Klau on the eurozone mess

According to Thomas Klau, “the assumption that the coordination of 17 national policies backed up by rules and sanctions can deliver” is “patently false”: “the choice must ultimately be between discarding the euro or taking the plunge into a federal structure complete with Eurobonds,  a common set of core policies,  a bigger and more flexible EU budget, and so on.” If that really is the choice — and one can debate this of course — then my money is on the former, especially given the way the current banking and debt crisis is playing out in both core and periphery. You can read the full article here.

59 thoughts on “Klau on the eurozone mess”

  1. Certainly my money is on discarding the euro. But I can see several ways that may come about and some are more destructive than others. The least bumpy road is via German disenchantment with the system leading to the introduction of a new D-mark circulating alongside the euro for a while. The worst route is a collapse in banking systems in Greece, Ireland and Portugal followed by Spain and Italy.

    There’s a need to plan for these contingencies, so a bit more discussion would be a good thing. I know this is easy for me to say and I’m conscious that this is a contentious subject, but I urge people like Kevin O’Rourke to start a conversation about just how Europe can cut its losses on the EMU project. To avoid attracting the wrath of the untutored, it could take the form of erudite papers with Euler equations and whatnot.

  2. @Kevin D

    “We have a plan, and the plan is the plan. There is no other plan”

    They won’t do anything no matter how much people discuss it. You will almost certainly have to wait for the market to act.

  3. @Kevin O’Rourke,

    Your money may be on the break-up of the Euro, but, previously, you posted on the article by Alan Posen which highlights the benefits to Germany (and, by extension, to the member-states within, or aligned to, its economic and strategic orbit). Quite understandably – focusing on economic matters, it did not highlight the more important (in my view) global strategic benefits of the Euro and the EZ in an increasingly multi-polar world.

    The EU’s political and isntitutional elites have invested far too much political capital and are too convinced of the utlimate benefits of this project to contemplate discarding it. The problem they are confronting is that the project was pushed through largely over the heads of their voters, it was sold as being fit-for-purpose, it was deemed far too complex (and too important) to be subjected to thorough democratic scrutiny. And now, trying to weather the first major storm of its existence, it is, inevitably, beginning to founder. Not surprisingly, the EU’s elites are performing all manners of contortions both to conceal from voters their previously shoddy shipwright skills and to engineer some repairs during a period of relative calm. One should not expect this effort to be structured or co-ordinated, but neither should one doubt the underlying commitment to effect some repair.

    But there are depper political forces at work that threaten to hinder this repair work and which must be managed.

    Some research conducted in Britain by an anti-fascist campaign group, Searchlight, is relevant in this context.
    http://www.fearandhope.org.uk/news/article/1825/Insecurity-is-fuel-for-the-far-right%27s-hate

    The Searchlight research has broken down attitudes to race, identity, immigration and nation into six groups. On the left are “confident multiculturals” and “mainstream liberals”, comprising 24% of the population. On the far right sit “latent hostiles” and “active enmity” (totalling 23%), who share antagonistic attitudes to others and differ only in the degree of their antipathy and tolerance of extremism.

    The centre of British politics are the “identity ambivalents” and “cultural integrationists”. Cultural integrationists accept diversity as long as there is an integrated national culture, the rule of law, and respect for authority. This is the group to which David Cameron’s call for a “muscular liberalism” is targeted. They are a quarter of the population. But the real swing voters are identity ambivalents (28%): economically insecure, worried about their local community, feeling threatened but open-minded and accepting of diversity – as long as their security is not threatened. So they feel more wage and job pressure from immigration, are anxious about their family’s financial future, but are, for example, much less likely to think “Muslims create problems in the UK” than cultural integrationists.

    It is likely this analysis could be replicated thoughout the mature, developed democracies in the EU. (It is interesting to speculate what a replication of this research would generate in Ireland. We most certainly have a mature democracy, but with quaint and anachronistic factional alignments.)

    With the general thrust of centre-right governance in the EU, centre-right politicians’ hold on power is threatened by the “identity ambivalents” being captured by the “latest hostiles” and “active enmity” camps. (In some respects the centre-left has been damaged more previously by losing core working class voters to these camps. We shouldn’t forget that Le Pen beat Lionel Jospin to contest the run-off of the French Presidential election in 2002.) We can expect some ugly US style ‘dog-whistling’ – and we’ve seen some already (e.g., Berlusconi on Albanian immigrants, Sarkozy on the Roma and Merkel declaring multiculturalism is dead – with Cameron dutifully following on).

    In the eyes of many core EZ voters the peripherals’ decade of misgovernance within the EZ has placed them outside the pale. The antipathy has not reached the intensity expressed towards ethnic minorities and Muslims, but we would be fooling ourselves if it didn’t have the potential to reach the same intensity – or be built up by populist, xenophobic demagogues.

    The onus is on us to get our house in order and to be accepted, once again, as compatible members. Any shrieking about the pain we’re suffering and our ability to bring the house down will be totally self-defeating.

  4. I did say *if* that is the choice — and this unclear, since the entire EMU construction is based on the principle that this is not in fact the choice.

  5. @Gavin,

    Thanks. But you should really get out of that neck of the media woods – or even better, as Spike Milligan once proposed: ‘Let’s get out of the wood before the trees arrive.’ 🙂

  6. @Paul Hunt

    The antipathy (toward Ireland) has not reached the intensity expressed towards ethnic minorities and Muslims, but we would be fooling ourselves if it didn’t have the potential to reach the same intensity – or be built up by populist, xenophobic demagogues.

    Just to make this clear:

    The best way to detail with the threat of racism and xenophobia is to keep your head down and our response to the increase of these prejudices should be to avoid attention.

    You can not believe this, so I suspect you only wheel it out as it fits in with your realist analysis of European politics which I present here in shortened form.

    * The European establishment is best represented by Angela Merkel.
    * Chancellor Merkel is the head of the CDU
    * The CDU’s policies are austerity, bank protection, a large eurozone and a strong euro.
    * The CDU has the plurality of votes in Germany.
    * Germany has the plurality (forgive me) of economic influence in the EU.
    * Therefore the entire EU is beholden to follow a policy of austerity, bank protection and maintaining both eurozone and a strong euro.
    * We are part of the EU and so have to accept this.

    If we accept this analysis we have to avoid publicly advocating and lobbying for actions that suit our national interests but not Angela Merkel’s political priorities.

    That sounds more like submission than realism and it is one of the reasons realism has a bad name, Henry Kissinger being the other.

    This is a might makes right, political philosophy and it gives no credence to the possibility that there might be a greater good than accommodating the internal politics of larger countries or that Ireland, badly regulated and governed as we were, might be a wronged party of wrong policies.

    Sadly no one will do our fighting for us and historically keeping ones heads down and hoping to be rewarded for good behaviour has not had a high success rate.

    The Germans understand this as few others do and we have no excuse for not demanding fairness rather than pleading for it.

    This is our Rosa Parks moment and it will not be comfortable or safe but doing the right thing often is not.

  7. Yes.

    ‘So why does Europe cling to its suspension of disbelief? The answer is that it cannot bear to face up to reality.’

    No signals pre March 24-25 that this Ontological Challenge will be placed on table by the Ontologially Challenged.

    To be both vulgar and succinct: Europe is in deep sh1t; and the little piece of it that we briefly inhabit is ahead of the curve.

  8. I’m all for the introduction of more information such as Euler-equations into the public when it comes to economic discussions. The systems have been described by complex mathematical formulas & judging by the current outcome the models were wrong. Complexity does not guarantee accuracy and at times I’d say that complexity is introduced to hide ignorance.

    The US had one policy backed by rules & sanctions for their currency. The crash in the US is at the very least of the same size in the euro-zone so evidently the introduction of one policy backed by rules & sanctions can fail as well. So by his reasoning having many policies failed and having one policy also failed. That would leave having no policy. Luckily his logic falls on that not all policies failed in the euro-zone so it is possible to have several working policies. Good governance works.

    Ireland handed over the regulation of banks to the (unaccountable) market so it might not be a big step for Ireland to give it up to an accountable authority. Countries with accountable authorities are reluctant to do so as an EU authority is likely more difficult to hold to account than a local one.

    I agree that it is a highly political task to allocate sovereignty. Especially as there might be countries willing to compete in the freedom given corporations operating in their jurisdictions. However, is it different to give up sovereignty to unelected corporations or giving it up to the EU? (Areas of sovereignty could be regulations regarding finance/banks, working-conditions, food-safety). It should be discussed. Some things are too important to be handed over willy-nilly.

  9. @Shay,

    For the purposes of engagement I’ll run with your shortened description of my ‘realist’ stance. But to provide some context I will counterpose an extract from a presentation I made to the Oireachtas Cttee on Communications, Marine and Natural Resources in Dec. 2005:
    http://debates.oireachtas.ie/MAJ/2005/12/06/00004.asp

    “Like all modern societies, Ireland applies principles, processes and practices to determine the award of power, profits and prestige. Ireland is a democracy. The Irish people and their public representatives should decide who exercises power and how that power should be exercised. Ireland has a market-based economy. The highest profit should go to those who provide in the most efficient way the goods and services people require. This is a civilised and cultured society. The prestige should be accorded to those in every area of activity who do remarkable things and who lift the human spirit.”

    Ireland’s reputation lies in tatters. We need to stand proud and tall again. The Irish people took the first important step on 25 Feb. They have delegated responsibility to those who will be elected to govern. The people deserve governance of a high order and those elected must not flinch from pursuing reforms that may provoke the opposition of comfortable vested interests (whether in the public or private sectors), but are required in the public interest – and, more importantly, are required to allow Ireland to demonstrate to our partners that we are well able to govern ourselves in our own interests and to the benefit of those with whom we are associated. We will then be a in a position to point to the folly of the EU’s current approach – and have our critique secure respect and consideration.

  10. What would the Irish do?

    During the bubble, we would have opposed any move towards a transfer union (at that time, we still hadn’t contributed 1 net cent to the EU budget); post Sept 2008, we would still oppose moves towards a federal state.

    The way life works is that the people who in the first Irish Lisbon Treaty campaign, were criticising the European ‘elites’ for making decisions without seeking the views of the people, are now slamming political leaders like Merkel for doing what they ached for.

    It’s forgotten now that it’s not only so-called ‘core’ rich countries that are resistant to see bailouts of peripheral countries; last year, Slovakia refused to contribute to the bailout fund for what it viewed as richer corrupt Greeks.

    It’s easy to forget now that Germany has financed much of the infrastructure in the peripheral countries.

    George W. Bush didn’t like multilateralism and many didn’t like his alternative – – of course the hurlers in/on the ditch can have it both ways when it suits.

    Even the G-20 is not G-Zero as Dr. Doom terms it; glacial advance can matter over time; despite calls for beggar-my-neighbour actions in all countries including Ireland, during the crisis, the move towards protectionism was mild.

    I don’t believe that the choice overtime will be discarding the euro and a federal structure.

    Germany will have several countries that will continue to see merit in a currency with it as the anchor. In time, with the growing German-Polish trade, it may also see merit being part of such a union. Denmark, another neighbour, has been shadowing the euro for years.

    The question is, what advantage would the struggling countries have outside the euro?

    No simplistic devaluation solutions, please!

  11. The Euro Zone – many parties sharing a currency – is addressing the problem of the different standards of standards, performance and responsibility amongst the parties. This is analogous to a family who own a farm in which none of the family members have any interest in the farm for farming.

    Should they sell it – break it up – and go their separate ways with their share of the capital or should they leverage it to raise a share of capital for each member, thereby generating some use from the farm while retaining it as a security, appreciating asset and cultural heritage etc.?

    If they leverage it, some members will perhaps fail to redeem the generated loan, while others will do so and with profit to spare. Both of these performers will soon want to leverage it again- -further, the former to have another go at making some profit and the latter because the first experiment went well and would now like to increase their scale, perhaps.

    So, it would seem that all leveraging members of the family should undertake to repay 110% (emphasis: 110%) of the loan they leveraged, thereby creating a reserve for those who failed or lacked a sense of responsibility to the security in their first attempt – this strategy would soon heighten a desire in all members that they should not be seen to be a burden on the others.

    Of course, it would be desirable that such a structure would be established before the farm/currency became near bankrupt, but probably better late than never.

  12. Addendum: I am sorry that the above is somewhat deficient as an analogy and perhaps is not worth posting as the currency/farm is up and running and that some members are net savers while others are bankrupt at this stage.

    Where to go from here …

  13. No simplistic devaluation solutions, please!

    We could call it “Quantitative Easing” if you like.

    Ireland has few options if it really-o, truly-o wants to leave the Euro. The biggest problem with deflation is—leaving aside rich people moaning about their assets and social status abroad—the effect on credit. If the country leaves the Euro then getting loans will become that much harder as now lenders will have to consider the stability of the currency in addition to everything else.

    But our debt levels have made the situation so bad, we might actually get better lending rates with a new currency than if we stick to the old and all the debts denominated in it. That said, I doubt a fiat Irish currency would work, but there is another option; the same option the Irish State took for many years of its early history.

    We could leave the Euro, but peg the new currency to the Euros.

    If new Irish punts were exchangeable at a fixed rate for Euros, this would limit the exposure of the currency to the vagaries of speculation. Not entirely, but enough to prevent hyperinflation and hopefully keep some credit lines open at least. That outcome would still be preferable to the slow death by debt the state faces now.

    There’s only one potential problem with this move. What currency are the Irish bank debts denominated in? In other words, if the existing debts _have_ to be paid back in Euros, switching currencies doesn’t seem like a worthwhile option.

  14. Does anyone else wonder whether the FG/Lab decision to review the banking / Croke Park bailout in two years might morph into a sort of deferred date at which the much trailed “renegotiation” is supposed to take place – assuming the forthcoming interest rate reduction is unspinnable as a regegotiation?

    I note the 10y gilt has touched 9.48 today. Its intraday peak was 9.5 and highest close 9.355 in Nov.

  15. “The EU’s political and institutional elites have invested far too much political capital and are too convinced of the ultimate benefits of this project to contemplate discarding it. ”

    Norman Lamont felt the same about the Exchange Rate Mechanism. The Euro will stand or fall in the market.

  16. @ Grumpy

    If there were a 2 year run up to a renegotiation where would that leave the banks and their bond rollovers? They haven’t a hope of getting anywhere near the financial markets when sov rates are in excess of 9%.

  17. @seafoid,

    But Norman Lamont fell out of it on his face – with a young David Cameron scurrying behind him. The ERM continued and mutated into EMU. It’s always been the DM+ and will be for the foreseeable future. Protecting this is one of the reasons the peripherals are being left to stew in thier own juices.

  18. @Jesper

    Generalising from the failure of a single regulatory system, you appear to conclude that a single regulatory system cannot succeed. You surely don’t need me to point out the difference between necessary and sufficient conditions. The US system could and did fail due to bad governance. The eurozone system on the other hand had to fail due to structural limitations.

    It’s simply not true to say that ‘not all systems failed in the eurozone’. Suppose there were a single market but no euro; Greece would already have defaulted, as would the Irish banks en-masse. And who would absorb the resultant losses?

    @Paul Hunt

    Lionel Jospin was defeated by complacent tactical voting rather than Le Pen. Two Trotskyists polled in the 5-10% range in the first round and if the election had been held under a PR system Jospin would in fact have defeated Chirac. Not only was the broad left vote greater than Le Pen’s, Le Pen gained almost nothing in the run-off round when he moved from 19% to 20% while Chirac advanced from ~39% to 80% (all figures from memory).

    The logic of your analysis of EU policy since 1990 is full of holes and laying blame at the feet of ‘the EU’s political and institutional elites’ smacks of opportunism given your disdain for ‘eurocrats’.

    The elites of the EU itself envisaged nothing like the arrangements that actually arose from Maastricht or any of the subsequent treaties. Those were the product of the member states. Far from advancing the goals of ‘EU elites’, member governments have conspired to turn Brussels into a dumping ground for necessary but unpopular reforms (e.g. the Lisbon agenda), a place to draw fire from national governments (e.g. the Dublin Convention) and a means of putting one over on their rivals within the bloc (e.g. the CAP).

    Likewise, the existence of racism and related phenomena does not in itself make accomodation of such phenomena any more necessary or desirable. In more than 50 years since the treaty of Rome, citizens of member countries have enjoyed freedom of movement without resulting in significant ethnic tensions on a single occasion.

  19. @seafóid

    It looks like the politicians might try to punt the whole thing (no, not that kind of punt) two years down the road. I don’t think any of them understand the markets.

  20. @Adrian Kelleher

    +1

    The original elites of the EU itself envisaged nothing like the arrangements that actually arose from Maastricht or any of the subsequent treaties. Those were the product of the member states. Far from advancing the goals of ‘EU elites’, member governments have conspired to turn Brussels into a dumping ground for necessary but unpopular reforms (e.g. the Lisbon agenda), a place to draw fire from national governments (e.g. the Dublin Convention) and a means of putting one over on their rivals within the bloc (e.g. the CAP).

    I think that it is unfair to characterize the unpopular parts of the Lisbon treaty as necessary. From fairly painful examination of it at the time it appeared to be a combination of making the EU into a private club for governments rather than a pan European political structure that derived its legitimacy from the people of Europe, a sop to arms manufacturers and a terrific way of making foreign policy even more Atlantacist when that was the very, very last thing on the collective mind of Europe’s citizens.

    I also added a small amendment to your paragraph as well, European elites have been thoroughly co-opted by the new pro competition, anti-solidarity ethos that Lisbon enabled. From big dream to alienating mess of economic directives – “Be the best market economy you can be” is the closest thing to a guiding principle the new EU has.

    To get back on topic one of the reasons we are forced by national self interest and moral urgency to confront the EU is that the EU we have now has been subverted by the economic interests and prescriptions of the more powerful states, it has diminished the power of the people, increased the pull of MNCs and most amazingly of all made the current, utterly dysfunctional, banking environment the central pillar of EU economic policy.

  21. @Adrian Kelleher,

    Le Pen’s 20% remains significant and Chirac’s advance was principally due to the Socialists being compelled to encourage their supporters to “Vote for the Crook, not the Fascist”. I merely used the example to highlight the continuing support for ugly, xenophobic sentiments. It also highlights the ability of the left to retreat to comfortable ideological positions, to defend their favoured ‘insiders’ and to fail to reach out to the liberal, progressive centre. Thus we have a preponderance of centre-right governance throughout the EU which has a tendency to pander to the less ugly, but still reprehensible, parts of the xenophobic and nationalist fringes. It’s not so much EU citizen v EU citizen, but EU citizen v non-EU citizen.

    This and the residual malign influence of Neocon ideology are hindering progress to a resolution of the current crisis.

    The Commission’s responsibility is to pursue the EU project, but is empowered by policy direction by the Council. However, it has accumulated institutional momentum and competences under various treaties. The problem is, as one UK politician put it, “we didn’t vote ’em in; and we can’t vote ’em out.”

    We can all find examples of national perfidy and Commission over-reach, but it is difficult to avoid the evidence that the EMU and EU Constitution were pushed through without sufficient democratic scrutiny. And it’s not so much the democratic deficit in the EU as the exercise of executive dominance by national governments (aided and abetted by their ‘permanent governments’).

  22. @Adrian,

    my statement was that some regulatory regimes worked in the euro-zone. Since some worked it means that at least one regulatory regime worked. By that I believe it is possible to draw the conclusion that it is possible to have multiple workable regulatory regimes in the euro-zone.

    Multiple points of failure or a single point of failure are the options. I’d rather have multiple points of failure resulting in smaller failures than a single point of failure that fails and destroys everything. If all banks in the euro-zone was governed/regulated as Anglo then the euro-zone would be gone. Luckily it is now limited to the one country where the regulations-economic governance were the worst.

    The populations in poorly governed states will suffer no matter the currency. Devalued currencies makes all imports more expensive. Who would have to pay the higher prices? That cost would be unavoidable with a distrusted currency.

    ‘Optimal currency area theory’ seems to be equated by ‘optimal interest rate area theory’. Should an ICB dictate one interest rate for Dublin and another the rural Ireland? Maybe an ICB should keep one interest rate for business parks and another for city centers? Which currency areas can banks operating in Ireland handle themselves?

  23. @Paul Hunt

    The Eurocrats can huff and puff but they haven’t got the smarts when it comes to the struggle against the wall of money that is the markets.

    Did they have a plan when Greece got into trouble in the first place? Do they have a plan for the Greek default? Do they have a communications guru who gets the message across well? None of the above.

    In medicine as in finance it is best to deal with the problem as soon as it occurs. The eurowallahs believe in procrastination and the hail mary.
    If Libya goes and things heat up in Saudi it will be risk off again but this time could be much more traumatic.

    It’s a rollercoaster and they don’t have a seatbelt.

  24. @Shay,

    “To get back on topic one of the reasons we are forced by national self interest and moral urgency to confront the EU is that the EU we have now has been subverted by the economic interests and prescriptions of the more powerful states, it has diminished the power of the people, increased the pull of MNCs and most amazingly of all made the current, utterly dysfunctional, banking environment the central pillar of EU economic policy.”

    I couldn’t agree more. Where we differ is that I’m convinced we need to do more to retrieve our reputation before we can credibly confront the EU.

    Labour here had its chance to shift the terms of the debate, but, fooled by its initial buoyancy in the opinion polls into believing that all it had to do was channel public anger and that there was no need to work hard on policy or to reach out to temporarily homeless voters in the liberal, progressive centre, blew it. FG, in contrast, with a leader popularly perceived to be ineffectual, made a virtue of necessity and put in the hard graft on policy. These voters have found a new home and will prove difficult to dislodge.

    The only way the current arrangement will work is for FG to allow Labour to slaughter some of FG’s sacred cows and for Labour to allow FG to slaughter some of Labour’s sacred cows. They can both both wave their own sets of scalps before their supporters. And there should be enough sacred cows remaining from the FF dispensation for co-operative slaughter (as FF could not see a sacred cow without seeking to milk it for political gain or securing the services of the bull to sire some more.)

    Some concerted effort along these lines will generate significant benefits and enhance Ireland’s credibility in the EU.

  25. Europe needs the Euro, the world needs the Euro. The British Pound and Swiss Franc no longer provide the ponds of liquidity to counteract the weight of the US$, Yen, Renmimbi. With Brazil, Russia and India on the rise even a standalone Deutschmark would be a seventh or eighth tier currency. Necessity is the mother of invention which means the continued existence of the Euro is a certainty. We are in the best currency unit Europe has had since the fall of Rome (except for gold and silver). If we had played our cards soberly and responsibly we would have continued to prosper without being caught up in destructive currency swings. The question I am unable to answer is which countries will be members of the Eurozone. The Euro enjoys great respect around the world, I have enjoyed the fruits of that respect and if Ireland drops out I will be disappointed both for myself and for Ireland.

  26. @Jesper

    “my statement was that some regulatory regimes worked in the euro-zone. Since some worked it means that at least one regulatory regime worked.”

    The cautionary tales of WestLB and Hypo Real Estate say otherwise.

    “By that I believe it is possible to draw the conclusion that it is possible to have multiple workable regulatory regimes in the euro-zone.”

    The inference is not sound. The eurozone capital markets are not a collection of national capital markets because the idea of national capital markets is not useful in the context of the single market; in fact the present crisis has made plain the fact that borders between the eurozone components are not financially meaningful — hence the fears of contagion, hence the drive for tax harmonisation by Germany and France and hence the inability of peripheral countries to resort to tax rises instead of spending cuts as a solution to their problems.

    “Multiple points of failure or a single point of failure are the options. I’d rather have multiple points of failure resulting in smaller failures than a single point of failure that fails and destroys everything.”

    You procede to err surefootedly with each step. The banking failures in the eurozone were not smaller than the US and did in fact ‘fail and destroy everything’ in spite of the multiplicity of regulatory environments as WestLB, HRE etc demonstrate. Common sense illustrates that unified capital markets spanning a fractured regulatory environment make financial disasters inevitable.

    Unified capital markets may dominate a unified regulator but unified capital markets assuredly will dominate a disparate collection of national regulators.

    “If all banks in the euro-zone was governed/regulated as Anglo then the euro-zone would be gone.”

    What about Ulster Bank? EBS? What about the foreign banks operating in Ireland and regulated abroad that nonetheless suffered severe losses here?

    “Luckily it is now limited to the one country where the regulations-economic governance were the worst.”

    Factually incorrect once more. RBS, WestLB, HRE etc. etc., and the very existence of the EFSF are all testimony to the falsehood of this claim. I can’t imagine you’re unaware of these facts.

    “The populations in poorly governed states will suffer no matter the currency.”

    Leaving the conclusions to be drawn to readers’ imaginations…

    Explain how the population in our ‘poorly governed state’ would suffer if the country repudiated the bank guarantee and let the private banks’ creditors look after themselves exactly as creditors must do in every other instance. Explain moreover how the population would have suffered from non-Irish banks losing out on their investments on Irish bank bonds ‘no matter the currency’.

    “Devalued currencies makes all imports more expensive. Who would have to pay the higher prices? That cost would be unavoidable with a distrusted currency.”

    Your arguments dissolve into a melange of indistinct concepts at this point. What are you trying to say?

    Why should devaluation of a punt that was hypothetically never subsumed in the euro lead to mistrust? Presumably, markets would respond to falls in prices (devaluations) by finding the product in question more desirable. I am surprised to find supply and demand being drawn into question once again on this board.

    More to the point, why should the hypothetical punt have suffered due to bank failures when the banks’ creditors would have had no recourse to a state bailout? Finally, how would Europe have been better off when many of those unpaid creditors were its own banks?

    Devaluation is a two-way street. It makes imports more expensive but exports more competitive. It’s neither desirable nor undesirable in itself, however it will occur due to economic problems and is a beneficial corrective to them.

    “‘Optimal currency area theory’ seems to be equated by ‘optimal interest rate area theory’. Should an ICB dictate one interest rate for Dublin and another the rural Ireland?”

    Generalising breezily from a particular case, assuming the same assumptions apply, and drawing bizarre and patently false conclusions as a result. Do you contend that differences between rural Ireland and Dublin can be equated with differences between Dublin and Bratislava? Did the growth differential between Dublin and rural Ireland correlate at all with that between Dublin and Berlin in the 1999-2008 period? With such sophistry, you wave away an inconvenient but well-established cornerstone of modern economic theory.

    “Maybe an ICB should keep one interest rate for business parks and another for city centers? Which currency areas can banks operating in Ireland handle themselves?”

    This is just question begging of the most obvious sort. Your post exhibits what Umberto Eco called cogito interruptus — the forms and structure of rational argument are there, but it all relies on huge leaps of logic to support claims that don’t stand up to critical examination.

  27. @Paul Hunt

    I couldn’t agree more.

    I win! Wait….

    Where we differ is that I’m convinced we need to do more to retrieve our reputation before we can credibly confront the EU.

    Damn. Our road runner/wily coyote routine continues.

    Its true that Fine Gael more finely tailored their policies to the fearful, selfish center and Labour foolishly got involved in that narrative of the squeezed, suffering, middle classes rather than the jobless and the disenfrachised. A better policy for Labour might have been to offer a vision of an alternate Ireland rather than a better run version of the current one, you can not convincingly argue for a just society without spelling out how you plan to allocate resources and protecting public service jobs and pensions does not qualify as a plan.

    Still, I wish our new government the best of luck and the discovery of nerves of steel.

    On an almost happy note the idea that there might be choices to be made about how the economy is configured has been planted in peoples heads so perhaps at the next election those choices will be more clearly articulated.

    The IrishEconomy.ie might be part of that.

  28. Lifted from an FT blog comment:

    “So let’s recap the situation in Greece:

    Three years of negative GDP growth.
    High inflation due to VAT increases.
    Increased taxation across the board in the middle of a recession.
    Fiscal contraction in the middle of a recession.
    Meaningful measures still not really taken: the judiciary is still useless and corrupt which essentially means that there is no rule of law: tax evasion and the business-killing corruption are still everywhere.
    No political capital by the government to actually push through (and implement) meaningful reform. They are horrible at negotiating and have set bad precedents of caving in to demands by special interests.
    Massive emigration.”

    It would seem a cultural unwillingness to address institutional dysfunction is a common theme which is surprisingly difficult to shift. It is almost as if national identity is at stake.

  29. @all

    Olli Rehn: Bailout terms should be extended to seven years

    http://www.irishexaminer.ie/breakingnews/ireland/rehn-bailout-terms-should-be-extended-to-seven-years-496297.html

    Later [Olli’s ] spokesman insisted: “This programme is the best guarantee for the Irish economy to recover, to have a new fresh start for the benefit of its citizens in the medium and long term, with a more solid basis, whether it comes from the restructuring of the banking sector or the fiscal consolidation of Irish state.”

    Ah Yes- a bit of ‘restructuring of the banking system’; methinks this one is driven more by Greece situation than by Ireland …

    5.15 pm AIB transfers €1.1bn in loans to Nama – ‘nother bit of re-structuring wha!

  30. @Adrian,

    it would appear that I’m not clear but you do raise some interesting points:

    The losses from the euro-zone core does seem to stem from them buying bonds issued by other banks in countries where the regulation failed ie. The US, Ireland. What can be learned from that? Don’t buy bank bonds from banks operating under a lax regulatory regime.

    Are you saying that all regulatory regimes in the euro-zone failed? I’m saying that more than one passed. Either the regulatory regimes that failed improve or they’ll be the ones to fail again. There will be more banking failures in the future and they will happen where the regulation/governance is the weakest.

    Ireland created a weakness for itself by choosing a lax regulatory regime. It was & is Ireland’s choice to do so. Other euro-zone countries chose not to.

    What can I say about poorly governed countries except that vested interests in them will look after themselves and leave the rest to manage as best they can. Therefore the general population in poorly governed countries will have it worse than the population in well governed countries which is governed for the benefit of the general population. We could argue about what makes governance good or bad but I find it difficult to believe that a country governed for and by vested interests is well governed.

    The banks operating in Ireland do seem like they were operating in a frenzied mode. I’m surprised the headquarters of the banks not regulated by the Irish regulator didn’t stop them. Those banks are now paying the prize. Years ago Barings bank failed due to one trader out of control where the headquarters didn’t stop the trader. I’m not quite sure what your point is?

    I’m not sure what happened before guarantee was issued nor why it was issued. Would it have been better for Ireland if another path had been chosen? Maybe. There might be an investigation into the events, in my opinion there should be. Other than that, what can I say about it?

    I find the optimal currency area theory to be a pretty theory with little to no practical application. I’ve raised the argument that the central bank interest rate is not the most important factor for the interest rate given to a borrower. The lending bank is supposed to rate the creditworthiness of the end-customer and that is the single most important step in setting the correct interest rate for that particular transaction. A bank that can’t do that task correctly will end up losing money. There is no correct interest rate for certain transactions as the risk is too high & there were/are banks who seem unwilling/unable to admit that.

    The optimal currency area theory seem to be applied here as though it was the most important factor. Might be true and that would remove the value of the skill of many bankers. If their skill is not a factor, how can they justify high wages?

    I am aware that well established theories have been disputed in science and the theories ended up being proven wrong. Is economy exempt from that possibility?

    As for the devaluation, others have raised questions about its benefits. Answer those questions and maybe I can be convinced.

  31. @Jesper

    In a repeat of an all too familiar pattern, having had your arguments rebutted on a point by point basis you simply rephrase them slightly and ignore the response.

    “Are you saying that all regulatory regimes in the euro-zone failed?”

    I’m saying that if one fails then they all fail.

    “Ireland created a weakness for itself by choosing a lax regulatory regime. It was & is Ireland’s choice to do so. Other euro-zone countries chose not to. […] What can I say about poorly governed countries except that vested interests in them will look after themselves and leave the rest to manage as best they can. Therefore the general population in poorly governed countries will have it worse than the population in well governed countries which is governed for the benefit of the general population.”

    Your vagueness, generalities, allusions to tacit but unspoken arguments and so on conceal the lack of substance to your arguments. If Ireland still had its own currency, the (overwhelmingly foreign) creditors to the Irish banks could have been allowed to go hang, and not only would the ‘general population’ here have had it no worse, the banksters would have run off scot free, complete with their stripy shirts and large sacks marked ‘swag’.

    In fact, it is still possible for the government to leave bank creditors in the lurch. Only euro membership stands in the way of this.

    “I find the optimal currency area theory to be a pretty theory with little to no practical application. I’ve raised the argument that the central bank interest rate is not the most important factor for the interest rate given to a borrower. The lending bank is supposed to rate the creditworthiness of the end-customer and that is the single most important step in setting the correct interest rate for that particular transaction.”

    Your objection to the optimal currency area theory is both convenient and emblematic of a tendency to marshall arguments like trenchlines in defense of a fixed position instead of proceeding logically from first principles.

    I’m baffled as to the idea’s connection to retail interest rates. The point of Mundell’s ideas is that a (more) optimal currency zone such as the basically culturally and economically homogeneous USA won’t be subject to asymmetric shocks as frequently as a multicultural, economically heterogeneous area like the eurozone. There are plenty of examples from recent US history — e.g. Texas in the mid 80s, Massachusetts in the late 80s/early 90s — of regional crises being averted due to the mobility of labour. Just waving Mundell’s ideas away is insufficient — provide some argumentation and stop merely rephrasing the same points without addressing counter-arguments.

    “The optimal currency area theory seem to be applied here as though it was the most important factor. Might be true and that would remove the value of the skill of many bankers. If their skill is not a factor, how can they justify high wages?”

    I’ve no idea, nor any idea why it’s relevant.

    “I am aware that well established theories have been disputed in science and the theories ended up being proven wrong. Is economy exempt from that possibility?”

    Let me just break this argument down:

    1) Scientific theories have been proven wrong in the past
    2) Mundell’s theory is a scientific theory
    3) Ergo, Mundell’s theory may be proven wrong

    While the argumentation is for once rock solid, the point is so trivial as to be not worth making.

    “As for the devaluation, others have raised questions about its benefits. Answer those questions and maybe I can be convinced.”

    In a managed floating exchange rate regime such as the country might have maintained outside the euro, the issue of devaluation is not a political one but an inevitable consequence of a downturn. That devaluation is an inbuilt safety valve in such circumstances is not seriously disputed by anyone.

    The fact is that the country is paying handsomely for euro membership. You lay down (unstated) objections to devaluation as yet another trenchline in your political defense — it cannot be called an argument — of the indefensible: that the Irish exchequer is somehow morally culpable and deserves to be burdened with debts incurred by contracts between private individuals to whom the state is in no way obligated.

  32. http://www.irishtimes.com/newspaper/breaking/2011/0307/breaking50.html

    “Fine Gael and Labour see no point in transferring further assets to the National Assets Management Agency (Nama), Fine Gael TD Alan Shatter said today. Mr Shatter, one of the negotiators of the programme for government, said the parties were concerned about the manner in which Nama was working, a lack of transparency surrounding it and the impact it has had on the stabilisation and recovery of property market

    “Both parties see no purpose in transferring further assets to Nama,” Mr Shatter said. He said there were also concerns about the huge level of expense Nama was incurring, particularly in relation to professional services.”

    It sounds like there is a chance of there being an adult in charge for a change.

  33. @Adrian,

    your claiming that I’ve said things that I didn’t.

    You seem to want that the crisis shouldn’t have happened. It did.
    You seem to want that the blame is entirely due to causes external to Ireland. It is not.
    You seem to want that Ireland never joined the euro. It did.

    The banks in Ireland failed due to bad bankers operating under a lax regulatory scheme. Can you explain how this ties into the optimal currency area theory? Did the currency make the bankers bad?

    The majority of the costs of the failure in Ireland have,due to the government guarantee, been taken on by the Irish state.

    It seems you are of the opinion that the government shouldn’t have guaranteed the bank debt. From the available information it seems like the decision might not have been wise. The decision was made. It is now to be dealt with. Reversing that decision became more and more difficult every day since the decision was made. I don’t know what has been said between the ECB and the Irish government over the past 2.5 years. The reality now seems to be that the money paid out already can’t be recovered. The bonds still outstanding are a different matter. Reversing the decision now will have given preferential treatment to some creditors over others that are legally entitled to the same treatment. That difficulty might possibly be overcome, I don’t know. I’m not privy to the inner dealings of the Irish government nor of the ECB and other than the publicly available information I have no idea what they are saying to each other.

    The previous Irish government took the decision. The Irish population decided that the previous government should be kicked out. The new government will deal with the situation to the best of their ability.

    You seem to want them to introduce a new currency. Your proposal have been discussed and I think the questions & comments from hoganmahew are relevant:
    http://www.irisheconomy.ie/index.php/2011/02/25/comparing-iceland-and-ireland/#comment-127827

  34. @ Adrian Kelleher

    If Ireland still had its own currency, the (overwhelmingly foreign) creditors to the Irish banks could have been allowed to go hang, and not only would the ‘general population’ here have had it no worse, the banksters would have run off scot free, complete with their stripy shirts and large sacks marked ’swag’.

    The majority of deposits were also from foreign residents including FDI investors in Ireland; would all them have been told ‘go hang’?

    The IMF would have had the same requirement as it has with Iceland, in respect of the repudiation of the EU common deposit guarantee arrangements.

    Would the IMF have had to fund the establishment of new banks?

  35. @Michael Hennigan

    Deposit insurance is a small fraction of the state’s obligation to the banks. The retail arms of the banks could have (would have, in fact, and rapidly, as their value would otherwise have quickly diminished) been sold off under the cover of bankruptcy protection legislation. At a time when foreign banks were operating profitably in the country, as they were up to 2008, the issue of establishing new banks was in any case irrelevant.

    @Jesper

    I’ve no appetite for either last-wordism or empty rhetoric. You go round and round in circles, generating new objections with each new post and never addressing any of the points put to you. Instead of churning out strawman misrepresentation of my statements and an ever-broadening list of demands, why not make an effort to reply to the actual critiques made?

  36. @ Paul Hunt

    Much of what you say is apt, but I couldn’t help noticing the below.

    ‘Ireland has a market-based economy. The highest profit should go to those who provide in the most efficient way the goods and services people require’

    I suggest

    “Ireland’s economy and media are dominated by powerful MNCS, who continue to mould public demand for must-have products. Branding and monopoly pricing are rather typical, and normal market mechanisms are highly distorted.
    While a desire for lifestyle enhancement is in itself reasonable, the associated growth in household debt is increasingly problematic in terms of our economic development prospects. The concentration of SMEs in the retail/distribution sector has also skewed the economy away from production.
    It follows that the orthodox canons of economic efficiency are likely to lead Ireland further up a blind alley. New thinking is urgently required’

  37. @paul quigley,

    I don’t disagree with your modification, but we need to focus on what is possible as we strive to identify and secure what is desirable. It is our misfortune that greed and stupidity have placed us at the fringes of the Euopean family; and it is our double misfortune that the family is subject, largely, to centre-right governance in the short to medium term.

    We can do little about the latter as Neocon ideology retains much of its malign grip and the centre-right will shift to appease ugly, xenophobic nationalism and populism. The tide will turn eventually, but not in time to help us. But we can do something about the former. The people purged the politcial stables on 25 Feb. We now need a correpsonding purging of the ‘permanent governance’ stables.

    What is possible and desirable might then become clearer and we would be better resourced and equipped to engage with the forces that confront us.

  38. The comment that “The HQ of foreign banks operating in Ireland should have reined in their Irish operations.”. Ireland ranked high in the world for its enterprising, honest and hard working people. This was largely due to the overseas Irish who thrived in well governed countries. Three in particular that I know are the saxophone player from Tralee who rose to head up Canada’s second largest bank and went on to run Barclays, The boy from Thomastown, Kilkenny who headed up the largest Re-insurer operation in North America a subsidiary of a German Re-insurer and the Dublin boy who headed up the Toronto Stock Exchange. These guys clawed their way to the top by dint of intelligence, drive and hard work without ever seeing the inside of a university except to receive honorary doctorates. The foreigners have no idea how conniving, corrupt and self serving the Irish governance and business models are. They are learning fast unfortunately and now count their fingers after they shake hands with the Irish. We have to stop blaming foreigners and take a good look at ourselves and our tolerance for aberrant social, business and political behaviour.

  39. “our tolerance for aberrant social, business and political behaviour”

    Have a look at a few econocentric current affairs programmes on the state broadcaster RTE – try the website. Is it me or is there something peculiarly convenient about the way any mention of the high costs in Ireland compared to say Germany are always confined to either social welfare payments or the minimum wage?

    I get the impression RTE want to steer the discussion in this direction because to mention public sector and semi-state pay rates vs Germany would be a bit orrfff.

  40. @Grumpy

    RTE is fascinating these days. And no matter how bad things get there is always time for the sports news.

  41. @ Adrian Kelleher

    You appear to have a benign scenario of a banking collapse, which would be accompanied by a plunge in the currency and rising interest rates/mortgage costs.

    As regards the 3 main foreign-owned retail banks, the parents of two of them had to be bailed out. All 3 were also technically insolvent.

  42. @ Mickey Hickey

    This is an excellent post.

    Few natons can look in the mirror as natonal myths like religion sustains people.

    We made lawyers multimillionaires to tell us what Charles Haughey was about when only the most gullible could be surprised but most of those were likely unconvinved.

  43. @Adrian,

    whatever I say I seem to offend you. You’ve called me a racist, you’ve called me a chauvinist. I’ve not labeled you. You seem to want to argue that the euro-zone has structural limitations and that Ireland should leave. It seems the two of us can’t debate this so I’ll leave it to others to debate with you. Hoganmahew raised some objections, Michael Hennigan raised some objections. If you want to argue for your case, then debate with them.

  44. Day dats innit – a little teaser: how many billions will be transferred to nama today and announced at 10 past 5? Need to get a bet on with PaddyPower.com …

  45. @Jesper

    The point is that you don’t debate at all. Your posts are a travesty of fair argument. With each post, several new arguments are invented all of which miraculously orbit the same fixed point, an invariant conclusion. If it was just tendentiousness was the problem it wouldn’t be too bad, but you also simply ignore everything that’s said to you, repackaging points that have been carefully rebutted and mis-characterising what’s said.

    It’s a fool’s errand to continue ‘debate’ in this one-sided conversation, and the only reasonable course of action remaining is to point out your abuse of reason and move on. Anyone can review what’s written above and work out who is being reasonable and who isn’t.

    Yoganmayhew didn’t seem to be so blind to the virtues of “competitive” — note the magic word — devaluation here.

  46. @Michael Hennigan

    “As regards the 3 main foreign-owned retail banks, the parents of two of them had to be bailed out. All 3 were also technically insolvent.”

    In the hypothetical circumstances examined, however, nobody would have been forced via obligations to a currency block to refund either shareholders or bondholders of these banks. Restructuring along classic good bank/bad bank lines would have been a simple technical process. The retail arms of these banks did possess market worth and there would have been no trouble in finding buyers.

    The whole point of the banking disaster is not that the banks in question weren’t viable, it’s that the senior management looted them during the good years making collapse inevitable once a downturn took place. The institutions in question were and remain prodigious cash-generating machines, it’s just that they were burdened with bad debts due to the machinations of senior staff who worked in the banks for themselves, never missing a chance to inflate their bonuses, rather than working for the banks.

  47. @Adrian Kelleher
    “Yoganmayhew didn’t seem to be so blind to the virtues of “competitive” — note the magic word — devaluation here.”
    Ah, the last refuge of a scoundrel – misreferencing. A devaluation implies having a currency to devalue.

    You are not talking about just this. You are talking about a new currency that is going to be accompanied by a devaluation, a default, a repudiation, a forcible conversion, no capital flight, and a line in the sand that will be the new peg.

    I have one or two problems with the longer term effects… I’ll repeat my zhou enlais on the short-term nature of competitive devaluations and deficit spending… it’s too early to tell whether they have been successful in ending the liquidity trap, post-poning it, or replacing it with something far, far worse.

  48. @hoganmayhew

    If you check this thread, you’ll see the topic was a hypothetical situation where Ireland was outside the euro.

  49. @Adrian Kelleher
    If you read my post again, you’ll see we (simpleton and I) were discussing liquidity traps, not Ireland outside the euro.

  50. @hoganmayhew

    If you read my post again you’ll see I was not “talking about a new currency that is going to be accompanied by a devaluation, a default, a repudiation, a forcible conversion, no capital flight, and a line in the sand that will be the new peg.” You were not misreferenced.

  51. @Adrian Kelleher
    “it is still possible for the government to leave bank creditors in the lurch. Only euro membership stands in the way of this. ”

    “In a managed floating exchange rate regime such as the country might have maintained outside the euro”

    PS Sorry, the magic peg was ObsessiveMathsFreak.

    Either you are talking about a prospective devaluation and at least the possibility of all those other things when you talk about a devaluation or you are engaging in historical titilation of the “would we all be speaking Russian if Stalin hadn’t stopped at Vienna?” sort.

    We don’t have a currency, we joined the euro. Either you want to leave it, which is fine, argue the case, or you don’t, in which case, there’s not much point in arguing about might-have-beens.

    I used the words “competitive devaluations” advisedly. They are, to me, temporary negative stop-gaps, as I’ve argued elsewhere. They hurt those least able to pay most. Largely, they don’t work. What, for example, is the euro:dollar exchange rate now? What was it in January 2007? For all the QE and all the jawboning, the competitive devaluations have failed. Saying that I see “temporary devaluation” as having virtues is misreferencing me.

  52. @hoganmayhew

    There’s a difference between an engineered competitive devaluation and a devaluation resulting automatically as a market corrective to economic recession. Many people have made the arguments about devaluation in much greater detail than I have elsewhere and I feel I made my points in the other thread linked to above. A concise version would be ‘what Krugman said’. Suffice to say I don’t share your conclusions.

    The disdain for hypothetical issues you share with Jesper makes little sense given that they were responses to direct questions put to me. How are hypothetical questions to by answered except by hypothetical answers?

  53. @Adrian Kelleher
    “The disdain for hypothetical issues you share with Jesper makes little sense given that they were responses to direct questions put to me. How are hypothetical questions to by answered except by hypothetical answers?”
    It is not, on my part, a disdain for hypotheticals, it is a disdain for might-have-beens. As I said above, I’ve no problem with talking about the advantages/disadvantages of leaving the euro (I think the disadvantages outweigh), but that we are in the euro really needs to be the starting point.

    There are plenty of hypotheticals that we can progress form here. How about introducing a scrip currency for payments by the state? With a time-limited function to it? Go to a dual currency system to deflate the domestic economy…

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