Bini-Smaghi: Whither Europe after the Crisis?

Lorenzo sure is busy giving speeches these days. Here‘s his latest. Some highlights:

Recently, a former Irish Prime Minister has even had the honour of front page headlines when he reproached the ECB for not having sufficiently monitored the Irish banking system when it is well known that in Europe the powers of prudential supervision are the responsibility of the national authorities, a competence that you do not want to give up.

And it’s not only former Irish Prime Ministers that get a tongue-lashing. Current heads of state also:

The piecemeal approach followed in recent months risks losing sight of the long-term goal. The measures may not be completely coherent. We came close to it last autumn, with the Franco-German proposal, endorsed by other countries, to make it easier for countries to go bankrupt. Fortunately, the idea has not gained acceptance, not only because of the ECB’s dislike but also because of the devastating effect it has had on financial markets. It will take time to recover from the loss of credibility suffered by Europe with that proposal.

The proposal was based on the assumption that the best way to discipline governments and to ensure sounder public finances is to make it easier for a country to declare bankruptcy. As soon as a country has problems with its public finances, it should seek a restructuring of its debts or automatically extend its bond maturities as a necessary condition for receiving help from European and international institutions.

This idea is mistaken for several reasons.

Read it yourself to see if you’re convinced by Lorenzo’s vision of a default-free Europe.

124 thoughts on “Bini-Smaghi: Whither Europe after the Crisis?”

  1. “The national press of different countries, unfortunately, tends to pander to anti-European sentiments and sometimes fuels conflict, without trying to explore the themes or to present the opposing viewpoints.”

    Has anyone ever seen Brian Cowen and Lorenzo Bini-Smaghi in the same room together?

  2. Mr. Bini Smaghi reminds me of Michael McDowell and Mary Harney at their worst. He is absolutely certain of the correctness of his own narrow views and prescriptions. He scares me.

  3. “The latest Irish Central Bank data has just been released.

    It was expected that the ELA (accounted for in ‘other assets’) would drop by €17.5bn to reflect the FRNs that were issued by the Irish banks in January.

    So, the expected figure would be in the region of €34bn.

    The numbers show the complete opposite.

    Other assets at the end of February stood at €70bn.
    ….

    So, it seems that Irish banks are running out of deposits, running out of collateral, and running to the Irish Central Bank to keep their doors open.”
    http://blog.cornerturned.com/2011/03/11/feb-ela/

  4. @Karl Whelan

    ‘Lorenzo’s Vision’ – let’s not get carried away now (-;

    @Lorenzo Fan Club

    Next meeting @high_noon during the Ceili in front of the Irish Central Bank on March 17. John the Seer predicts that Lorenzo’s visage will appear on the side wall of said bank and that the hologram oracle will speak in all 27 tongues of the union, and … er … be understood by none. Discussions afterwards in the local hostelries, and all proceeds to be drank to the health of the deficit.

  5. @Karl,

    Way off-topic I know, but given that (i) LBS got some treatment on the previous thread, (ii) Richard Tol seems to be engaged on other matters and (iii) Irish voters decided to deprive the Greens of parliamentary representation (or participation in government), it might be time to consider part of their legacy and the resulting challenges. This recent review article may be of interest to some here:
    http://www.europeanenergyreview.eu/site/pagina.php?id=2802

    Perhaps you ro one of your fellow contributors might like to kick-off a thread.

    Thank you.

  6. Hurrah for Bini-Smaghi

    The contradiction of member states (politicos + media) blaming Europe for domestic ills while continuing the path of integration is one of the paradoxes of the EU

  7. @PHL:

    OK, I read thru the review. God its awful lite. Too tech to explain at this juncture. Will comment at length if KW opens a thread.

    BpW

  8. @ Herr Lucey

    re ELA increase. Its a bit more complicated than that. It is genuinely temporary, although if the ratings agencies come in with some harsh findings, some of it may become more permanent in nature.

    @ Karl

    Is Bini-Smaghi on a book tour or something at the moment??

  9. Mr Bini’s arguments are all over the place. Two things strike me – 1. he’ll blindly defend the ECB 2. he seems to have a personal vendetta against the Irish.

    Take this bit: “The current decentralised system does not sufficiently penalise free riding, i.e. attracting to your country one part of the industry by lowering the level of regulation. In reality, taxpayers also benefit because the development of the financial sector, encouraged by deregulation, contributes to increased tax revenues that fund government spending. Only at critical stages, when a country’s financial system is in trouble, do taxpayers find themselves having to compensate for the shortfall in tax revenues in that sector and in some cases seeking help from taxpayers in other countries.”

    Now this is a not-too-subtle go at the IFSC etc. He ignores that these ‘imported’ finance companies haven’t cost the Irish taxpayer!

    These paragraphs are full of invective, but it’s hard to figure out what he recommends. Is he saying that Ireland should allow bank bondholders to be burned? Or that Irish taxpayers have to pay the losses of private banks?

    “To reduce the dependence of the euro area as a whole on local events the link between a country’s public finances and its national banking system needs to be severed. This link stems from the assumption – mistaken as we shall see – that regulation and prudential supervision must be carried out at national level because ultimately the country’s taxpayers have to bear the costs of any bank failures.
    The crisis has shown that this assumption is not true. The errors and negligence arising from Irish regulation and supervision are paid by the taxpayers of that country – but they also expose others to enormous risks. The whole of Europe’s banking system is influenced by what happens in that country. For example, the opaque way in which last spring’s bank stress tests were carried out in Ireland has weakened the credibility of the stress tests in all the countries. In a truly integrated market supervision cannot remain decentralised because the decisions that supervisors take do not only affect national taxpayers.”

    Well if the ECB hadn’t supported foreign funds fleeing via liquidity ops, thereby forcing an alternative approach to the Irish banking system, the Irish sovereign and taxpayer would be in a better position. On stress tests, why didn’t the ECB highlight their doubts when the stress tests were published last year? I wonder if Guv Honohan agrees with Mr Bini.

  10. Why’s anyone surprised? You refuse to take your (monetary) lumps and opt for rule by European General Gouvernement – you’ll have to deal with guys like this.

    Fyg, we refuse him entry at the airport.

  11. @ Karl

    Am particularly disappointed that our top economists don’t get off the fence a bit more and explain on Vincent Browne, the national press or wherever that we are in a downward deflationary spiral with terrible consequences. With households paying down debt, businesses going bust and no government spending to take up the slack there is no hope for growth. Exporting our way to growth is a pipe dream. Japan was an export powerhouse wit massive fiscal spending from 1990 to 2004 and it still couldn’t break out of its deflationary spiral. European monetary economics is dead and you have a duty to explain it as such.

  12. @BW,

    I know it’s ‘lite’, but it’s still better than the guff being spouted through Irish official and commercial channels.

  13. @Ahura Mazda

    My assumption has been that Bini Smaghi has been assigned by the ECB to play the heavy on the Ireland case, saying the things that it would be unstatesmanlike for president Trichet to say in public. I suppose it could be personal though.

  14. @AS: A Freudian spelling I presume!

    Off the fence? I have asked on more than one occassion on this site for commentators to bring into the light of discussion their economic Model-in-Use – to no avail!

    I can presume and infer all I like, but I cannot really take them to task absent a knowledge of that Reference Frame.

    The global financial model is predicated upon the eternal growth of debt. So I take it as a self-evident truth that extracting ourselves from our contemporary debt-swamp requires us to take on even more debt. 😉

    BpW

  15. @ Brian Lucey ,eoin bond
    Is it temporary or is this the ECB undertaking a transfer to the Sovereign of as much as possible of the liquidity required to keep them afloat.

  16. @Brian Woods

    There are NO models.

    Follow Lorenzo – debt is limitless – both keep goin on an on an on an on an on etc

  17. @ Gavin

    magic beans. Seriously.

    It’s allowed to create liquidity in the same way the ECB can (though this has raised a fair few eyebrows from those that didn’t realise it could do this – its QE-lite to be honest).

  18. Next Thursday – St Patrick’s Day – Italy will celebrate the 150th anniversity of its ‘reunification’.

  19. Sorry, last comment slipped in incomplete (and with an interesting Freudian slip). What I meant to write is:

    Next Thursday – St Patrick’s Day – Italy will celebrate the 150th anniversary of its ‘reunification’.
    Not all are happy that this day has been made a nation holiday. The Northern League – whose members tend to wear green throughout the year – believe that the Italian unitary state was a mistake and is a failure.
    I wonder will Signor LBS use the occasion for another blast at Ireland?

  20. I should have added this bit as well in which Lorenzo solves the current fiscal crisis by conjuring up a world in which fiscal crises would be verboten. Ingenious.

    “If the objective is to ensure healthy and robust public finances in the euro area, it cannot be achieved only through monitoring procedures and under pressure from the financial markets. In my opinion, we have to turn the problem on its head. We need to ask ourselves what it takes to prevent countries from getting into a solvency crisis. In other words, if the goal is to have sound public finances, a country should not be allowed to be insolvent. Countries belonging to Monetary Union should be prohibited from defaulting or restructuring their debt.

    The best way to prevent euro countries from defaulting is to lay down rules for debt which have constitutional weight.”

  21. @Eoin Bond

    magic beans (-; love succinct summaries –

    reckon we hit the perfect 10 soon – if we haven’t hit it already?

  22. @eoin bond
    Thanks.
    So effectively the ECB are lining us up for a restructuring with the Sov. Holding as much of the can as possible. Or have I got it entirely wrong?

  23. @ Karl Whelan

    I would refer you to the mandate agreed at the December European Council for the ESM and the Delphic wording of the paragraph dealing with illiquidity/insolvency.

  24. @Karl W

    I find this totally moronic. What he envisages is a stricter rule on max deficits which would be a fixed number.

    This is a bit like me deciding that any stock in a portfolio that falls more than 3% from its peak should be sold. It might work for big, defensive multinationals but for anything with a high beta, like a small highly rated company, it would just result in continually selling every dip.

    Al the very least Ireland needs to counter with a proposal that deficit limits must reflect the volatility of each economy’s GDP series. Similarly, different morons – like Charlie Spenditwhileyouvegotit – would be required to run a correspondingly higher surplus during booms.

    Why not get Noonan’s minion to publicly ask Lorenzo to explain how Ireland’s breeches of the deficit limit in the decade prior to 2008 contributed to its difficulties.

    Megaphone Bini is monopolizing he airwaves and if the peripherals don’t start to put forward basic, self-evident counter arguments there will be no support at all in EZ core states for anything other than a maximum repayments strategy.

    This guy is actually making the case for reform in Ireland more difficult – which is some achievement.

  25. “….conjuring up a world in which fiscal crises would be verboten. Ingenious.”

    Is there not a recognised condition in a well-governed central European country where a person, having been knocked down by a car driving the wrong way up a one-way street, refuses to accept that it happened because it was forbidden? Perhaps LBS is suffering from this.

  26. One useful thing in “Verbal”‘s latest is that it slightly demystifies the ECB line on bank bondholder losses – or rather, non-losses.

    He effectively argues that because the member states have not given banking regulation over to the ECB or similar pan EZ institution, any losses to bank bondholders are the fault of that choice and a failure of the national regulator. Implicit is the “fact” that the ECB would not have allowed any bank to get into such deep water had it been allowed to be in charge. This choice, and the failure of the national regulator means it is up to the state in question to pay for the banking losses.

    Elsewhere – just after the bit Karl extracts in the original post – he rather revealingly dismisses the bond market as a means of disciplining states (through yield spreads) on the basis that market prices are not always correct. Given that he also accuses EU politicians of not understanding the markets, this is bizarre. If markets have no useful function in establishing yield spreads then what can they do? This premise is used to dismiss the role of markets and introduce the idea that instead, what is needed is a more rigid set of rules.

    This disrespect – even contempt – for markets goes a long way to explaining the apparent insistence that the traditional market realities of risk / reward and corporate or sovereign bond investment be thrown out of the window via the conflation of bank and sovereign debt.

    It looks to me as though there has been a bit of an anti-market cult at work within the ECB. Ireland appears to have been its first experiment.

  27. A number of points about the Lorenzo Bini Smaghi.

    1. The article is turgid to the point of being unreadable. Reading it was like chewing rocks.
    2. The man was on the board of the ECB, yet admits in the opening sentences that

    First, the crisis has caught Europe unprepared.

    . That admission should be enough to lose him his job.
    3. His proposal for the ECB to take over the budgetary process and borrowing capacity of all member countries is completely unrealistic. At least he partially admits this. But his blinkered and unrealistic thinking is shown by the statement

    In other words, if the goal is to have sound public finances, a country should not be allowed to be insolvent. Countries belonging to Monetary Union should be prohibited from defaulting or restructuring their debt.

    Earthquakes should be prohibited in Japan!
    4. His proposal for the ECB to have a central regulatory authority is about 10 years too late, but is absolutely needed.
    5. His targeting of Ireland is at the least inappropriate for a member of the ECB board.

    Recently, a former Irish Prime Minister has even had the honour of front page headlines when he reproached the ECB for not having sufficiently monitored the Irish banking system when it is well known that in Europe the powers of prudential supervision are the responsibility of the national authorities, a competence that you do not want to give up.

    It has been stated in these pages that the ICB is responsible only to the ECB. I am not clear on this issue of who the ICB is responsible to.
    6. On this last point, if it was just Irish “prudential supervision” that was the problem, why are we having new Basel protocols and revised capital ratios across all European banks.
    7. Finally it seems to me that Lorenzo is spinning for his supper. And he is working for very powerful spin masters. But he displays an undisguised visceral dislike of Ireland. Ireland will never get an even break while he retains his position. Irish public policy should be drawn up in the light of that fact.

  28. I just love the ‘first motor cars’ analogy. They did not have advanced safety features, apparently. They had guys driving them though.

    Grumpy: the markets screwed up pre-2007 with too-narrow spreads and countries that met SGP rules got into trouble too. Now that the bond market vigilantes are doing their work, they are to be ignored, it would appear, and the answer is better rules, to be applied to countries which observed the old ones and got into trouble anyway! B-S at least offers entertainment value.

  29. @Karl
    @grumpy

    Limits don’t work just because they exist. Constitutional limits on sovereign debt already exist in Europe, viz. Poland, which has a constitutional debt limit of 55% of GDP. When Poland was set to break that limit for 2011 what did they do? They cooked the books and partly reclassified their large pension liabilities to fall outside of the scope of public debt. Fully sanctioned by the European Commission, I might add.

  30. Colm, it is reassuring that the flawed mechanism for allocation of capital and pricing of risk that is the market is now redundant thanks to the superior and crystal clear intellect of Verbal.

  31. @Grumpy

    “It looks to me as though there has been a bit of an anti-market cult at work within the ECB. Ireland appears to have been its first experiment.”

    It would appear that we are indeed an experiment. If Eoin Bond is correct then we are just printing the stuff (or creating it digitally) with the other Euro members standing idly by. Won’t be long before we get to the 180b level at the rate the ICB are creating the stuff. Magic beans- no more liquidity crisis.
    We can unwind at our leisure.

  32. @Karl Whelan
    “Countries belonging to Monetary Union should be prohibited from defaulting or restructuring their debt.”
    Did he really say that? After the last critique I did of Signor BS, I couldn’t face another one. That’s mad. No really, it’s delusional. It is the sort of thing that lunatics say about their voices.

    As grumpy says about S. BS’s views on the bond market, this is someone who really doesn’t appreciate where money comes from. Clearly he thinks his magic beans can exist in isolation without all the other participants that make up a ‘money’ system – the productive labour that underpins the means of exchange, the saving of that laborious means of exchange that, at bottom, constitutes the bond market. What does he think? That Central Banks invented money and that they are (or should be) anything more than a rationalisation of productivity?

    Do you know, the goldbugs make more sense than this. Signor BS? Yes, indeed he is.

  33. Is there a showdown coming?
    Is the ECB going to stop funding the Irish banks and force them to draw down on the punitive EFSF.
    Portugal will be next. I wonder…..

  34. @hoganmahew

    I remember that one – we reached similar conclusions – in early days I was fooled – then I started to read carefully hoping to learn something – what an incredible awakening …… and he is on the Executive Board!!!

  35. @Hogan

    “As grumpy says about S. BS’s views on the bond market, this is someone who really doesn’t appreciate where money comes from. Clearly he thinks his magic beans can exist in isolation without all the other participants that make up a ‘money’ system – the productive labour that underpins the means of exchange, the saving of that laborious means of exchange that, at bottom, constitutes the bond market. ”

    Can magic beans exist in isolation?-seems they can according to the following from zerohedge-

    “But the truth is that the Ponzi Scheme of the U.S. Treasury issuing bonds and the Federal Reserve buying them up cannot last forever as Gross noted in his March newsletter….

    “Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t.”

    Gross also noted in his newsletter that the Federal Reserve is currently buying up about 70 percent of all new U.S. government debt.”

    Now if our magic bean creators in Dame Street can use some of them to buy up our debt held by those pesky foreign bondholders at a large discount then we can use the surplus beans to stimulate the economy.

  36. It is difficult to strike a balance, especially when the economic and political difficulties are inspiring a search for scapegoats, even abroad. …This crisis has shown the difficulty of dialogue between public opinion in different countries, which obviously have access to news through the national media which in turn do not always try to present the views of the other party, much less that of European institutions.

    For example, the opaque way in which last spring’s bank stress tests were carried out in Ireland has weakened the credibility of the stress tests in all the countries.

    Ahura Mazda says LBS “seems to have a personal vendetta against the Irish” while Joseph Ryan says “he displays an undisguised visceral dislike of Ireland.”

    I don’t think it’s fair to put him in a category which includes the first ‘democrat’ of modern times, Oliver Cromwell.

    As to the IFSC and regulation, it could fairly be argued that the German regulator should also have responsibility for the nefarious activities of units of some of the German public banks at Dublin’s offshore centre.

    The charge on last year’s stress tests is a serious one and should be answered by the financial regulator.

    There were common rules but LBS appears to suggest that there were issues that inevitably came to light, but were hidden.

    It’s a reasonable point given that further recapitalisation announcements were made less than 2 months after the stress tests were published.

    As for the scapegoating, there is no denying that we have plenty mushroom demagogues feeding into the hope that somehow, we can avoid tough choices and maybe unearth again another Fir Bolg era philosopher’s stone, in some bog.

    Garret FitzGerald says in The Irish Times today:“This accusation of cynicism on the part of Labour seems to me to be much more applicable to Sinn Féin and to some of the left-wing Independents who, standing on a grossly irresponsible ‘debt default’ platform, have repeatedly failed to respond to the simple question: ‘If, as you propose, we default on part of our debt, who then would lend us the money required to continue to pay public servants and to finance social welfare?’”

    Who wants to be bored with downsides?

    There is a problem where some blame can be reasonably put on others but if we take say an 80:20 split, it should never be unclear as to where the overwhelming culpability should lay.

    On the brighter side, the farmers are rolling in the hay for a second year and the arrival of QE2 from London rather than Frankfurt, may boost tourism as would a visit by President Obama.

    Arthur Beesley wisely says in The Irish Times today that Enda Kenny’s drive to build confidence will not be done in a day, or in a year. Of necessity it is a slow-burn plan.

    Kenny may have to compromise on the corporate tax base but a change in 5 or 10 years ahead may only have an impact on operations in Ireland where there is little value added such as say a 20 person leasing firm that is booking huge revenues in Ireland.

    We seem to have few allies in Europe and Brian Lenihan had to miss many EU meetings in the past year.

    As in business, personal relations do help.

  37. I think the argument among reasonable advocates of ‘default’, by which some of us mean restructuring unguaranteed bank debt, is that we should seek assistance from the IMF alone, rather than the EFSF. It seems very unlikely that the ECB will actually pull the plug on ELA provided we still have hostages in the form of guaranteed bank debt that can be morally and politically distinguished from sovereign debt per se.

  38. Last sentence from IT, more on same in FT.

    “German Chancellor Angela Merkel said bailout rates for Greece would be lowered by 100 basis points, and the repayment period is to be extended to 7.5 years.”

  39. @ Celtic Phoenix

    The FT has it that the decision to allow the €440bn fund to intervene in the so-called primary bond market was ‘particularly unexpected’. It’s not the only thing that has been unexpected, and they are just firefighting now. My lay understanding is that this move is necessary to prevent peripheral sovereign yields from rising and ratings falling to junk. All the move will show is that the core EZ pols are in a bit of a fix.

    @ Michael Hennigan

    ‘Kenny may have to compromise on the corporate tax base but a change in 5 or 10 years ahead may only have an impact on operations in Ireland where there is little value added such as say a 20 person leasing firm that is booking huge revenues in Ireland’

    That’s a very sanguine interpretation. All we can reasonably say is that our CT regime is now coming under serious fire. Since it is our main plank for the putative recovery, the implications are obvious. As the saying goes, hope for the best, but plan for the worst.
    In some respects, your position on the ‘left’ parties is correct, but there is an additional truth, which is that the majority parties lack a viable plan. Any long term ambitions are liable to be overtaken by events, and loss of sovereignty is all too possible.

    @ grumpy

    ‘This disrespect – even contempt – for markets goes a long way to explaining the apparent insistence that the traditional market realities of risk / reward and corporate or sovereign bond investment be thrown out of the window via the conflation of bank and sovereign debt’

    Your views are generally very sound, but let”s name it. The manipulation of markets is as old as markets themselves. Markets for services are often opaque, and markets for intangibles are particularly liable to manipulation. Martin Luther opposed the scale of indulgences, probably because he recognised that there was a bit of a Ponzi going on.

    Haute finance has always been a game of smoke and mirrors, but Greenspan and Co took the game onto a new level. Insofar as LBS has ‘contempt for markets’, he learned it across the pond, where he took his PhD. Now that the wheels have come off the NeoCons cart, he would like to return to the patrician standards of old Europe. The trouble is that it no longer exists. Like us, he is in uncharted waters.

  40. Seems to me that one of the key messages from the summit is getting lost in the discussion. Plenty of focus on corporate tax rates and the corporate tax base; not so much on the suggestion that our current austerity measures are inadequate.

    From the FT:

    “Enda Kenny, Ireland’s new prime minister, received a rough welcome to the European stage on Friday, with both his French and German counterparts pushing him to impose additional austerity before they consider lowering interest rates on Dublin’s €85bn bail-out.”
    http://www.ft.com/cms/s/0/abc7f1e2-4c0c-11e0-82df-00144feab49a.html#axzz1GN8wSoAc

    The stuff about corporate taxation that is getting discussed is a matter of straightforward bullying by the French and Germans, designed to put their interests ahead of ours.

    The stuff about greater austerity is a matter of asking that we act in our own best interests, and stop panhandling for borrowings that will further delay our recovery of competitiveness, and will end any chance that we have of avoiding default on our sovereign debt.

    The former deserves no more than a flat refusal. The latter is worth discussion, and a good deal more.

  41. If it takes this kind of fight for what amounts to scraps from Europe, how is this mess ever going to get sorted in any kind of orderly way?

  42. Whatever the end result will be it will be the result of negotiations. A successful negotiation is one were all parties come home with something they wanted. To have a successful negotiation it is necessary to find common ground:

    1. Germany & France want to humble bondtraders. To do so they want bondtraders to realise losses.
    Ireland want bondtraders to realise losses.
    Can an agreement be found around this point?
    2. Germany & France don’t want what happened to happen again.
    Ireland doesn’t want what happened to happen again.
    Can a way to make it less likely & less costly be found that is acceptable to all concerned?
    3. Germany & France want the situation to be resolved as soon as possible.
    Ireland want the situation to be resolved as soon as possible.
    If the concerned parties were to be working together it is likely it would speed things up.
    4. Germany & France don’t like money to be wasted.
    Ireland doesn’t want money to be wasted.
    Can an agreement be found?
    5. Germany & France might be arguing for a common consolidated corporate tax.
    Ireland want solidarity.
    Can an agreement be found?
    6. Most countries in the EU do not want to give up sovereignty.
    Ireland does not want to give up sovereignty.
    Can an agreement be found?

    Many items look like they can be resolved. It is not inevitable that they will be resolved.

  43. In a frat boys club Enda’s induction might consist of being stripped naked and chained to a lampost. The effect is much the same here really.

  44. It seems to me that BeeCeeTee puts his finger on what really matters; the need for Ireland to face up to the fact that it must get its public finances in order and this can only be done by (i) cutting public expenditure (notably through job cuts and reform of salaries, pensions and social security) (ii) raising taxes (iii) selling state assets. Of course, there will be academic arguments about the capacity to created the necessary primary surplus etc. etc. but beggars cannot be choosers.

    The reality is that certain areas of the private sector are beyond austerity at this stage having simply disappeared while at the same time the economy is beginning to slowly return to the horizontal from the previous risk of capsizing, the change in ballast being (i) the performance of the FDI export sector (ii) ditto agriculture and (iii) the dramatic increase in emigration.

    All of this is old hat. But it is amazing how it gets pushed aside, the Irish media being almost Pavlovian in its parochial reactions to what happens in Brussels.

    Merkel and Sarkozy (assuming the latter knows what he is doing, which is open to doubt) wish to keep Kenny’s feet to the fire but mainly in respect of keeping to his programme, not corporation tax which is one of those running debates that will not find a solution any time soon but provides a very useful whipping boy domestically for them (and they are both in deep political trouble).

    Kenny was, of course, right to stand his ground not because the wording to which he objects is particularly binding (if it is as reported by the IT) but because, had he agreed, one can imagine the way Sarkozy and Merkel would have run with the ball. Indeed, he seems to me to have emerged from his baptism of fire with aplomb.

    Of course, the behaviour of France and Germany can be seen as a rather brutal form of arm-twisting and incompatible with with the European ideal. But Europe is not a benevolent society, never has been and there are major benefits to Ireland from this fact finally sinking home.

    Another point that seems to me worth mentioning is the fact that Greece is not in the EFSF and there were pressing arguments for deal struck with it. What remains to be seen now is whether Portugal will fall into the arms of what can only be a reformed EFSF. This cannot operate on the basis of different rates for different countries.

    On the interventions by Bruton and Sutherland, neither was particularly good but the latter had at least the benefit of drawing attention to the fact that no moral hazard is associated with being forced into the EFSF, no more than in regard to balance of payments assistance to the new Member States. The indignity of it is more than enough as the Portuguses seem likely to find out. The markets will have their say on Monday.

    LBS is obviously not flavour of the month of the with many contributors. I found his speech to be broad-ranging and, in a sense, courageous (although he evidently knew that the deal reported by the FT was on the cards). He is not arguing, as far as I can see, against the operation of the markets but pointing out what seems rather obvious, that matters cannot be left entirely to them because, apart from them getting things wrong, failure to regulate also provides them with the opportunity to make easy money at the expense of both the ordinary investor and the taxpayer.

    On the brickbats handed out to Ireland, he is maybe gilding the lily on the bank tests, but one can hardly quibble with the rest. Ireland is responsible for the hole that it is in and, apart from there being no way round, it does not help the Irish case to try and deny it, especially if you get your facts wrong as John Bruton did in the matter of prudential supervision cf. Article 127.6 TFEU. The Council has the power to confer specific tasks on the ECB in the area but such has been the reluctance of Member States to do so there is still in the treaties, even after ten years of negotiation, an exclusion for insurance undertakings.

  45. @ Jesper

    I would think similarly.

    With these kind of decisions it’s also worth observing that the people making them have to be able to answer the question put to them by their colleagues and the broader population, ‘why did you agree to that’? They then need to be able to say, in simple terms:

    This is a good deal for Ireland/Germany/France/Netherlands/Spain (etc, etc)) because….

    If you can craft a sentence that fits the blank for all of them (using some of your criteria), then you might have a chance for agreement. Of course, it can’t be a ‘Peace in our time’ sentence. It has to sit on a sustainable reality.

    @ Karl Whelan, John McHale, and others

    Lorenzo Bini-Smaghi has seen fit to reference Ireland now a number of times. Perhaps there might be some mileage in one of our leading academic institutions inviting him over to present and debate on the issue. I would suggest not with an Irish speaker of any kind (special pleading), but with a person of similar stature at the European level. Any chance?

  46. The Irish who opposed the enactment of the Lisbon Treaty have got what they wanted: European leaders responding to the sentiments of their electorates rather than elites making decisions without regard for public opinion.

    President Stipe Mesic of aspiring member Croatia, said after the rejection of the first referendum: “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.”

    So with the growth of support for extreme parties of the Right, Europe has become a less consensual place.

    What was strange in 2008 as the economy was heading towards the cliff, was the alignment of Irish leftists with right wing groups, when most significant social advances in the very conservative society, had their genesis in Europe.

  47. Some weekend reading.

    http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/119809.pdf

    @ David O’Donnell

    A very good report from NYTimes but you will note that the distinction between the initial bilateral loan deals struck with Greece and the EFSF is not adverted to when, in fact, it is crucial. The Greek deal is a one-off, Irish participation in the EFSF is part of a rules-based arrangement of general application.

    Another interesting point, if I understand the matter correctly, is that the stress tests for Irish banks (the presumed Augean stables) will be completed well before the general series of Euroarea stress tests.

  48. DOCM
    ” Ireland is responsible for the hole that it is in ”
    No. thats not quite true. Ireland is responsible for a very large part of the hole. And we can and will and should get out of that part. But the getting our is made the more difficult when SarkMerk place the burden of bailing out their banks on us having made it clear via the ECB that said banks were inviolable. So, they can feck right off and sort their mess. We will sort ours. If they wont get off then we will all stay in the hole.

  49. @ Gavin

    are you sure we could guarantee LBS’s safety if he came here, given his recent comments on Ireland? I’m thinking egg and flour type behaviour rather than anything more dangerous than that.

    @ DOCM

    Irish bank stress tests will be conducted as at end-Feb, and released, hopefully, at the end-March. The rest of the stress tests will be conducted as at end-March, but not released until June.

    @ Eureka

    Japan still has hundreds of billions of Dollars of reserves, the earthquake should only have a very moderate affect. They’ll print more Yen rather than sell off foreign reserves, if they need to.

  50. Our EU partners are screaming at us that we need to stop running up more public debt. The sovereign bond markets are screaming at us that we need to stop running up more public debt.

    We have just had a general election in which this message was studiously ignored by all parties. It is mostly being ignored in the general Irish media, I’m guessing because it doesn’t fit any of the narratives they are using to tell the story of the crisis.

    Most surprisingly, the main academic contributors to irisheconomy seem to be ignoring it. What’s up?

  51. Ireland is very very politically useful to Angie as it allows her to shift debate tactically – her real strategy is to continue to hide, and to ruthlessly keep of all agendas, the fragile, undercapitalised, and in many cases UN-capitalised state of The Landesbanken, which in turn are linked to the smaller Savings banks [sim credit unions] which in turn are linked into the local business community ……. and who buy ‘bonds’ in Landesbanken … the latter with some links to the Bigger German Boys ….. and her, and Axel’s sheer terror of a little idiot of a paddy setting off a Gallopeerin Domino …. hence the extremely useful tactical ploy of attacking that which is not negotiable Irish Corp Gov etc as it wastes time and keeps her real strategy on track ………… Nicky is a useful idiot in this regard as he has some similar probs ……… but most sane Germans can’t stand him ………. and neither can the vast majortity of the French …. good tactics by an Taoiseach to have a crack at him (as he fooled the previous lot in cahoots with Ms Largarde, who had her own agenda [and she is much too bright, unlike floundering Nicky, to claim otherwise]

    the interest rate on the wee loan is a sideshow – who really negotiates the €250 billion issue is what Patricia the Irish Sovereign_in_Exile wants to know? With present state of play – and idiots and fudgers all over the place in Europe, we HOLD.

  52. @BCT

    ‘The sovereign bond markets are screaming at us that we need to stop running up more public debt.

    Nope. Sov bond mkt has no probs with real Irish sov debt – they are furious at idiocy of conflating such debt with ToxicBank debt – it also pollutes their assumed AAA+++++ investment in sov debt: they naturally pull plug as they see inevitable Conflationist Default – which will scald them. I agree with them.

  53. @ BeeCeeTee

    Most surprisingly, the main academic contributors to irisheconomy seem to be ignoring it. What’s up?

    In answer to your question on public debt, there is an unusual common interest across the spectrum, from traditional trade unions on the left across to the extreme right of the spectrum where resides the medical consultants union, whose forebears in league with the Catholic Church helped to collapse a government in 1951.

    Simply the common interest is to protect bubble gains, against the backdrop of a culture where there has been no constituency for parsimony in the use of public funds.

    It’s worth repeating that in this emergency where more than 200,000 people have lost their jobs, no vested interest have said more could be done with less public funds.

  54. @Michael Hennigan

    The Irish who opposed the enactment of the Lisbon Treaty have got what they wanted: European leaders responding to the sentiments of their electorates rather than elites making decisions without regard for public opinion.

    We did enact the Lisbon treaty (sadly) and we are currently enjoying the fruits thereof, which seems more like policy that reflects the sentiments of bank bond holders than those of the European public.

    Lisbon was a treaty enacted without democratic consent across Europe which did nothing (and I went through the agonizing tedium of reading the consolidated text) to increase the power of popular democracy in the EU in any way, it did quite the reverse.

    What the Lisbon treaty did do was to change the balance of power in the EU’s governing institutions to vastly increase the influence of the ruling Governments in the larger EU countries and make it much easier for them to use EC negotiations for domestic political gain.

    And – Oh my God! – that is exactly what happened.

    Those on the left who opposed the Lisbon treaty are not terribly surprised by the turn of events it enabled while those who did support it cling to the belief that if Christmas had come earlier the Turkeys might have been better treated. You poor fools.

  55. @ Michael H,

    There’s a ring of truth to what you say, but it is deeply depressing if that is the reason why none of our tenured economists of high repute seem interested in engaging with the substance of what our EU partners and the bond markets are saying on Irish public spending.

  56. @ Mr Bond

    “I’m thinking egg and flour type behaviour”. Various cheeses surely.

    @ Shay & Michael

    From the link posted by DOCM.

    “CONCLUSIONS OF THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA OF 11 MARCH 2011

    § National fiscal rules

    Euro area Member States commit to translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation. Member States will retain the choice of the specific national legal vehicle to be used, but will make sure that it has a sufficiently strong binding and durable nature (e.g. constitution or framework law). … The Commission will have the opportunity, in full respect of the prerogatives of national parliaments, to be consulted on the precise fiscal rule before its adoption so as to ensure it is compatible with, and supportive of, the EU rules.”

    Note the top down approach. The Heads of state will ‘make sure’ that the constitution is changed such that the state is bound to fiscal rules agreed at Euro level. I’m not clear how this making sure sits with the democratic capacity of the people to decide what should and shouldn’t be in the constitution.

  57. @BeeCeeTee and Michael H.

    Do I undestand correctly that you are saying the academic contributors to this blog are ignoring the public debt crisis?

    And that we’re doing so in a bid to protect our public sector salaries?

    I’ll just say that both claims strike me as very weird.

  58. K O’R: It’s good that Kenny gets this wake-up call sooner rather than later.

    But what an intro to the job! First the NY Times mistakes him for a woman, then his EU partners want to screw him. Any man would find that unsettling.

  59. @Karl, good god, no.

    I’m saying that the academic contributors to the blog do not seem to be engaging with the proposition that we need much faster progress on cutting the deficit.

    People like Merkel and Sarkozy have been banging on about it for a while. Our one regular commentator from the sovereign bond markets says that we need to do it to have any chance of getting back to market funding. Simple arithmetic says that our debt to GDP ratio should top out at a more sustainable level if we do it. Latvia provides an example of another country within the EU doing it.

    I find it perplexing that the academics on the blog are not engaging with it. But the worst I think might be behind that is that it is contrary to a big weight of consensus about the proper pace of adjustment, that may arguably be the responsibility of the interests MH has referenced.

  60. @ Karl Whelan

    I wasn’t targeting academics as regards salaries but I would include university administration in what I said in respect of large consumers of public funds.

    It always tends to be the Government that has to make a move and there are large consumers of public funds across the spectrum including the estimated annual €500m that goes to the legal profession.

    I copied the last line on the post as it was most convenient on an iPad.

  61. Karl,

    I don’t think they suggested the public debt crisis was being ignored. More that one aspect of it was getting somewhat less attention than others.

    Acres of pixels have been written about the debt crisis. The ELG, unguaranteed seniors, banking recap, the role of the ECB and FF and default have been fulsomely engaged with by Ireland’s academic economics sector – and others.

    On elements such as the primary deficit as an overwhelming Achilles heal for negotiations or even default and Croke Park’s amazing resilience, public payroll etc, it seems to me and apparently others too, that there has been a bit of a tendency to skip that and move on to other things.

    Personally, I think the looming election meant there was going to be as little discussion of it as possible by the politicians – they either all engage with it or efectively none do as it is just a vote looser. Outside politics though, I was really surprised. It is almost as though it is bad taste to talk about it.

  62. @ BCT

    Ok then. I’ve discussed the issue of the appropriate pace of progress on cutting the deficit on loads of occasions. To be honest, though, as of right now that’s the not the big issue determining Ireland’s ability to get through this crisis. The banking situation is far more important at the moment. But more on that later.

    @ Michael H.

    Also, ok then. I am perhaps a little sensitive on this one because it’s not an easy thing to do to publicly call for cutting your own salary and yet Irish academic economists have, almost without exception, said again and again that public sector pay rates have to be cut. Even now, down a couple of grand a month since the start, I accept that that Croke Park agreements ruling out of further pay cuts simply isn’t tenable and I suspect most of my colleagues agree with me.

  63. @ Gavin Kostick

    I do’nt think too much should be read into this wording. The conclusions of European Councils simply reflect political undertakings by countries to act in a particular way. As the experience of the so-called Lisbon Strategy (who remembers that?) has shown, they do not live up to expectations because, while willing the objectives, they do not grant the means. These means are to be found solely in the legally binding elements of the treaties such as in relation to avoiding discrimination (cf. recent decision of ECJ on insurance criteria) and EU legislation.

    The real substance of what is being decided is in the set of formal proposals from the Commission (dubbed, it seems, the “six-pack”) to put in place legally-binding measures to improve economic coordination among the 27 Member States, all of whom participate in Economic and Monetary Union (contrary to popular belief).

    The “Pact for the euro” agreed by countries whose currency is the euro (a currency which all member countries have a right to adopt and all countries, with the exception of the UK and Denmark that have formal opt-outs, have an obligation to adopt once they meet the criteria) sets a very undesirable precedent and risks splitting the EU down the middle for no great gain.

    The “grand bargain” to which so much attention is being drawn already exists and is to be found in the succession of treaties establishing the EU. Fundamentally, these treaties trade a single market in return for economic and social cohesion. Slowly and unwillingly, a new generation of inadequate European political leaders are coming to the realisation that this is the case.

  64. Last December Karl Whelan wrote:

    The structure of the adjustment is also somewhat harsher than is necessary. I had argued in recent months for a sharply front-loaded adjustment to get the deficit below ten percent in a bid to restore access to the sovereign bond market. With this target now beyond us, there was a strong case for a smoother adjustment that would have been less disruptive to growth in 2011.

    Upthread BeeCeeTee wrote:

    I’m saying that the academic contributors to the blog do not seem to be engaging with the proposition that we need much faster progress on cutting the deficit.

    It appears the problem is not that KW has failed to engage the proposition, but that he has rejected it.

  65. @ Shay Begorrah

    Lisbon was a treaty enacted without democratic consent across Europe..

    This is an absolutely ridiculous statement.

    Edmund Burke was addressing electors of a rotten borough, but he eloquently defended his right to make decisions as a member of parliament rather than a member for Bristol in 1774.

    It’s a travesty to claim that members of a democratically elected parliament in accordance with a country’s constitution, are acting undemocratically, when deciding on an EU treaty.

    You want to have your cake and eat it.

    The original 6 of the EEC, I assume should have held referenda in 1972 to get approval for the entry of the then poverty-stricken backwater known as Ireland and also in respect of other and subsequent entrants.

    You say the power resides with the big countries; this is also palpable nonsense.

    Austria, the Netherlands and Finland, for example, are not in an amen corner for Germany for example.

    Josef Pröll, the Austrian vice-chancellor this week told the FT that no other government can force Portugal to accept aid from the EFSF fund.

    Shock horror that big countries could use EC negotiations for domestic political gain.

    So an individual country should try and interpret what would be common Union public consent but not respond to what would meet approval of their own citizens!

    Essentially, political leaders should respond to public opinion but not specifically the views of their own citizens.

    That seems clever!

  66. @Karl, you have a fine history of commenting in this area, and I much appreciated the stance you took in the past against stretching out the adjustment period well beyond 2014. My comments were about the blog as a whole in the more recent past.

    I’m looking forward to what you have to say on the banking situation. I’ll be particularly interested if you can educate us on what the Central Bank is up do, and what the implications are.

  67. @ Karl Whelan

    On the general point of the “commentariat” in Ireland, I think that those paid from the public purse are on something of a sticky wicket because the general level of salaries in the public sector in Ireland is, or is perceived to be, out of line with salaries paid in the private sector in Ireland and in comparable employment in other euro countries.

    In fact, this is one of the themes that could usefully be taken up in the context of which model Ireland should follow to get out of its present mess. There is no doubt in my mind that this should be an amalgam of the Scandinavian approaches, “flexicurity”, pension reform etc. One of the major elements in the success of these countries lies in the equalisation of employment and pension rights. David Cameron’s government is setting out to tackle the problem in the UK.

    It is also a major element in the debate on the main theme of this thread. German politicians, in particular, will not buy the béal bocht approach until this debate starts and some resolution is arrived at. (Not that I am arguing for an imitation of the German model which is totally skewed and has seen poverty levels actually rise in the past ten years. The figures are startling. Of a working population of 60 million, there 5 million part-time, 5 million with so-called mini-jobs (social security recipients) – 400 euros for 20 hours work per week – and 1 million agency workers).

  68. @BCT

    When it comes to the deficit, I think most academic economists here are torn between two strong concerns: that austerity will deepen an already devastating recession; and that avoiding austerity deepens the debt crisis. For the most part, the “free lunch” ideas of expansionary fiscal contractions (associated with the right) and deficit-improving stimulus (associated with the left) have been thankfully avoided in the Irish debate.

    So the basic trade off between limiting the recession and State creditworthiness has been at the centre of the debate. I hold my hands up that I underestimated how vulnerable our creditworthiness actually was. Karl, Colm, Kevin and others had a better sense.

    I would disagree with Karl, however, in de-emphasising the deficit challenge relative to the banking challenge at this juncture (apologies if I am misinterpreting him). The fact is that we would probably not be in a debt crisis without the bank losses. But also we would probably have been able to deal with the bank losses without a debt crisis if we did not have a double digit deficit.

    Getting the deficit down is now at the centre of regaining creditworthiness. Unfortunately, I don’t see much scope of policies to reduce the burden of the bank losses. Almost all of us agree that the original guarantee was a horrible mistake and also that the right course was to be ready to impose losses on unguaranteed bank debt when the guarantee expired last September. It didn’t happen, and not doing it now seems to be a condition for reliable ECB support — maybe it always was. There is only about 4.5 billion euro of unguaranteed bank debt left in Anglo and INBS. And there are serious obstacles to loss imposition in BOI and AIB given their capital levels. Furthermore, I know some see a significant qualitative difference in terms of reputational damage and balance sheet contagion between defaulting on ELG guaranteed bank bonds and State bonds, but I just can’t see it.

    So we are back to deficit reduction as you say. We have funding for two years or so, but it will pass quickly enough. While the recession-creditworthiness trade-off has not gone away, I fear you are right that deficit redcution takes centre stage in exiting the crisis, in part because of serious design flaws of the bailout mechanisms that I have tried to grapple with on other threads.

    I have high regard for many of the personnel in the new government, but I think that they have got off to a bad start in signalling their intent and political capacity to (at least) implement the plan agreed.

  69. @ John

    I don’t agree with you about the new government and the 2015 thing. The EU have said that they don’t expect us to reach 3% until 2015. The new government is thus right in line with the EU on the timeline for the implementation of the plan.

    Nobody believed the 2014 target. The EU and IMF said so immediately after signing the agreement. It was purely a creature of pre-election Irish political posturing. Giving up an incredible target doesn’t erode credibility.

  70. So John you say we should try to pay off the sov debt and the bank debt. What happens if as Colm McCarthy has alluded to before, we pay the most of the bank debt and find the walls of the hole too high to pay the sov debt? Am I missing something?

  71. @ Karl Whelan,

    “The best way to prevent euro countries from defaulting is to lay down rules for debt which have constitutional weight.”

    Oh, but we already had that up to 1971, but both Johnson and Nixon took away the Breton Woods rules and began the long experiment with deregulation that came crashing down in 2008.

    The EZ has built its foundation on the same fiat print your bubble system imported from the US. Unregulated banking has lent to subprime peripherals with abandon unchecked leading to the economic disasters around us.

    We are in the curious and absurd situation of awaiting the stress tests which if they revealed the true €900 bn exposure of the German banks would bring the euro down tomorrow. No way can they be relied upon.

    As long as Germany can keep the peripherals on life support, as long as it can hide its true vulnerabilities, replace them with more opportunity to trade with the BRIC pack to cover its losses, even while dismantling CAP support, there will be no great change.

    EFSF http://reut.rs/fL4gSO is all we’ll get. Austerity for indebtedness and a
    penalty surprise that yields a coupon for lenders supporting expanded EFSF. That’s why our motley crew will accept the 1% cut around the 22march next, roll over and accept the terms for base rate CT . All happy in the EU, our parliamentarians get down to playing with their new jobs without such embarrassing issues to have to deal with.

    Irish citizens get screwed and our default is brought much nearer. As our economy races toward default under the pressure of austerity induced deflation it cannot avoid, our cryogenic economy may again be revived to ensure it doesn’t fully disappear causing more embarrassment at national and eu level.

    All to protect Anglo and other Irish predator lenders including German bondholder banks and the political and financial class feeding from their remains.

    We need a new era Breton Woods to promote fair trade across the world, not the fiat bubble Ponzi mess we have at present.

  72. @John McHale
    Is it not the case that deficit reduction is a longer term problem. The immediate crisis is the 187billion in very short term funding that is supplied by the ECB and the Irish Central Bank. Irish creditworthiness cannot be restored with this overhang. I think this part of the crisis requires resolving before we can start the longer term recovery.
    As it is unlikely that the ECB will agree to fund long term or to continue QE lite through Dame Street (per Eoin Bond) it would appear that no solution is available and some radical plan must be put in place to address this immediate danger to the State.

  73. @Karl

    My issue is not really with the extension of the target. Taken as a whole, the Programme for Government does not convince me that the government as a collective gets the seriousness of signalling capacity to see through the needed fiscal adjustment. There are a series of measures to boost the economy, with little direction as to how they will be paid for. Alos, while having a minister for public service reform seems to me to be a good idea, effectively having one minister in charge of revenues and another for expenditure — and from different parties! — has to be a cause for concern.

    Now I don’t want to overstate the point. I know it is early; and appreciate the political challenges of putting together a programme that both parties could buy into. But while I have no doubt that key members of the government get the seriousness of the deficit reduction challenge, I had hoped for a stronger start.

  74. @ Brian Lucey

    I missed your comment earlier on. I would be far from absolving the ECB and the other countries of the EU but we are where we are, to use a phrase in vogue. Had the Irish authorities carried out their prudential supervision responsibilities, we would not be in the situation we are in now. (Interesting negotiating strategy though!).

    I do not doubt that some easing of the loan conditions for Ireland will come but it seemed to me unlikely that an Irish request would be conceded on a weekend when the paymaster states had much bigger fish to fry, or rather a threatening forest blaze to extinguish. For once, they seem to be ahead of the markets although it seems to me that Portugal may well be thrown into the firebreak.

  75. @ John McHale,

    “Getting the deficit down is now at the centre of regaining creditworthiness. Unfortunately, I don’t see much scope of policies to reduce the burden of the bank losses. ”

    Perfectly true, but the austerity and deflationary cost of this will bring about inevitable default anyhow.

    The sov debt by itself could bring about default. But bank debt is the final nail in the coffin to this economy.

    We should investigate and audit and put before the country every penny that has gone into them and continues to be leeched into them.

    But the chinese walls erected to prevent the truth about the banks getting out have been well built:)

  76. @ceteris paribus

    I am certainly not saying that we don’t face serious challenges in sustaining the banking system. The most urgent is to keep the ECB support in place — and for depositors to have confidence that it will stay in place — which is why we have to be so careful with the unguaranteed bank debt and our relations with ECB.

    We also face a huge challenge in restoring the creditworthiness of the banking system. Given how low it has sunk, we need to work on multiple dimensions. An analogy might be the need to work on all engines of a four engined plance, recognising some are likely to fail: ensuring high capitalisation (after credible, information revealing stress tests); deleveraging without causing any unneccessary additional losses; ensuring the aforementioned reliable lender of last resort; and re-establishing the credibility of the ELG (admittedly a huge challenge and clearly dependent on success on the fiscal front).

  77. @ceteris paribus

    “The immediate crisis is the 187billion in very short term funding that is supplied by the ECB and the Irish Central Bank.”

    This point is continually made, but could someone kindly elaborate some detail regarding this funding? For example, in what form does it exist for the banks, its terms, or etc? Will its funding terms change shortly, what are its limits?

  78. @DOCM
    (i) cutting public expenditure (notably through job cuts and reform of salaries, pensions and social security) – being done
    (ii) raising taxes – being done
    (iii) selling state assets – being done

    Taking on more debt via EFSF? Bad idea
    Removing our competitive advantage via increased Corp tax? Bad idea
    Relying on Europeans to put citoyens ahead of banks – Bad idea.

    See how much we all agree on!!!

  79. @John McHale

    I only saw the Irish papers on the web earlier but having looked at the Telegraph I got a better sense of yesterdays meetings. It appears we got off to a bad start – “The spat between Ireland’s newly elected prime minister and French President Sarkozy – and less so Germany’s Chancellor Merkel – was one of the reasons negotiations dragged on until the early morning hours. “We were not really satisfied with what Ireland said,” said Mrs Merkel. ”

    I like the analogy but I think the main computer (187b) is top priority because none of the engines will work without it.

    The hardball stance by Enda could backfire. We have a lousy hand in this game and bluffing is all we can do.

  80. @Colm Brazel
    My understanding is the ECB liquidity money consists of overnight, one week. one month and three month money and the ECB have indicated they will continue the funding until June. With the recent change in the rules it appears some of the collateral used by our banks is not acceptable to the ECB and hence the CBI facility which has been described by Eoin Bond as “magic beans” creation out of nothing. This is the scary part.

  81. We need to seriously examine all our options including leaving the EZ.

    Last chance to see Hamlet at the Helix, where you’ll hear:

    Neither a borrower nor a lender be;
    For loan oft loses both itself and friend,
    And borrowing dulls the edge of husbandry.

    But there are too many profiteering from the gravy train to even think of it:)

    Beg, borrow from EU and steal from citizens is our solution!

  82. Glad to have assisted in getting the discussion going on cutting the deficit.

    A question. It seems to me that if we achieved a sustainable positive primary balance in 2012 it would be enough to make our sovereign debt top out at a clearly sustainable level, hazards of the banking crisis aside.

    It would probably also sort out a lot of our interest rate problems. Merkel has as good as agreed to cut the rate if we speed up sorting out our deficit, and we might be able to avoid drawing it all down anyway.

    It would also put us in a stronger bargaining position when it comes to the banking crisis. It would give us a credible threat of imposing our own solution, even if for reasons of diplomacy and good relations the threat remained unstated.

    Internal political considerations aside, I think Ireland’s clear interest is in achieving a positive primary balance in 2012. What do others think?

  83. @BCT
    I think achieving a positive primary balance in 2012 is impossible for many reasons including the Croke Park agreement. The place would come to a halt given the required cuts to achieve this aim.
    I think you are misreading Angela – if we are good boys she will agree with reductions on strict conditions. As Colm Brazel points out above we end up worse off financially and with a potentially devastating impact on FDI.

    “”Financial assistance from the ESM and EFSF will take the form of loans,” Van Rompuy said. “However, to maximize the cost efficiency of their support, the ESM and the EFSF may also, as an exception, intervene in the debt primary market in the context of a program with strict conditionality.”

    Read the small print.

  84. @ceteris, if we rule out everything that is politically difficult, then we are left with the path of least resistance. That’s no way to go about choosing from among the horrible options open to us. Abrogating the Croke Park agreement is politically difficult, not impossible.

    Cutting public spending faster would reduce GDP, but “come to a halt” is an exaggeration.

    I’m afraid I’m having trouble figuring out what you mean about FDI. If you think I’m suggesting any change to corporation tax, please reread.

  85. Re Lorenzo’s article:

    “One way to ensure that the discipline is actually binding is to empower a supranational entity in the euro area to issue government bonds for the Member States. The countries would in fact no longer have the capacity, technically or politically, to issue public debt on the market.”

    the ‘Big Brother’ totalitarian financial fascism aspect of this is mind blowing, the bureaucracy and amount of policing/negotiation and agreement impossible to estimate. The potential for conflict inestimable. But this is the way apparently the world is headed, forget politics and democracy, super financial government by the ECB with all decisions taken away from parliamentarians or citizens ?

    Rather than have that it would be better to allow the EZ to break up but retain the political EU harmonisation, maybe eu member states becoming similar to ancient greek city states with their independence.

    Scrap the fiat system leading to Lorenzo’s financial fascism removing self determination and choice, oops might mean scrapping Croke Park and university salaries, now what chance is there of that.

    Better to have what we have, emigration, mass unemployment, while those who continue to favour the status quo, keep coining it. Irony of ironies.

  86. @ceteris paribus

    Yes I noticed as well the ”Financial assistance from the ESM and EFSF will take the form of loans,” Van Rompuy said. “However, to maximize the cost efficiency of their support, the ESM and the EFSF may also, as an exception, intervene in the debt primary market in the context of a program with strict conditionality.”

    Our negotiators could do a deal there that would address all aspects of our debt SD and bank debt. But if there is not a deal prepared to be written down based on that clause right now, we should exit the EZ. My feeling is that paragraph is just put in there to soften the derisory deal they are offering alongside their CT demands, so as a ‘might happen in the future’, it should be ignored for the confidence trick it is.

    Simply put, if our total banking and SD problem cannot be addressed in a deal that will reassure markets and observers able to do the math on our ability to get out of our bondage, then its walkaway time.

    Trouble is I very much doubt we have either the political will or vision for that….so Ireland will exchange democracy for EU vassal state status:)

  87. @ceteris paribus

    re “My understanding is the ECB liquidity money consists of overnight, one week. one month and three month money and the ECB have indicated they will continue the funding until June”

    thx for that, a big paper on that from someone would be in order as well to cover interest rate, removal of funds from Irish banks, maybe an expert analysis to help interested people like myself understand it better….was this interest rate used as leverage argument for the penal 5.83% …could that money if its already here not be used to purchase back our SD debt?

  88. @BCT
    I accept that coming to a halt is ott but it would be very painful and politically and socially unacceptable. I think this has been recognised by the powers that be (IMF and EU) and hence the kicking the can further out.

    But the main point I make is that regardless of fixing the deficit we are sitting on a time bomb (187b) with a very short fuse and all else pales into insignificance while this remains unresolved. Where do we get this amount so that the ECB can exit.

  89. @ Bee Cee Tee

    ‘Abrogating the Croke Park agreement is politically difficult, not impossible’

    The Minister for Public Service reform is a socialist. I can’t see him relishing the hangman’s role. We might find oil yet after all.

    We have a Taoiseach and MoF from the Western seaboard. What sort of welcome will they get down home for choking provincial towns. ? Bank branches of a century’s vintage will be closing anyway. So will garda stations, post offices and public healthcare facilities, all within the Croke Park agreement.

    We seem to have a recipe for political stability with economic instability.
    Unless there are counterbalancing challenges to private vested interests, threatening the CPA will probably lead to a loss of political stability. One way or another, the road is going to a rough one. Cool heads required.

  90. Ceteris,

    There is no leadership either within the political scene or without, putting forward a policy of the country standing up for itself.

    Going to the EU to negotiate from a position where you have publicly committed to retain access to a credit line to fund the structural deficit, particularly given the comparatively expensive nature of the public and semi-state payroll, is the same thing as a guy sat in a smart car, wearing a smart suit saying “Buddy, can you spare a dime?”

    What kind of response do you expect?

    Does anyone really think Europe will go for the theory that the more Ireland pays its workers, the more value added economic activity there will be and therefore the country will be able to pay off its debts in full?

    BTW the magic bean total is whatever printing by the CBI exceeds to actual value of the collateral posted. Last time I looked about 35bn was IOUs from the state. The figures yesterday need to be explained more fully if the market is not to make up its own mind. Have a look at the 2 yr Irish sov bond for a hint.

  91. @ Colm Brazil

    ‘Simply put, if our total banking and SD problem cannot be addressed in a deal that will reassure markets and observers able to do the math on our ability to get out of our bondage, then its walkaway time.

    Trouble is I very much doubt we have either the political will or vision for that….so Ireland will exchange democracy for EU vassal state status:)’

    I think you are right, and that is, sadly, what is shaping up. Too many years of complacency and mediocre governance. The transition will be fudged of course, so that we get to keep a lot of the symbols.

  92. @Grumpy
    I looked at the 2yr -7.94%. Is this indicating default within 2years. The Greek 2 year is 17% so it seems that the market is saying Greek default is inevitable. But ours is a long way from the Greek yield.

  93. @BCT

    The Croke Park Agreement was self abrogating:

    “In its clarification of the Croke Park agreement, issued in May of 2010, the Government indicated that the provisions in paragraph 1.28 of the agreement, which stated that, “the implementation of this Agreement is subject to no currently unforeseen budgetary deterioration”, would be applied in a bona fide manner”.

    In pretending the budgetary deterioration did not happen, all the main political parties have “abrogated” the agreement’s protection of the private sector.

    But shhh! nobody is supposed to know. Don’t tell the taxi drivers that drive around Dublin for hours looking for a fare – they might get cross.

  94. Cetris, look at the move in the last week and compare with the 10 yr over a few months. This is indicating significantly increases default assumptions in the near term.

  95. @Michael Hennigan

    It’s a travesty to claim that members of a democratically elected parliament in accordance with a country’s constitution, are acting undemocratically, when deciding on an EU treaty.

    Not wanting to deviate too far from the point but parliamentary democracy is a sad and useless farce if the elected politicians feel free, once in government, to implement policies without regards to the wishes of their voters, or the general mass of citizenry, but instead policies that best suit their own political imperatives.

    Lisbon illustrated, with nauseating clarity, the passing interest the European political classes have for their own electorates. The UK’s involvement with the Iraq war was of course another dreadful example with far more serious consequences.

    Democracy is about more than choosing which politicians rule us and after the Iraq war, Lisbon and our bank guarantee I would have hoped that it had finally sunk in. Instead we have the peoples’ longing for fair, honest and most of all accurate representation dismissed as mere sentiment.

  96. I don’t know whether to laugh or cry. With EU & ECB leaders speaking with utmost clarity we persist not so much with reading between the lines as by looking off the page. Economsits, of course, are notorious for this: look at the carrers that have been made in trying to figure out what Keynes really meant.

    The EU is acting as if knows that we are beyond rescue and is just trying to get as much of its money back as it can. In additio, between now and the inevitable catastrophic default it is erecting as many firebreaks as it possibly can.

    @all: don’t look for complexity when it all is abundantly plain and simple.

    Why do we persist with pretending otherwise? Why, John Mchale do you persist in asking what we ‘can do to sustain the irish banking system?’ Dear professor, there isn’t one. It is so far over the edge – and perhaps this is a difference between us and Greece – that any interest rate reduction and/or term extension a la Grecque is simply besides the point.

    I know most of the contributors to this blog will find this hard to understand, but nobody out there cares one jot about the fate of this little Island. their diagnosis is plain and simple: we brought this on ourselves while displaying utmost arrogance and hubris. On this version of events, we deserve everything we are about to get.

  97. @ceteris,
    I wouldn’t put too much stock in the idea that because the EU and IMF approved of the slow walk towards a balanced budget it is therefore a sound idea. It’s clear that the EU dictated the deal, with kicking its own difficulties down the road being the over-riding concern.

    @Paul, I’m aware that the minister for public service reform is a socialist with an interest in cornering the market in public service votes for the next 50 years. But I think this is a case where it is right to speak truth to power. It cannot possibly be good for public decision making to keep quiet just because one thinks the message will be unpopular and the Minister won’t listen. That way lies another government as bad as the last.

  98. @DOCM

    It is also a major element in the debate on the main theme of this thread. German politicians, in particular, will not buy the béal bocht approach until this debate starts and some resolution is arrived at. (Not that I am arguing for an imitation of the German model which is totally skewed and has seen poverty levels actually rise in the past ten years. The figures are startling. Of a working population of 60 million, there 5 million part-time, 5 million with so-called mini-jobs (social security recipients) – 400 euros for 20 hours work per week – and 1 million agency workers).

    This interests me quite a bit.

    Whenever the low level of German social welfare payments has been breathlessly raised here as an example of how low we need to set the bar, or how little comparatively their hospital consultants are paid is mentioned admiringly, I wondered whether we are the beneficiaries of transferred austerity rage from Germany.

    Could it be we that we serve partially as a useful distraction to the insecurity shocked German hoi-polloi from the contradictions implicit in the strong Euro/high competitiveness/bank coddling/continuous austerity strategy that Merkel has settled on as the path to continued political success?

  99. @Simpleton
    “we brought this on ourselves while displaying utmost arrogance and hubris. On this version of events, we deserve everything we are about to get.”

    You are being harsh. whether we deserve this mess is debatable but I have to agree that we need not read between the lines. Nick and Angela have made their positions perfectly clear and so has Enda. Standoff – guess who comes off best.

  100. @Simpleton.
    I have to agree with you re the EU getting concerned about (ECB) money. And well they might. They also have good reason to feel aggrieved because of Ireland and the hubris displayed by the government and elite. The Irish may deserve everything they get. But if Ireland sinks there goes the ECB money, which the EU can afford. What they cannot afford is what that means for the Euro and EU.
    In the cold light of day, neither Merkel at least, if nor Sarkozy, will not want the post war phase of cooperative European history to end on their watch and because of their decisions.

    In my view, Kenny did well. At the very least he has not signed up to any agreement knowing that no matter what he signs, Ireland is unlikely to be able to adhere to it. A 100 basis point reduction now makes little difference to the situation. Neither does defaulting on the remaining bondholders, particularly if they can be paid with ECB cash.
    The situation has moved on.
    People are adhering to views and positions that had relevance one or two years ago, but are now irrelevant.

    Eventually Ireland will have to concede something on the corporate tax. The quid pro quo should be the full €187 billion now owed to ECB. It was after all private corporate debt, the equivalent of a negative corporate tax, in other words.

  101. @Joseph Ryan

    “Eventually Ireland will have to concede something on the corporate tax. The quid pro quo should be the full €187 billion now owed to ECB. It was after all private corporate debt, the equivalent of a negative corporate tax, in other words.”

    That would be a good deal if you could get it but I am afraid that Jean Claud could not agree a hit of this magnitude. On the other hand, how much are they going to retrieve if they continue with the rapid wind down of the banks. The vulture funds would only pay about twenty cents on the dollar so a massive loss is crystallized if they go down that road.

    How much extra CT would France and Germany collect if we raised our rate?

  102. We are a paper tiger in any negotiations as long as we have a deficit that needs outside funding. This is an unpleasant reality that many here understand but that no political grouping seems to be interested in explaining to the general population.

  103. @ Shay Begorrah

    Democracy is about more than choosing which politicians rule us and after the Iraq war, Lisbon and our bank guarantee I would have hoped that it had finally sunk in. Instead we have the peoples’ longing for fair, honest and most of all accurate representation dismissed as mere sentiment.

    Rather than beating about the bush, answer a simple question: If the stance of Merkel and Sarkozy on Ireland and the Eurozone reform, represents popular opinion in their countries, do you approve or dissaprove of they reflecting that sentiment?

    The ‘power of popular democracy’ is a great slogan but it can sometimes be confusing.

    US public opinion is both in favour of federal spending cuts and against them.

    When questions are asked on specific araes of spending to cut, 80% of the budget disappears off the table!

    I assume, you’re in favour of referenda in all 17 EMU countries on proposed reforms?

  104. @ Bee Cee Tee
    ‘It cannot possibly be good for public decision making to keep quiet just because one thinks the message will be unpopular and the Minister won’t listen’

    I am not asking anyone to keep quiet, but it’s surely as necessary to be realistic about the political possibilities as the economic ones. Thankfully board is consistently civil, enjoyable and informative, so there is hope yet.

    ICTU has consistently opposed austerity, on the grounds that it must lead to debt deflation. That position is at least arguable, so I should be surprised if the MforPSR was gripped by austerity fever on taking office.

    The other reality I noted is that many provincial comunities are increasingly dependent on state employment and benefits. Building has gone wallop and manufacturing jobs are as scarce as the proverbial hen’s teeth. Pressing the reset button on the economy entails kicking the state plank away, are at least sawing off a big chunk.

    It was the harsh austerity policies of our first government which set the seeds of subsequent FF dominance. The Castlebar FG cumann has a long memory.

    ‘The combination of Cosgrave, Blythe, Brennan, and McElligott ensured that the new state would concentrate on rigorous retrenchment. Blythe reduced governement expenditure from 42million pounds in 1923-4 to 32 million in 1924-5, and 24 million in 1926-7.

    He thus found himself in the happy position of proving Irish fitness for self government by reducing income tax from 5 shilliings in 1924 to only 3 shillings in 1926, 6d less than in England, a historic triumph over the old enemy. Fiscal responsibility and low taxation were supposed to impress English doubters of the Irish capacity for self discipline’

    Ireland: Politcis and Society 1912-85 Joe Lee Cambridge UP 1989 p 109

  105. @BeeCeeTee

    It’s worth reflecting on who the big losers in this crisis are. They’re the people in the private sector who lost their jobs as a result of the recession. Is it just that these people should have their social welfare payments cut after the losses they’ve already taken?

  106. @Michael Hennigan

    Rather than beating about the bush, answer a simple question: If the stance of Merkel and Sarkozy on Ireland and the Eurozone reform, represents popular opinion in their countries, do you approve or dissaprove of they reflecting that sentiment?

    Of course I approve, and I approve in a similar way with the rights of any other country to reject them. My objection is to how little the collective (and putative) European citizenry can affect the actual collective government of the EU.

    Perhaps the central problem lies in how the popular European mandate is always mediated through the interests of domestic political parties. We have a situation now where a set of often narrowly elected centre right governments have gathered together a dominant bloc in the European council, international government for national sectional interests.

    In the EU collectively there is strong opposition to these policies but since only ruling parties are represented in the council we instead get the current false consensus.

    I might add that it was Lisbon which gave us a more powerful centralised executive without any equivalent European democratic structure to balance it. When combined with QMV (a terrible mistake) we have the situation where parties representing a minority of the European electorate can easily assemble an unassailable majority of voting power in the EC.

    It is a disaster not just for us but for representative democracy in general.

  107. @ Shay Begorrah

    I think that the problem lies in the tendency of non-German commentators to attribute a monolithic status to Germany in European affairs. This has been justified to a certain extent by the tendency of German politicians from left and right to view all European problems as Germany versus the rest. It started in earnest with Scroeder who represented the first generation not to have experienced the Second World War and who made no secret of the fact that he intended to stop Germany being, as he saw it, the milch-cow of Europe. He, of course, also stepped out if line with US in relation to Iraq and it was no surprise that he ended up on the baord of the Russian company developing the natural gas pipeline from Russia to Germany across the Baltic. But the phenomenon was most obvious during the period of the Grand Coalition between the SPD and the CDU/CSU when Merkel got on better with her supposed political opponent Steinmeier than she now gets on with her nominal ally from the FPD, Westerwelle.

    You could say that German politics represents a permanent alliance btween orgainsied labour in the strong sectors of the economy and whoever happens to be in power in Berlin.

    But there are signs that the wheels are coming off this cosy arrangement as the ordinary unskilled German worker is beginning to realise that he/she is being taken for a ride. There is no other explanation for the huge drop in the popularity of Merkel when the German economy is supposedly booming.

  108. @DOCM

    You could say that German politics represents a permanent alliance between organised labour in the strong sectors of the economy and whoever happens to be in power in Berlin.

    Not only will I say that I will claim to have thought it up myself.

    Germany represents a bit of a moral conundrum for me, Germans have endured severe austerity to unify the country and now, quite reasonably, wants to bask in some of the financial benefits and not continue taking the heavy financial lifting of the EU budget. Ireland’s generosity to itself must seem particularly galling as Germany cut everything to integrate the GDR (with mixed results for the East it seems).

    However as someone on he left of the political spectrum the increased inequality and lack of concern for the unemployed that Merkelism, and as you say perhaps all German post-post war politics, represents seems unjust and unsustainable – particularly if we get another global shock and/or the current Chinese slow down has serious knock-on effects for exports.

    Finally we have the implications for Ireland of the strong Euro and banking system protection policy required to protect Germany’s hard earned wealth (and purchasing power). These seem set to bankrupt the state and damage the cohesion of society very badly.

    Could I have another German political consensus please?

Comments are closed.