating eye into the world of clientelism and who’s your father .

Born Athlone, Co. Westmeath ,May 1937. Sister of the late Brian Lenihan, Dáil Deputy and Minister. Daughter of PJ Lenihan, Dáil Deputy 1965-70 & Mrs Anne Lenihan, Aunt of Ministers Brian and Conor Lenihan. Educated at Loreto Convent, Bray, Co Wicklow: UCD and St. Patrick’s College, Maynooth (BA, HdipEd). Former secondary school teacher.

Dick Roche TD, Minister for European Affairs, has welcomed confirmation that the Rathnew Community Centre project is to receive €500,000 towards the development of the new centre which will replace the old and dilapidated building that has served the community for many years. Read Roche welcomes Bray to Greystones Cliff Walk funding
Posted 02/11/10
Dick Roche TD, Minister for European Affairs has welcomed funding of €101,250 for the further improvement of the Bray to Greystones Cliff Walk. Read More

This press conference, 4 year plan, thing is one of the weirdest moments in the entire crisis. A government who basically announced yesterday that they will not be in power in a few weeks time, today announce an ambitious 4 year recovery plan for a country they bankrupted. John Gormley is speaking now, he wont even be in politics in two months time! Half the people on that stage will either have retired or been voted out of office by then. It’s a bit like Alex Ferguson announcing yesterday he is going to retire in january, then announcng a detailed plan today on how man utd are going to win the next 4 premierships. It’s non-sensical.

It’s on every american news channel, they must be a bit bemused. Imagine George Bush coming out with this kind of thing a few weeks before handing over to Barack Obama. “Ok Barry, here’s the keys….. and here’s what you’re gonna do for your 4 years in power…”

As I quipped this morning (re: AIB 99.9% in “but not state owned”):

Possession is 0.1% of the law!

Yeah, they didn’t laugh then either…

My conjecture: some legal land mine with derivatives/bonds insurance etc. means that moving to 100% state ownership and off the market triggers insurance / contingency systems, but I’ve no idea really.

I’d much prefer if we had a straight IMF deal instead of this hybrid EU/IMF deal.

The IMF is interested in getting us out of this situation, even if that means defaults. The EU Council has duel interests of gettingus out of this, but also in repaying all the money we borrowed from EU banks, while disimproving our competitive situation vis-a-vis the other MSs, for instance by rising Corporation Tax.

It’s not a healthy influence to have in these negotiations. But unfortunately, the ECB has forbidden Eurozone countries to go to the IMF on their own.

@seafoid – it’ s not just FF I can assure you. I know the offspring of a FG TD who is working on the assumption they will just waltz into the job when Daddy retires. They have all the confidence and grooming that a private education bought them but they are as thick as two short planks and will undoubtedly just be lobby fodder. Doesn’t stop them from believing that particular seat in the Dail is their birthright though. That’s part of the reform we need in Ireland.

Meritocracy? Don’t make me laugh.

@Joseph – “…….That’s part of the reform we need in Ireland.” – as a voter you don’t need the government to enact that reform you can do that yourself shortly.

“Ger Says:
November 24th, 2010 at 1:22 pm

If there is one positive thing to say about the Bank Guarantee, it is that it is partly a product of simple misfortune: If the ECB had been acting as lender of last resort at that early stage of the crisis, then there would have been no need for the guarantee. ”

I’ve read countless posts about how the ECB stuffed up, but none of you are prepared to deal with the big elephant in the living room. WHY?

and if you say it wasn’t planned / deliberate incompetence, you’d be stuttering and coughing up wouldn’t you.

I don’t live in Ireland anymore. I’ve already abandoned ship, and if any of you aren’t burdened by debt..yet.. I urge you to do the same.


All I saw was English tabloid papers everywhere, ladette women drinking in bars, criminal gangs out of control. We haven’t been sovereign for a long time, but now more than ever we aren’t. I refuse to accept Ireland as the state it was in 1922 and it wasn’t really free then either. The seanad was always there, slowly selling us out..naiively, and unknowinlgy in fact. And owing debt to a big pig German, or a snake paradise island nuking frog, or perhaps THE Queen – finished. Checkmate. Prepare for pro-fascist “big-thinking” in school text books. Prepare for an IMF (Eugenicist) sponsored water supply.

RIP Rep. of Ireland. I loved you once. I would have felt guilty not to have fought for you. But, I know you’ve slowly been poisoned and are already gone.


Arguably, 1922-1937. Neutrality – a joke of an idea in this world.


I find Martin Wolf quite technical but usually worth reading. However, I think he’s missed the point when it comes to Ireland.

His basic point is that Ireland’s problems are as a result of private rather than public sector mismanagement. He claims (a la John the Optimist) that Ireland is still a relatively competitive export driven economy and actually wasn’t in much debt when the crisis began. He claims Ireland could still grow its way out of debt.

I feel he’s ignoring the key issue of the debt fuelled property boom and its effective massive subsidization of Government spending. The Irish public and private sectors—in the form of the dail/bank/developer complex—were and still are intertwined in a way that makes this analysis invalid; the banking guarantee was merely the formalisation of this already existing (FF)pact.

The 25% collapse in the economy from the property sector, combined with unavoidable reductions in government spending, and compounded by a credit shortage as Irish Banks transmute into debt collection agencies, make a growth lead recovery impossible in the medium or even long term. Wolf even notes that this was the Government’s existing policy, but fails to mention that noone in the bond markets was buying it.

He argues that insisting on fiscal discipline will may compound the recession further, and hints at further dangers of moral hazard and speculation. I would disagree, and say that fiscal discipline at all level is the way out of this crisis.

But Wolf is right on one thing, our problems are the fault of the private sector, both in its reckless borrowing and indeed lending; the bond markets continue to be the prime cause of calamity in this crisis. Fiscal discipline is the way out of this, and if the bond markets disagree—which they greedily will—then they should be politely told that their debts are being restructured.

Isn’t the problem that the total value of financial assets (in this case mostly bonds) in the Eurozone is too large relative to the size of the real Eurozone economy ? And the same more or less globally as well?

Ireland’s problems are founded on two things. (i) that there was an excessive economic and fiscal dependence on construction activity that has ended and (ii) that the govt took over the debts of the Irish banks, apparently in order to make sure that these banks remained Irish owned.

We could have survived (i) comparatively easily. Surviving (ii) by itself would probably have been really difficult. Surviving a combination will be vastly difficult.

Most people in the country could have survived the private sector calamity that a debt-to-equity conversion of the banks would have represented. For instance I didn’t hold equity in the banks and wasn’t owed money by the banks. Many were in the same position. Only by the govt action of socializing the debts brought the general public into the mix.


As far as i understand all banks can tap the discount window of the ecb when ever they want (albeit a higher rate) – they need not use the main refinancing operations. This was also the case at the time of the crisis – the ecb introduced special liquidity facilities but as far as i understand it the ceiling rate was always open to banks

The ‘spin’ at the moment is suggesting that Europe will scare Microsoft out of Ireland. However one of the smartest men in the world chose the classic popular Gaelic name ‘Rory’ for his first child. Mr. Bill Gates understands and respects the Gaelic/Global spirit of president John F. Kennedy that put the first people on the moon and will put things right, and better here in Ireland. We have heard from the IMF, now let them hear from us. Elections today, then budget. Restore social justice and inclusive, tolerant Christian democracy in Ireland. (‘they have bought half of us and terrified the rest of us’ Padraig Pearse) The Democrat Lincoln was a great admirer of Danial O’Connell he also wrote in the Gettysburg address ‘a government of the people, by the people for the people.’ Elections now, today. Nick Leesons will come and Nick Leesons will go but democracy must be defended, everyday.

MW is being too kind to Ireland. He enables greater criticism of Germany. The bias is the realization of how out of control GB lending was to Ireland! Yet he advocates turning that into equity. The correct solution, of course. FT is free of all bias? Maybe so for MW.

Ireland Gov backed the private sector too strongly and deliberately disabled all regulation. We know the result. They were “egged on” by GB and elsewhere. A poster boy. Boy, not man.

If we bury the truth, we enable our grandchildren to live through these days themselves. Sympathy is pointless.

seafoid Says:
November 24th, 2010 at 5:13 pm

YES! Absolutely. Too many claims to underlying assets. These assets will not change, except by neglect, but those claims?

They all have to be reduced. We can do it by country, and drive down the Euro. Eventually, when it is unavoidable, as it will be painful for UK, G,F,I etc, these claims have to be resolved. Until then, the music is playing! All the parties are dancing, it is rude to point out that there are too few chgairs!

That is why I pay little attention to discussion of subbies etc and even interest rates payable on borrowings. They will be academic and dealt with across a table where Ireland’s debt will be measued against that of others.

Sovereignty is a bit of an illusion, unless we follow Switzerland. We would need to be serious about neutrality else the US simply takes over as in Australia. Since we have too many interests in common with the US, that is unlikely and will end up with massive problems. The US has always had contingency plans to invade Ireland if necessary. The EU represents a threat to the US. Merely to business profits and banking, but that is vital. So the sub-prime has infected EU.

There is no sovereignty except for individuals. Migration is possible. But thinking it is unthinkable, rules it out! Defaulting is an option, but not the only one and can be adopted if the others are too painful. What will Germany do? Not much. All we would need to do is play the US off against the EU.

Comments are closed.