McCarthy in the Sindo, again

There is another cracking column by Colm in today’s Sunday Independent.

Money quote:

The European economies have not been experiencing the worst recession since the Second World War because the retirement age is too low, or because there are national differences in corporation tax rates. Ireland is not in an IMF bailout because the budget deficit, in the years before the crisis, was outside the Eurozone parameters. There was exemplary compliance with the fiscal policy rules and all boxes were ticked, up until 2007, in Ireland and in most Eurozone countries. This is a banking crisis and it remains unresolved three years after the bubble began to burst.

66 replies on “McCarthy in the Sindo, again”

Vincent Browne has an interesting column in the Business Post. It is almost as if Vincent and Colm have swapped brains. Maybe it is a Sindo v SBP thing.

His arguments are federalist. Europe’s framework is the responsibility of each member state. France and Germany are seeking a resolution within that framework. The proposal for a quantum leap in ECB governance is a good one but saying that we were somehow simply “unlucky” in hosting unsupervised backs is stretching it.


Patricia the Irish Sovereign_in_Exile says:

A banking crisis? Quite! Default and be done with it – I want to come home.

there is a banking crisis, it is unresolved, and it is wrong to state that policy has failed. Why do I say that? Back in 2009 I spoke to a number of senior FF members, not of Cabinet rank, and some not even in the Dail. I walked away from the set of discussions, it would be far too pompous to call it a meeting, it was more in the nature of chance encounter, pretty convinced that there was a deep streak of nihilistic fatalism embedded in the emergent policy. One of them said to me “why should we do all the work, and let that other shower take the benefits”
we are where we are. Bad as the September 2008 decision on guaranteeing the banks liabilities might have been, the initial decision at least is explicable as one made under pressure and in some haste. The decision in November to accept a poor, nay appalling, bailout, was made in cold calculation. In retrospect I predict that it will be seen as a worst decision than that of September 2008. The European Central bank cannot have it both ways: it cannot act as an agent of the federalising Europe, and expect that the consequences of this federalising are not taken on at the federal level. Restructuring, it much more polite term which means the same thing in the end as default, is going to happen. It can happen slowly, but can happen more rapidly, it could happen in an orderly fashion, or it can happen in a disorderly fashion. The ECB has a role to play in this, and it’s time that it was made to realise that.

@Brian Lucey

ECB has a ‘job spec’ which limits its present ability to ACT … and to SPEAK: ergo, reality needs to dawn rapidly in Political VichyLand to update the spec ….. note that EuroIntelligence reported recently [I posted some time back] that many German banks are not only NOT’well-capitalised’ but UN-CAPITALISED.

We posted sufficent on ‘bank resolution mechanisms’ back in early 2009 on this blog – after I while I gave up …. I’ve gone Nuclear.

@ BL: “The ECB has a role to play in this, and it’s time that it was made to realise that.”

Presumably you mean the ‘brains’ of those who may be permitted to actually make the realisation: then act. But if the decision and non-action is a ‘political’ one? Not financial reform?

Politicians are engaged in enacting new regs and manipulating or ignoring existing existing ones, not to correct the predicament, but to extend it out as far as possible so that it has less of an electoral liability for them. However, THEY do understand the nature of the predicament. Its the general pops that do not. Will THEY ever cop on? And if they do, will they take to streets with their pots, pans and dustbin lids?


@Colm McCarthy & ALL citizen-serfs (both here and over there)

“Germany is seeking to circumvent the Basel III agreement by pushing the European Commission to ignore what has been agreed in Basel to suit Germany’s own interest . Germany lost out in the Basel III negotiations, because the agreement would force German banks to raise large amounts of real capital. The German government is now pushing the European Commission to draft a directive to recognise silent capital – a form of preference shares – as part of a bank’s core capital, independent of the legal status of the banks. FT Deutschland says that the real danger about Basel III is that each jurisdiction will end up removing unwelcome bits of the agreement to suit its own competitive interests. The Basel III proposals envisaged that only equity and retained earnings count as core tier 1 capital, while Germany wanted to recognise silent capital as well. Without the use of silent capital, Germany’s MOROSE banking system would IMPLODE. The entire Landesbanken sector would disappear. Large parts of the German banking system are not merely undercapitalised. They are effectively UN-CAPITALISED.” [CAPITALISATION ADDED (-;]

Gotta go … Blind Biddy has the spuds on …. Great fan of the rolling maul is Biddy ….

It’s strange that the straightforward and impeccable logic in this article could escape anybody.

Integrated financial markets cannot function without integrated financial regulation, a fact that was as true while the crisis brewed as when it broke. Furthermore, the ECB’s narrow remit does not permit stable monetary control. ‘Internal devaluation’ — the product of this restricted freedom — is another meaningless phrase, just like ‘soft landing’, designed to portray as scientific something that is anything but. ‘Internal devaluation’ means economic disaster in plain language.

The single market committed the EU to regulatory integration to a degree that was probably poorly understood at the time, but the political structures that might permit it to function were stifled. Blaming the EU for the crisis is like blaming the corpse for the consequences of a botched operation. It is the member countries that have created the institutions and the member countries that have abandoned all principle in their populist pursuit of something ‘won’ in Europe to bring home from conferences.

The EU must either move forward to genuinely democratic integration, something not likely in the current climate, or regress to a sort of geographically limited but deeper WTO. Lurching onwards with institutions that are manifestly unfit for purpose and where member states nakedly argue for national advantage carries risks of great severity by any historic standard. Ireland’s corporate tax rate and the Deauville agreement are one and the same in this regard: each is founded on an interpretation of the national interest that is facile, populist and blinkered.

Around the time of the bailout deal, Helmut Schmidt made some choice criticisms of Merkel (‘reactionary’ and ‘doesn’t understand the modern economy’) and Axel Weber (also ‘reactionary’ and ‘nationalist’, a word with powerful connotations in the German political lexicon). If the EU is to be driven by the ideas of the Merkels rather than the Schmidts of this world then it has no future.

The American experience is not particularly helpful if one pins their hopes on some EU banking regulator. Assuming the regulator can avoid being ‘captured’ by the banks, and that is a big if, the very nature of the current global economy makes effective regulation almost impossible.

Where you have floating exchange rates, unlimited rehypothecation of collateral, sovereign debt worries, counterparty risk on obscure CDS contracts and off balance sheet exposures whose to say whether a bank is solvent or insolvent at any particular moment. Even the very accounting rules are themselves mutable at the discretion of the TBTF entities.

“Irish politicians should not be shy about urging a better deal for Europe”

Colm McCarthy is absolutely correct about where the next goernment should focus all its external efforts. But the political obstacles are enromous. The senior politicians in the core EZ are caught in a double bind. First, they and their predecessors forced through an ill-designed EMU over their voters’s heads by convincing their voters that it was far too complex to make it amenable to the process of securing their direct consent and that voters should trust their politcal leaders assertions that it would work out for the best of all possible worlds. They (the politicians) also knew that if they sought their voters’ direct consent it would be unlikely to be forthcoming. (The same ploy was adopted for the much re-wrapped EU Constitution.)

Secondly, these senior politicians have also been successful in temporarily ‘warehousing’ a huge amount of their banks’ debt exposure, but a day of reckoning will have to come eventually and their voters will be on the hook whatever way it is played.

These senior politicians live in dread of confronting their voters with their previous deception on EMU and the implications of resolving their dodgy banking system (not to mention many financially insecure municipal bodies).

I agree with Adrian Kelleher’s conclusion, but he may be underestimating the politcial challenge facing these senior politicians, in particular, Chancellor Merkel, as they struggle to deal with major previous and ongoing policy failures while trying to keep the EU ‘project’ on course.

A new Irish government will be able to assist this process by asserting, correctly, that Ireland has taken pain, is taking pain and will take more pain, but that its policy and regulatory failings, however egregious, are part of bigger and deeper EU set of policy and regulatory failings – and that moraly and economically there is no justification for imposing excessive punishment on Ireland and the other peripherals.

But this will have to be accompanied by serious structural reform of the non-tradable and sheltered sectors (both public and private). A failure to do this will invalidate any case Ireland might be able to make at the EU level.

And I can’t see an FG-Labour combo (similar to its disastrous predecessor in the ’80s) being willing or able to tackle these reforms.

John McHale:

I am most upset at the suggestion that I have swapped brains with Vincent Browne. I imagine Mr. Browne feels the same.

@Brian Lucey

I largely agree, but I think it’s wrong to single out the November bailout as the really inexcusable failure. By the Week of the Bailout the pressure and the haste were back, largely thanks to the ECB. And having sauntered like day-trippers into the EFSF ambush, it would have been too much to expect the government to have a sudden change of mentality and go Rambo. I think the inexcusable decisions were taken in the weeks and months on either side of the May expiry of the original blanket guarantee. That was when it should have been clear to everyone that guarantee-and-recapitalise had failed, when the country had time, money and the opportunity to make a decisive change of course, and when the government blew it.

@Paul Hunt
Is there not a possibility that an FG/lab administration will seek to mirror the performance of the ’94-’97 administration – jobs/growth/budget discipline and surplus even given the current disastrous scenario left to them by the present administration?
Harping back to the ’80’s and conveniently or otherwise ignoring the last piece of responsible administration seen on this island, seriously undermines your contribution.

@ Colm McCarthy

When will get to see your latest report on the semi-state fire sale or lack thereof?

@ Adrian Kelleher

It’s strange that the straightforward and impeccable logic in this article could escape anybody.

A lot of things seem strange when the political context is ignored.

For example, if the Irish economy had been run prudently during the international credit boom and was absent the pervasive cronyism with construction that also doomed Japan, the Irish who today see merit in what is termed ‘burden sharing’ would very likely be strongly advocating the contrary position.

It is interesting to contrast the demands of Irish politicians in the early years of EEC membership in calling for higher regional grants to support the ‘poor countries’ on the western perihery with their silence during the boom years on transfers to poorer eastern countries, even though then we had not as yet contributed one net cent to the EU budget since 1973.

Then in June 2008, many still had the arrogant attitude that we didn’t really need this EU as we were likely to be contributing to the budget in year s ahead; basically there was nothing to be squeezed further from the lemon — President Stipe Mesic of aspiring member Croatia, said: “Now that they have used the accession and structural funds, when they have developed enormously, I’m a little surprised that the solidarity is at an end.”

Adrian, you are correct regarding reform as the PAC report on the legal cartel system highlights; where lawyers in a small country can not only become multimillionaires as public contractors investigating bribes similar to what they earn each day and after more than 13 years, the sytem that spawned the corruption remains unreformed.

There are a multiplicity of domestic reasons for outrage but there is very little and the problem for politicians in places like Germany, the Netherlands, France, Austria and Finland, is that they already pay high taxes and do not get the salaries and perks available to for example Irish academics.

The €300,000+ first year bonanza arranged by retiring ministers for themselves, contrasted with the lot of private sector workers who are not in the FDI sector, highlights what has been so wrong internally. Without a vested interest as protector, the lot is no occupational pension and a high risk of unemployment – – in some cases permanent unemployment.

Where is the outrage?


You have a point, but, for the ’94-’97 rainbow administration, most of the heavy-lifting had been done in the period following ’87 – supported, it must be said, by the most statemanlike act in the history of the state by Alan Dukes (and a fat lot of good it did him or FG) – and they were able to function in a relatively benign domestic and international environment. The ’82-’87 administration failed to get to grips with the fiscal bubble inherited from FF – and that is similar to the circumstances we confront now. In addition, neither it nor the ’94-’97 administration tackled the major structural reforms (FF being pathologically incapable of doing so) that are urgent now.

Where is the outrage?
And unless this glaring imbalance is corrected, the Europeans will not agree to a modification of their terms. Nor should they.
I am in favour of bank closure and bank bond default but not before the Irish vested interests have been divested of their interests.

@Brian Lucey

Oh, and I forgot to add that by the end of April we had also seen (and approved, God help us!) the Greek “bailout”, so we knew very well what the EU/IMF’s “assistance” to us would look like if we allowed ourselves to get into the same straits.

Excellent article and completely logical. germany’s banking system is overcrowded, politically protected and it has operated at extremely low returns for a very very long time. bankers, in this environment, took the logical decision to lend to sectors and countries where available returns were higher. That is one structural driver for over lending in the periphery but it isn’t the only one, we have to add corrupt politicians in the local countries, hijacked philosophers and an ability to capture regulators to make a really explosive soup.

It is, for me at least, a tragedy that Ireland should be at the leading edge of a crisis that seems will inevitably lead to massive, cross border defaults and create the economic equivalent of a nuclear wasteland. Our corrupt politicians took and took and talked up their “cute hoor” credentials to the great joy of the electoral majority and when the day came to actually grow up in September 08, they failed. They thought that brass neck dressed up as “confidence” would allow them to kick the ball forward and, in doing so, they made the problem worse. They guaranteed debts for their corrupt friends even though it is impossible for the country to honour that guarantee. In 2010 when the guarantee expired and the ECB wanted to take Irish debt off of it’s books to make room for another basket case (Spain, Portugal…..) the game was up..

the more I think of all of this the more I am convinced that we have to chose, a fully federal Europe in which Ireland is an extremely poor, edge country with no capacity to print money, to license banks or even to access debt markets wihtout the approval of the center, or we break from the Euro. I don’t know which decision is right for the Irish people as I don’t live there any more, but if the decision is to exit, I hope we are not the first to default and go.

@Michael Hennigan

The power of the unified capital markets dwarfs that of any individual government in the EU, even those of the large countries. For this reason, and because of the breadth and depth of regulation needed to make it function, the single market demands democtratic political institutions at the EU level. This is a broader concept than burden-sharing and isn’t situationally motivated. To restore the primacy of politics, either political action must occur at the appropriate scale or states must divorce themselves from the capital markets.

It isn’t accidental that Iceland has emerged much better than Ireland from an even more dire banking crisis. It has at its disposal the Keynesian tools needed to protect its citizens against such crises. Malaysia took a similar approach after the Asian crisis; it was much maligned at the time but proved a great success.

I make no nationalist arguments. If the ECB had powers similar to the Fed, I could live with the consequences of the banking disaster even though considerable pain would still result for this country. Conversely, until the 1980s the country still had the freedom to tackle the crisis using Keynesian methods.

Today, on the other hand, all freedom of action is gone. Taxes cannot be claimed on the NAMA-protected developers because their wealth can disappear overseas at the touch of a button. Those who benefitted from the manipulation of the property market are safe, as are large segments of the economy. A minority are having their lives destroyed by unemployment, and those who benefitted least from the boom are being asked to pay to clean up the mess.

All of these effects follow from the ineffectuality of states in the face of capital markets that dwarf their power and that have triggered recurrent waves of crises in Asia, Russia and South America, and latterly in the rich countries. An ardent priesthood have long lauded the supposed wisdom of these markets, but their actual behaviour has been capricious and arbitrary. For example, the emerging market mania of the 90s continued until a matter of weeks before the Asian collapse. So long as market participants’ eyes are fixed on other market players instead of on the assets being valued, this structural irrationality will exist.

The policy straitjacket the capital markets place on governments commits them to dangerously pro-cyclical policies. Hysteria is whipped up during booms, austerity demanded during depressions. Of course capital cannot be made unemployed and so has little to fear from austerity when it can simply move elsewhere.

Paul Volcker has pointed out that many of the innovative financial products of recent decades are of no discernible value to anyone except the employees of the banks themselves: not to the shareholders, not to the customers, not to the nation. They are snakeoil.

If you sell lightbulbs or garden utensils, you will be subject to consumer protection legislation. In finance not only does the product not need to posses any value, it can be actively damaging to the purchaser. The finance industry continues to expand nonetheless, an object lesson in the triumph of hope over experience.

Ther was much stupidity in the EMU project but one of the more obvious ones ( and yes, it was argued publicly at the time ) was the German insistance on the 3% deficit limit.

At the time the French line was that this was arbitrarily rigid and would create unnecessary problems for countries that experienced a recession. It was clear to anyone who bothered to think about it that it would cause a bigger potential problem for any country that was likely to have a more volatile GDP path as any recessions were more likely to put the deficit above the numerical limit.

Ireland, as a very high beta EZ economy, was particularly stupid to sign up to this.

From a practical standpoint, London is a bit of a problem wrt the idea of having a EZ wide regulator – they will not join in and most countries with significant financial centres want to keeo their local options open to respond in a competitive way to what the City does.

States can be very effective if they behave responsibly and accept that there are a variety of consequences to whatever decisions they take. For instance, you mention that capital cannot be made unemployed, which is true, but it can be, and regularly is, destroyed. If states allowed banks to fail, and by that I mean the state removes itself from the failure process and leaves creditors to collect their own debts then capital is destroyed.

Instead, we are told that “we can’t bear the consequences of bank failures” “bondholders are pari pasu with depositors” government would not be able to pay nurses, teachers, pick your community, if it is cut off from the debt markets..

Despite all of the anger on these boards, I don’t get a sense that we are really prepared to discuss the consequences of the decisions we are taking. We have signed onto a morally indefensible bank bailout. We know that it is impossible to honor the debt we assumed, yet we can’t bring ourselves to stand up and say no, we won’t lie.

Of course the consequences of this is that we will default and when we do, there will be no excuse because we lied. We could be cut off from access to debt capital markets and we will be accused of having defaulted on a massive amount of debt that we assumed from corrupt banks and even more corrupt former politicians. We will be the Argentines of Europe…..shameful

Colm McCarty is obviously right in explaining that the present crisis is a banking crisis more than a fiscal crisis (except for Greece special case);but this will not stop the German and the French to attempt to use their present leverage to obtain the reform they deem necessary toward a better integration. (Personally ,I think they will be right in doing so).They will not obtain everything they are asking for, but I would not bet that Ireland will be able to retain its corporation tax rate for ever.

I don’t think the reasons given for the poor design of the euro stand up. Exchange rates have largely been not a problem. Differential responses to interest rates have, so far, been within national Central Bank’s ability to resolve (that the Irish CB chose not to does not mean that the problem was unsurmountable).

I think Iceland is instructive. Look at the capital flows that created the Iceland bubble banks. Look at the domestic CB’s unwillingness to do anything about them. Could they have? Maybe, but then again, maybe not. As Adrian Kelleher notes, the capital markets are very big. So should the ECB have controlled eurozone capital flows more closely to match its MiFID responsibilities? Yes, probably.

Would this have been enough, though? Maybe not. Seamus Coffey that has a piece that identifies non-euro capital flows as the primary driver of credit expansion in Ireland ( ) (yes, I’m inferring that from the piece in combination with Morgan Kelly’s proposition that available capital is what drives bubbles more so than demand).

What we have in Iceland and in Ireland is, I believe, a classic emerging market crisis where capital over-flows into an economy that does not have the opportunities to put it usefully to work. When the inevitable crisis of confidence comes, the capital attempts to flow out. I have a suspicion that Spain will be in a similar position, but little evidence to back it up so far.

Controlling capital flows is a difficult proposition for an NCB. George Soros, following the emerging market crises of the late ‘nineties, identified unregulated capital flows as a serious threat to economies. He, as a market participant that benefitted from timing those flows, was not taken seriously, I believe. As a result, the eurosystem’s regulatory apparatus was designed for the last war (inflation) and not for the current battles. It is a Maginot line of an edifice outflanked by more nimble capital transmission methods. It is designed to cope with foreign currency crises and inflation risks, not with international capital flows.

What does this tell us? Well, it tells us that our central bankers are largely an outdated lot. They are neither traditional central bankers in the Bagehot tradition (Mervyn King, for example), nor modern enough to understand the implications of global financial markets (like de Campos Meirelles, maybe?). They are conducting monetarist cavalry charges against submarine warfare… noble, but a little futile.

(Yes, I realise that this is a different position to the one I used in the argument against LBS’s paper, but my understanding of the facts has changed…).

But the problem with “capital flows” is that the term implies a natural occurrence such as average rainfall, rivers flow into seas, but there is nothing natural about capital flows. In ireland’s case, developers and house buyers borrowed and international banks furnished credit willingly. These were private voluntary transactions and that means there is nothing inevitable about them either. A central bank can and should monitor risk in it’s financial system, but if it decides not to monitor risk, then it must either decide to stand back from both the monitoring process and from the inevitable collapse.

In our recent crisis, Iceland central bank allowed their banks to go out a borrow outrageous amounts of money and when the inevitable collapse came, they were only prevented from stepping in to save their banks by the sheer size of the problem they allowed to develop.

Ireland did worse because it convinced itself that it could transfer the liability created by privTe actors onto the public purse by lying about what they were doing. We shall see that they too created a problem that was to big to solve, today however we can only guess the ending of a very sad story.

To circle the square of on the one hand not preventing a debt bubble but then stepping in to prevent it’s consequences, the central banks themselves have used bastardized economics theories to justify their lies. They claim that it is efficient market forces on the way up, but we deny that efficient markets exist when they collapse. These lies, obfuscation, deceit and moral bankruptcy will eventually cause the collapse of the whole system…

It would seem, from my reading of this, that a lot more power is going to have to be transferred to Brussels. The solution to the EZ system’s shortcomings will involve much policy being dictated by Old Europe. This was also the message in the Indo’s editorial. I wonder how does the Irish electorate feel about this? Or is there another way?

“To circle the square of on the one hand not preventing a debt bubble but then stepping in to prevent it’s consequences, the central banks themselves have used bastardized economics theories to justify their lies. They claim that it is efficient market forces on the way up, but we deny that efficient markets exist when they collapse. These lies, obfuscation, deceit and moral bankruptcy will eventually cause the collapse of the whole system…”
Oh I agree entirely. There is nothing natural about them and they are incredibly dangerous – that’s why I mention Soros’ warnings about the EM crisis – caused by over-active capital flows, misdiagnosed as a forex crisis and domestic overheating and so the wrong medicine applied by the IMF in more than one case. The IMF has learned somewhat that there is more to life than monetarism, the Fed and the ECB are lagging far behind. If you don’t believe that there is such a thing as mis-allocation of capital or that capital can be ‘wrong’ in what it does, you don’t see any dangers in unregulated capital.

If the master bank is saying that unregulated capital flows are not a problem, it is probably impossible for the slave bank to buck this trend.

Colm Mc Carthy gets it:

“The crisis in Europe, with the possible exception of what has happened in Greece, does not have its origins in loose budgetary policy. Its origins lie in a crisis of overleveraged banks making foolish lending decisions. …….

The dud assets acquired in France, Germany and other continental countries included exotic derivatives of mortgage loans in the United States as well as bonds issued by dodgy banks in places like Ireland. ”

German and French banks probably know the score as well, but would prefer to find some useful scapegoats (Greek goverments, Irish banks, and other sellers of their dud assets) to deflect responsibilty for their own foolish lending decisions.

These European banks must now take responsibilty for their part in the reckless explosion of debt in the peak years of the credit/debt creation mania.

@Dominique Jean-Raymond

How governments pursue their aims is as important as the aims themselves.

From the Guardian:
“At the Brussels dinner on 28 October attended by 27 EU heads of government or state, the presidents of the European commission and council, and the head of the European Central Bank, witnesses said Papandreou accused Merkel of tabling [EU voting right curtailment] proposals that were “undemocratic”.

“If this is the sort of club the euro is becoming, perhaps Germany should leave,” Merkel replied, according to non-German government figures at the dinner. It was the first time in the 10 months since the euro was plunged into a fight for its survival that Germany, the EU’s economic powerhouse and the lynchpin of the euro’s viability, had suggested that quitting the currency is an option, however unlikely.”

There’s an account of an embarrassing phone call between the José Sócrates and Angela Merkel here:

“Angela Merkel was locked in talks about the euro crisis when the phone rang in the gleaming chancellery in Berlin. The Portuguese prime minister, José Sócrates, was on the line from Lisbon with a plea for help. […]

“According to accounts circulating in Berlin, Merkel left Sócrates to wait while she sought the views of her high-powered visitors – Dominique Strauss-Kahn, the French head of the International Monetary Fund, and Giulio Tremonti, the highly regarded Italian foreign minister who has recently been lobbying for the introduction of “Eurobonds” as part of a solution to the year-long crisis.

“Merkel asked Strauss-Kahn about Sócrates’ dilemma. The German-speaking IMF chief was dismissive. The Portuguese plea was pointless, he said, because Sócrates would not follow any advice he was given.”

(The Portugese government denies the call took place).

JC Trichet warned the Deauville two of the consequences of their actions, resulting in an extraordinary scene:

“But Mr Trichet was also increasingly concerned that the Germans’ push to lean on private investors in a new bail-out system was going to scare the bond market. The day before the summit he called José Manuel Barroso, Commission president, to argue his case. Mr Barroso agreed: this really was not the time to start a debate on the shape of a future bailout – and particularly on the extent to which bondholders would have to share the burden with taxpayers.

“As leaders gathered, there seemed to be growing resistance to Ms Merkel’s plans – especially among German allies seething at how she had behaved in Deauville. Fredrik Reinfeldt, the prime minister of Sweden, put it bluntly: “To solve Germany’s problem, we shouldn’t create problems for everyone else.”

“But once the summit began, opposition began to fold. No president or prime minister spoke up against Ms Merkel, who was pushing the bail-out measures with her characteristic grasp of policy minutiae, according to people who were in the room. It was left to Mr Trichet to defend his position, with only Mr Barroso on his side. “I have the impression that people don’t really realise what the reality of the situation is,” Mr Trichet is understood to have said.

“Mr Sarkozy could stand no more. He cut off his fellow Frenchman and issued a stinging rebuke: heads of state were accountable to their people; central bank presidents only to a board of governors. With Mr Sarkozy’s backing, Ms Merkel won the day. Treaty change would come. But when the markets opened the following week, it was Mr Trichet who was proved right.”

An FT editorial:

“As an Irish rescue looms ever closer, none has intoned more forcefully on the need for unity to save the eurozone than Herman Van Rompuy, the titular head of the European Union, and Angela Merkel, its paymaster and de facto commander. Yet a gulf separates their rhetoric of working together from the reality of European solidarity cracking under the strain.


“Ireland has done more than many other countries to shine a light on losses in its banks (although not enough, even now). Its fatal mistake was not to follow up with a credible and fair plan for who should shoulder those losses. Now that markets have caught on, as they eventually always do, the European response displays the worst instincts of a mob in fear: it puts Ireland in the stocks in order to protect Portugal and Spain[.]

“The ugliest expression of naked self-interest is the idea of exploiting the control over Dublin’s economic affairs that a European loan would imply to force up Ireland’s 12.5 per cent corporate tax. Some large EU states sniff an opportunity to rid themselves of this long-standing irritant once and for all. This would be bad policy and catastrophic politics.”

I don’t know about ‘bad policy’, apart from the timing which is dire, but ‘catastrophic politics’ is no understatement. EU law stipulates that taxation is the perogative of national governments. Sarkozy is playing to the gallery, not engaging in the practical business of government. It is French voters who should be most angry at this.


Even prudent states have their options limited by the mobility of capital. The global race to the bottom in corporate taxation — with Ireland in the lead — is a prime example. The solutions you mention are no more realistic politically than the democratisation of EU institutions mentioned above. Raising taxes to suck cash out of a boom would be fought tooth and claw and in fact I cannot think of a single instance where this has actually happened.

There’s neither money nor votes in falling property prices. The Irish bubble didn’t occur in a vacuum; powerful interest groups whipped up the fervour, including banks and the government.

The solutions being suggested at the EU level currently involve tying governments’ hands ever tighter; it’s extraordinary to think that the response to a banking crisis has been to suggest limiting the powers of democratic states. The prescribed cure, budget rules, are for a different disease from the one the patient is suffering from.

@ hoganmayhew

‘What we have in Iceland and in Ireland is, I believe, a classic emerging market crisis where capital over-flows into an economy that does not have the opportunities to put it usefully to work’

+ 1. The push theory of capital flows.

1 How we got here

‘Very tightly linked currency regimes…act like a gold standard to force a tight link between local conditions and the monetary conditions of the rich-country financial centres. Small changes at the centre can have drastic effects at the periphery’
‘During liquidity or credit boom periods, Less Developed Country (LDC) assets are the ones most likely to benefit. Of course, during the reversal, these are the asssets most likely to suffer.’

2 We are where we are
‘If the amount of debt owed is greater than the country can pay, any foreign investor has to accept that, if his investment increased the country’s debt servicing capacity, that increase would be shared among all investors’

The Volatility Machine: Emerging Economies and the Threat of Financial Collapse
Michael Pettis OUP 1990
Essential reading, IMHO, even though the recipe for recovery is fairly unplatable.

It is agreed that the ECB should have been much less reliant on the Irish regulators. It is also true that the European banks lending to Irish banks were greedy and foolish, but that tale of poor, innocent ,borrowers having money rammed down their throat by dastardly lenders won’t play too well outside of Ireland.

@Dominique Jean-Raymond
Flushed by rugby success, no doubt, you are missing the point. The international capital markets are too big for an individual national central bank to regulate, particularly in the case of a small nation like Ireland (or Iceland).

Never mind the EM crisis of the late nineties, the ERM crisis of 1992 should have been warning enough.

The ECB has no mechanism to regulate disorderly capital flows. It doesn’t even regard it as a problem. My argument is that Soros is right – this is the central problem of a globalised financial system.

As Seamus Coffey’s post (referenced above) shows, the majority of the capital that flowed into and is flowing out of Ireland was from outside the eurozone.

Your strawman of poor innocent borrowers is beneath you and shows a contempt for addressing the issues that have caused the financial crisis.

If availability of capital is the one and only thing that is needed then the location is pure chance. However, I’d make the claim that the credit bubble happened where the bankers were the worst & I also claim that the bankers will always be the worst where the regulation is the laxest.

Would AIB & BOI be in so much trouble now if Anglo had been stopped sooner?

While I agree that there are no Money and no votes in falling property prices, I disagree that a) capital mobility constrains government action to the extent that it is powerless b) that it is unrealistic to expect democratization at the EU level. There are many instances where governments have acted to constrain demand when things look like the party is out of control or when national interests dictate them. Brazil for instance has just imposed capital controls through it’s tax regime and chile has had special taxes on incoming capital for a very long time. Turkey has recently enacted stringent reserve requirements on consumer loans and so has Brazil.

I admit that these controls come after these countries suffered their own disasters in the 1980’s and early part of this decade, and that may be the key to understanding the politics of capital constraint. When the populace is sufficiently removed from a crisis that nobody remembers how horrible they are, then politicians don’t act, but when the consequences of debt default and subsequent deflation or hyper inflation are fresher, then the prime motive of politicians of every side is to prevent another debacle.

It may be idealistic/u realistic but it refuse to believe that democratization is a pipe dream. History has proven time and again that when institutions remove themselves from popular oversight they collapse and often spectacularly. Egypt’s surprise revolution is a classic case in point where the powers that be, securely insulated from the corrosive effects of their actions, honestly believe that they are popular, when they are not. Without popular oversight disasters occur. I understand that Europe’s great project is to create a regional economy, and I understand that the project can only happen over time, but I believe that the cynical reason for this is that politicians refuse to lead. Instead they insulate themselves from real anger and try to create the next step of integration as crises appear. The big picture is that the policy proposals to create harsher central controls was always the point and this crisis is a classic example of creating a system from crisis. They have to do this because they are ingenuous. They refuse to discuss the consequences of integration on national populations, they refuse even to admit that an overarching governing body and a common currency make further deepening controls that most countries would reject immediately if they fully understood them. That is fine but the consequences of this leadership vacuum could be catastrophic.

I would love to see Trichet and Lorenzo Bini Smaghi go to the US and demand the American taxpayer refund European banks’ subprime losses. “Your regulators were at fault so you must pay up”. They’d be dropped straight back to Brussels -at 20,000 feet from a B52.

The distinction between budgetary policy and the banking woes strikes me as an artificial one.

In Ireland, budgetary policy was very much linked with fuelling the property boom.

When there was a minor measure taken to rein in the buy-to-let sector, the developers squealed and tax policy was adjusted.

There was no stress on developing the productive sectors of the economy and less than €200m was going into venture capital for business annually compared €10bn in overseas property investment.

In Spain, the banks that were regulated by Banco de España, have survived a huge housing crash that was also sustained by loose budgetary policy and politically controlled regional lenders known as ‘cajas.’

In Germany, again it’s state-owned banks which were tools of industrial policy or patronage for regional and local politicians, the Landesbanken, which have had the biggest problems.

German and French banks are usually mentioned as the lenders to Irish banks; what’s the exposure to British banks and bondholders?

Germany’s biggest bank, Deutsche, has very low exposure to the peripherals and the Bundesbank estimated last November that German banks’ direct exposure to Ireland was €25bn.

It should also be noted that comparable countries to Ireland such as Austria, Finland and Denmark which shadowed the euro, did not end up in the basket.

‘To expect taxpayers alone, and only those in the countries unlucky enough to have hosted the mis-supervised banks, risks sovereign default in these countries, of which Ireland is the prime example’

– the words ‘unlucky enough’ are inappropriate. We hosted mis-supervised Banks because we tolerated and elected an incompetent FF Govt who then allowed weak regulation and lack of control by the Central Bank. We got what we deserved, and shouldn’t try to say it was by chance. We all had a chance to vote against FF and whilst some may have done so the majority didn’t, so we live with the consequences.

@ Michael Hennigan

‘There was no stress on developing the productive sectors of the economy and less than €200m was going into venture capital for business annually compared €10bn in overseas property investment’

The governing party, and many other were in the grip of an ideology. The state should step back from trying to develop the productive sectors of the economy. All that was necessary was to create the right tax environment for MNCs, and let the IDA loose as the gracious host . Tourism would take up any employment slack remaining. Meanwhile the EC looked after agriculture.

Having ceded responsibility for our manufacturing economy, we handed over the keys to our financial economy, by setting up a casino called the IFSC. The sleepy domestic banking system was easy meat for Ponzi operators. Catastrophic looting and destruction of wealth was the outcome.

The construction bubble appeared to solve the ‘residual’ problem of employing those who lacked third level credentials, and generated lots of tax. That gave an unwarranted air of competence to the governing party, but led to its rapid demise when the lights came on. Eaten bread is soon forgotten.

Joe Lee has lots of interesting material about small country comparisons in Ireland 1912-85. He identified gross weaknesses in our governance long before the bubble, but we weren’t really listening.

It seems that Chancellor Merkel has decided that, if she is to confront her voters with the implications of the ill-designed Eurozone and the sorry state of much of the core EZ banking system, she needs this “competitivenness pact” to provide cover. She believes her voters will only step up to the plate, how ever reluctantly, if they are convinced that all other member-states are subject to the same fiscal governance that they have in Germany. She believes that most voters in Germany take the view: “We will only accept reforms of the EZ and some responsibility for our dodgy banks if we are convinced that these feckless peripherals will be subject to the same type of governance as we are. They must behave more like Germans.”

To assist this process, Ireland can legimitately argue for wider burden-sharing to clean up the EU banking and financial system, but moaning like a teenager: “It’s soooo unfair” is self-defeating. And carrying through meaningful structural reforms in the domestic economy is vital to establish any credibility in the EU corridors of power.

At the end of 2007 the Irish property bubble had massively inflated, and was just about to burst. So what was the ECB’s opinion of Ireland at the time? Well from these statements it looks like Ireland was the star pupil in the class, from whom all the new and inexperienced Euro countries like Slovenia could learn a few good lessons if they paid attention…

The stellar growth performance of Ireland was not just due to higher labour and capital input but also, and mainly, due to labour productivity growth, which has been close to 3% per year since the introduction of the euro and, according to available estimates, almost entirely due to growth in total factor productivity (TFP).

Labour market and wage and price flexibility have contributed to preventing inflation from rising excessively and becoming entrenched and ultimately unsustainable for the country’s competitiveness.

Public debt, public expenditure and budget deficits have all been significantly lower in Ireland than in the rest of the euro area.

The Irish example shows that it is possible to prosper in the monetary union while having a higher potential growth rate than the rest of the union. This does not need to be “paid” in terms of divergent or explosive inflationary outcomes and / or in unsustainable competitiveness for the country.

Fiscal policy in Slovenia is too lax, out of line with what would be required for macroeconomic stabilisation. Deregulation of the product and labour markets has not yet been completed. Wages are growing faster than productivity, in particular in the public sector. The risks of a boom-and-bust cycle are looming. In the face of this worrying scenario, what is the reaction of the policy authorities? Very predictable: they blame the euro for the price increases. “Déjà vu all over again”: Whenever things go wrong in a country, the policy-makers blame Europe. It’s obviously not the right response, and it won’t help the Slovenian people understand where the problems lie. Whether Slovenia will turn out to be more like Ireland than Portugal in the next few years depends entirely on Slovenia. And this will be true for any new member of the euro area.

Now who was singing the praises of Ireland so loudly that even the IDA might have blushed – why none other than our learned friend Dr. Bini-Smaghi in this speech.

Now in fairness a cloud or two was seen on the horizon, but he seemed pretty clueless as to what could or should be done.

At the same time, one should not be complacent about developments in Ireland. Several years of very low and even negative real interest rates, coupled with buoyant growth, may have led some sectors of the economy, and the housing market in particular, to levels which are unsustainable over the medium term. We still do not know of policies that have been reliably deployed to prevent the risk of misallocation of capital in an environment of very low real interest rates. Only time will tell.

“Only time will tell” – Well at least the good doctor got that right.

@paul quigley,


You are confirming that everyone, to some extent or other, in all developed economies, swallowed the Neocons snake-oil. (Even LBS, as Bryan G points outs, despite feeling a tad queasy, swallowed his draught.)

Ireland, as an SOE at the intersection of the economic space defined by the US and the UK and that defined by the EU single market, had little choice but to go with the flow. Even those with influence and authority on the ‘left’ supped at the capitalists’ trough and took a liking to the swill. Yes, better governance might have moderated the excesses, but the overall thrust could not be deflected. Even far better governed countries in the centre and north of Europe could caught up to varying extents; and the political reluctance to confront this is what is hindering the required EU-wide burden-sharing and reform of the EZ that is required.

The requirement for reform of governance at the national and EU-level to avoid imbibing this snake-oil in the future was never more pressing, but it seems we are condemned to employ the same tired, dysfunctional institutions and procedures to chart a course out of this mess.

I’ll return to the topic of the limits to state power in the face of the capital markets later on…

I wholeheartedly agree that granting power to a democratic EU, meaning the parliament rather than the council, is necessary desirable, at least in accordance with subsidiarity. The word ‘subsidiarity’ is interesting as it was common during the 80s and 90s but has almost fallen out of use; I don’t know if politicians understand how to apply it anymore in the context of the single market.

The overlap between the skills needed to be successful in politics today and the skills needed for good governance is minimal. An obsession with process is needed to remain politically competitive, leaving little opportunity to develop expertise in the actual business of government. Pseudoscience plays a role here as well; in an effort to transform politics into a science, a host of micro-issues are subject to intense scrutiny but any unifying narrative is missing. Tony Blair’s government called it evidence based policy, but the absence of ideology transforms the bigger picture into a meaningless jumble. Ultimately, the effort to transform government into a science is a fools errand.

The judgement and experience that underpin great leadership, and the bold but non-scientific narratives needed to make sense of the world, are forgotten in this environment. The blinkered vision that results causes the perpetual drift apparent in even well-governed countries; a complete lack of vision is the norm.

The decades between the fall of the Berlin wall and 2008 were dominated by politics-as-theatre. Relaxed by a delusional perception that the world was converging on free, peaceful and democratic norms as predicted by Francis Fukuyama, political leaders allowed themselves to become so distracted by the process of politics that they began to forget its aims. The outward forms and language of great events were employed but the focus was exclusively on besting the opposition.

The Iraq war, to pick one example, was theatre on a grand scale, a wanton squandering of blood and treasure in compensation for the fact that aircraft carriers and tank divisions are of little use against terrorists.

Likewise, the opposition to the war was theatre. When Bush and Blair stopped pretending to seek UN consent for the war, Jacques Chirac, angry at his scene being stolen, addressed the world to pretend to veto a vote he knew would never occur. France, Germany and Ireland, to name but three, “opposed” the war but France and Germany freed up US forces in Afghanistan and Ireland provided (and profited from) major logistical support. Of course bound and drugged prisoners were also routed through all three countries for the entire period, destined for who knows where, with the CIA aircraft immune from inspection by prior arrangement. This didn’t stop the countries piously pretending to oppose the Guantanamo prison.

Even the opposition to the opposition was theatre. The Bush administration had no intention of permitting allies it didn’t need tangle up post war reconstruction (and the business opportunities it was felt to offer) with ideas about nation building that it did not share. Long before the March 2002 Bush-Blair meeting, Donald Rumsfeld had written a memo stating that “The mission must define the coalition. The coalition must not be allowed to define the mission.”

Colin Powell’s notorious WMD presentation to the UN didn’t even have an original script. Self-consciously reprising the role last played in rather more serious circumstances by Adlai Stevenson during the Cuban Missile Crisis, Powell solemnly clicked from slide to slide, including one satellite shot depicting tyre tracks in the desert where, he claimed, an Iraqi mobile laboratory had been located at some earlier time. Stevenson’s presentation was a legendary encounter; supposedly too liberal, too soft and a has-been, he scored a devastating win against his Soviet opponent in the court of international opinion. Powell’s imitation, based on wholly confected premises, made “the dog ate my homework” seem like the words of a titan of history.

@ Antoin B

I don’t buy the ‘it’s all our fault’ argument, but just to take one point.

The children of Ireland, who are now saddled with debt, clearly had no hand or part in this – and if they stay in the country they are the ones who will be paying through their working career, and the funds put aside for their pensions used up.

So however things develop, surely the state has an obligation to its youth to do its best to reduce its debt?

@ Brian Lucey

You hit the nail on the head.

The Irish politics I know is summed up precisely in the childish, conniving, selfish, self defeating quote “why should we do all the work, and let that other shower take the benefits”. Irish higher intellects at work.

Even more disconcerting is that both FF and FG are joined at the hip and think exactly alike. The political system in Ireland is deeply dysfunctional since all parties in power since 1922 took care of the party and the party hangers on first while actively sabotaging the other party and the country as a whole. This behaviour is seen as being perfectly normal and is rewarded at the polls.

On many an Irish politicians gravestone should be engraved “I left them a big enough mess that it took them over ten years to recover.”. Sure tis fine fellas dey are.

Until the public comes to their senses the order of the day will continue to be selfishness, greed, cronyism, nepotism and outright fraud and corruption. All perceived as business as usual by the population as a whole.

@ Bryan G

So what’s your point.

There is always a danger with superficial comparisons of countries.

Ireland is an economy where the data can mislead more than other developed economies because of the overwhelming dominance of MNCs in the tradeable goods and services sectors.

By the crazy year of 2006, Irish people who believed then that an economy with 100% mortgages and the dearest properties in the world with Beverely Hills but for holes-in-the wall by comparison, either had a self interest in the gravy train continuing or they were fools.

@Adrian Kelleher,

You are taking us off on a narrative of the US Neocons’ international agenda in terms of the global expansion of rapacious financial capitalism and the projection of US conventional military power into the Mid East and Central Asia (ably supported by ‘useful idiot’ ‘freshwater economists’, fellow travellers in the UK Labour party (and elsewhere in Europe) and Rupert Murdoch’s News International).

In Ireland we need to focus on the political efforts in the EU to push back this agenda (now that unfettered financial capitalism has revealed the havoc it can wreak, the military project is becoming bogged down in Aghanistan and the geo-political project is confronting people-power in Egypt). I am not entirely comfortable with the German strategic vision for the EU as an exporter of high value, high knowledge-content goods and services to the emerging economies and for the projection of ‘soft power’, but it is the biggest game in town. We are culturally, goegraphically, historically and economically bounded by the space defined by the US and the UK. But the US Neocon tendency – continuing to reject the legitimacy of Democratic Party electoral majorities and employing the Tea Partiers as useful idiots – continues to shape US geopolitical and economic strategy. The UK is in managed decline and distancing itself even more from the EU. So we are confronted with a major strategic challenge.

And very few seem to recognise it. We seem to be absorbed with how unfair the whole world is being to lil ole Ireland.

@ Dominique Jean-Raymond,
re “but I would not bet that Ireland will be able to retain its corporation tax rate for ever”.

You seem to be very concerned by Ireland’s corporation tax. I am not familiar with the French tax system, but on a couple of occasions I have heard that the effective rate is lower than Ireland’s. For example, this article from the Irish Times suggests France’s effective corporation tax is 8.2% whereas Ireland’s is 11.9%.

“In Germany the actual rate paid is 22.9 per cent and in the UK it is 23.2 per cent. President Nicolas Sarkozy has made clear his dislike of Ireland’s low corporation tax rate but his country’s effective tax rate for corporates is an amazingly low 8.2 per cent – below the Irish level. Earlier this month, an unnamed Irish official said that “based on our information, 25 per cent of all French companies did not pay any corporate tax in 2009”.

The Irish effective tax rate, at 11.9 per cent, is very close to its actual rate. This reflects Ireland’s desire to make its corporate tax regime as simple as possible, again so as to attract foreign direct investment. We do not have the range of write-offs other countries do.”

Is this accurate?

Enda Kenny has been sent over to Berlin to sort out Merkel on his own. How could Noonan let him go?

It was Merkel who invited Kenny. She is not asking him over there for a foot rub. What will Dr. Merkel be saying he agreed to afterwards. No doubt they will have a had a very good meeting with plenty of points of agreement. I hope that Enda is at least wearing a wire.


Isn’t there a bigger picture here, though? AFAIK the global ratio of debt (private plus public sector) to GDP had been growing at a nice clip for decades (certainly for the past decade, at least). So wouldn’t it be fair to say that our fundamental problem is not that credit is free to flow to localised debt bubbles, but rather that the whole world is a single debt bubble, though one which happens to have hotspots of net saving and of particularly excessive borrowing? That’s not to say that capital inflows to regional debt bubbles would be all fine if only the global debt-to-GDP were stable at some desirable level. But that’s not the problem we have.

One big difference this makes is that no-one even wants to try to prevent global credit flowing into regional or sectoral bubbles, because just like the participants in the Irish or EM bubbles, no-one in the global credit bubble – emphatically including the creditor/exporter countries – wants that bubble to burst either. Once all the good investments are taken, credit can only continue expanding faster than output if creditors are free to make bigger and worse malinvestments. Hence the Great Moderation. Likewise, that’s certainly not to say that unrestricted capital mobility would be fine if only there existed the political will to keep (world, EU, whatever) debt/credit in some proportion to output. But that’s not the problem we have. Since there’s effectively an iron-clad political and bureaucratic will to keep leverage going up forever, unrestricted capital flows are just a means to that objective. Small wonder that EU leaders like to peddle budgetary nostrums and tax-harmonisation instead.

(I’m assuming that Recent Events haven’t dampened the political appetite for more leverage. After all, the powers that be have tasted global deleveraging and found it bitter. So hey, yes, let’s double global credit again over the next decade! But even to the extent that the leadership has given up on renewed credit expansion as undesirable or unattainable, that only means they’re facing into the dogfight to stick the credit losses on others. That’s not a situation which rewards political honesty about what happpened over the past decade-plus either. Particularly if your name is Germany. 🙂 )

You are taking us on a new journey with your mention of neo-con land, but a fun ride it is! The theatre you mention is there and American political theatre is often better than other countries. That is probably because they have been at it longer. Politicians, obsessed with process and ideologically confused, are indeed good at the PR and the BIg lie politics (we are against Iraq in public, but nod nod wink wink in private).

The point you make about a neo con philosophy is probably right too. What worries me is that neo-cons have a defined objective, they want to return to a system where countries act only on the basis of “self interest” and ” there is no such thing as society” and they are happy to exploit muddled centre right thinking to achieve their ends. They have no problem with rampant credit growth because they understand that the subsequent collapse will ” kill the entitlement beast”.

US conservatives talk about the strong dollar blah blah but they haven’t, as far as I know, sold one ounce of the massive gold reserves they hold. Even though they believe that others should (the UK’s biggest mistake in history). From their point of view,the transfer of private sector bank debts onto public balance sheets is a perfect means to accelerate the end of the current system.

Ou job, is to survive the ride and come out with something at the end….our decisions so far are not encouraging.

@ Ahura Mazda

The effective tax rate for most foreign companies is likely to be much lower than 11.9% with the benefit of accelerated capital allowances and R&D credits, which I would think is loosely defined.

I would think that it would be hard to get a reliable measure from a large number of tax collection agencies for this metric.

The Economist reports this week, more than a quarter of companies on the Tokyo Stock Exchange had operating margins below 2% over the past decade.

If you include micro companies where there is little or no profit reported, it can make inter-country comparisons a bit iffy.

@ All

In 2006, an international survey compared over 300 metro areas using the standard of a 2,200 square foot, 4 bedroom, 2 ½ bath home that would be typical in an area favoured by a management level family. It found that for the cost in Dublin, Ireland at US$1,406,497, you could have bought nine similar houses in Houston, Texas, three in Amsterdam, two in Sydney and almost two in Tokyo.

We hadn’t even struck oil; we were host to large American companies and too many were deluded into believing that the fairytale of riches from selling each other houses, would keep going.

@Michael Hennigan

Agree with your sentiments. For whatever reason – tribalism, cronyism, nepotism – Ireland doesn’t throw up a political class that fits with a modern economy. It isn’t alone among EU states in having this congenital weakness – look at Italy. But I am not sure that rule by expert elites is a viable option either.

However, some TDs seem even further out of touch with commercial reality than the Croke Park fanboys. Take Johnny Brady FF for example, finding it hard to manage on a TD’s salary plus expenses.

It strikes me that reducing the interest rates attached to the bailout is of little value unless the public sector shrinks in cost and numbers. May be I am missing something here?


My point is that the ECB have recently come out with a tremendous amount of self-serving guff in an attempt to justify why they can force a sovereign government to pay back private unguaranteed debts. Given that they were cheerleaders for the Green jersey team right up to the point that it all crashed and burned, this seems both arrogant and hypocritical to me.

As self-appointed guardians of European financial stability, it appears the ECB were clueless as to the consequences of the large imbalances they were observing via the visibility they had into the banking system; they didn’t have any policy mechanisms with which to address them anyway; and they justified their passivity by saying it was impossible to distinguish between a boom and a bubble. Not a great platform from which to pontificate to others.


“…Merkel who invited Kenny”.

My hunch is that Angela asked her “friend” Enda not to harp on too much about the word “negotiate”.

IMHO flirtation with the “D” word in the various Irish media has been noticed with alarm throughout the EZ as has consensus on one issue right across the Irish political spectrum together with Lenihans decision (or “postponement”) this week.

It would not surprise me if very strong informal hints were given to Enda today indicating that in return for not mentioning one word and discouraging references to the other word a more satisfactory deal may re-emerge next month.

Relaxation of the “bailout” terms will also be easier to “spin” in Germany and elsewhere if the EZ is not seen to be giving into pressure from Ireland. IMHO this explains the strenuous requests, transmitted via various intermediaries, over the last two weeks to Irish commentators to tone down the “Euro rage” rhetoric.

Of course it would be better if Enda was “wearing a wire” but we may get some insights (as well as his interpretation of the meeting) through his choice of words in tonightś debate.

@The Alchemist

“It strikes me that reducing the interest rates attached to the bailout is of little value unless the public sector shrinks in cost and numbers. May be I am missing something here?”

Only in as much as you are not going far enough. The public sector and sheltered professions are basically using the rest of the nation as a human shield.


Have no fear for the Professor. If he’s not discouraged by the fact that, as proven by Martin Weitzman, his conclusions may be arbitrarily inaccurate even if underpinned by reasonable assumptions made in good faith he won’t be discouraged by anything.


(fragmentary notes on market constraints on democratic or other political authority)

Suppose an election is approaching in a certain country and a socialist party is ahead in the polls. The stock market goes on a slide, as does the currency, as money tries to escape taxation. Voters like politicians will be rewarded for behaviour attractive to the markets and punished otherwise, even if this behaviour is inimical to their interests including their economic interests.

Any assumption that the markets exclusively favour good policy is unsound. The markets demand returns now but circumstances might favour long-term investments; by way of example, the quality of the workforce in two or three decades might be highly sensitive to investment in early education, particularly in disadvantaged communities, but this time horizon lies outside the markets’ perceptions.

Equally a given problem, for instance global warming, may trancend a given economy in scale but that economy might nonetheless contribute towards solving it. The markets will still punish those economies that seek to cooperate towards finding a solution and reward freeloaders. This follows from the structure of the modern global economy: the markets are global but effective political institutions are local.

Even self-evidently positive developments will be punished by the markets if they are perceived to threaten the economy. The Egyptian stock market plunged relentlessly after the onset of the protests there, losing 25% of its value in three days until trading was suspended. The country haemorraged cash and foreign exchange reserves plummeted. The cash value of freedom is zero.

The business cycle is longer than the electoral cycle; as Ireland discovered, rampant credit expansion is no substitute for growth, but they look much the same for a while. Any government will be tempted to let the good times roll until after the next election, just as in Britain the temptation to cut interest rates was often irresistable in an election year prior to BoE independence in 1997.

@ Michael Hennigan –,

Fair comment on the Irish rate. Though my comment was to query the effective corp. tax in France.

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