Categories Uncategorized Paul Krugman: When Austerity Fails Post author By John McHale Post date May 23, 2011 107 Comments on Paul Krugman: When Austerity Fails Paul Krugman gives his assessment of Europe’s crisis resolution policies: NYT article here. Related ← IMF Staff Report and Conference-Call Transcript → CSO Access to Finance Survey 107 replies on “Paul Krugman: When Austerity Fails” Oh good. Nothing like a Krugman column to bring out the nutters. @Kevin Ah yes, Kevin, nothing like a carefully-reasoned rebuttal. @Peter It was more of an attempted prebuttal, so to speak. One possible answer to Krugman’s penultimate question is that some influential ECB people don’t think that the peripheral countries really belong in the Eurozone. Let ’em print drachmas. Alternatively, if they are really capable of living in an austere, low-inflation environment, let them prove it. In other words, Krugman shouldn’t ask what the ECB is thinking. He should ask what its ultimate goal is, i.e. what kind of Eurozone does it want. Answer as per Basil Fawlty (who wouldn’t be out of place in the ECB): No riff-raff. @ Peter Stapleton To be fair, Kevin’s original rebuttal appeared as carefully-reasoned to me as Krugman’s article, which suggests: (i) Talking about default in the US is ‘irresponsible’ and ‘scary’ (ii) Not talking about default in Europe is ‘incredibly foolish’ and a ‘failure of fantasies’ (iii) The only solution to more over-spending is more spending (I wonder how he sold that idea to elected politicians) Krugman may be a fantastic economist and well-deserving of his Nobel price, but this article strikes me more as partisan swipe at the ‘pain causcas’ than economic analysis. “Realism, however, appears to be in short supply.” Really? I am sure the fiancial whiz-kids (aka: politicians) know exactly where they are heading. Its known as – “Covering Our Asses”. They need time to work through the easy bits. Its the difficult problem of an inevitable debt ‘you-know-what’ that they have no answer for – yet. A sufficient level of aggregate economic ‘growth’ within each of the Euro countries will not come. That’s the predicament. The politicians want the usefulness of a federal currency without the political unacceptable federal fiscal policy that goes with such a currency. Unwinding the Euro is possibly an ‘unthinkable option’. But so was the demise of the USSR. Its like the tail-gunner in the crippled, burning bomber whose parachute was in the forward compartment: be barbecued, or jump. He jumped – and survived! Will the Euro be so lucky? Its only a matter of time before Irish citizens get annoyed enough to demand action on bankrupcy and mortgage reforms. Whether they will demand an end to tax incentives, reliefs and subsidies to private interests is also a matter of some significance. It would appear that ‘tax forgone’ is simply a shifting of the tax burden – not its elimination. It needed over 100 years for most european governments to introduce social protection measures for some of their citizens. These measures were expanded to fill the available political space. But now a demand, from an un-elected elite, to reverse these policies has been issued. Who loses? It sure won’t be the politicians! Brian Snr. @ Edward v2.0 I would agree. Kevin Donoghue might like to read the attached recent editorial from the FT and explain to others in what respect “austerity” is not working in Europe as maintained by Krugman. Even the Greek economy grew in the first quarter of 2011. http://www.ft.com/intl/cms/s/0/553d6ec4-8311-11e0-85a4-00144feabdc0.html#axzz1MywTiqCB P.S. On re-reading the editorial, and there is no better paper than the FT to catch a changing wind, I noted that it could still not resist some mischief making. “In either case, more decisiveness will be needed – of the kind displayed in planning the post-2013 European stability mechanism. This had unfortunate short-term market effects, but is the right model for the future. It should be firmed up with a legal requirement to haircut the creditors of insolvent states”. This is exactly the main bone of contention between Germany (and Austria) and the rest of the EZ 17 in drafting the treaty to establish the ESM, if other press reports are to be believed. The “unfortunate short-term market effects” will seem a picnic in retrospect if such a provision sees the light of day. The valid question is whether there is a situation in which Krugman would NOT recommend additional government spending, even at the cost of sovereign default. For instance, it is hard to explain the Irish situation as anything other than the natural consequence of a massive property bubble that everyone from banks to government “Texas-hedged” by increasing their exposure to property. The amount to which austerity contributed to the contraction seems quite small, based on what we know about the structure of unemployment, which is still concentrated most heavily among construction workers. However, arguing for/against austerity is a useful political exercise for American pundits, so expect Americans to continue to treat Ireland as a large ajar economy, like the ones they’re used to on their continental landmass. The valid question is whether there is a situation in which Krugman would NOT recommend additional government spending, even at the cost of sovereign default. For instance, it is hard to explain the Irish situation as anything other than the natural consequence of a massive property bubble that everyone from banks to government “Texas-hedged” by increasing their exposure to property. The amount to which austerity contributed to the contraction seems quite small, based on what we know about the structure of unemployment, which is still concentrated most heavily among construction workers. However, arguing for/against austerity is a useful political exercise for American pundits, so expect Americans to continue to treat Ireland as a large ajar economy, like the ones they’re used to on their continental landmass. Its only a matter of time before Irish citizens get annoyed enough to demand action on bankrupcy and mortgage reforms. Whether they will demand an end to tax incentives, reliefs and subsidies to private interests is also a matter of some significance. Given that most of the noise in the national media for “mortgage reforms” (by which I’m assuming mortgage debt forgiveness) comes from middle-class/much higher net worth types, I’d guess that the answer to your second question is ‘no’. FT articles kindly linked by DOCM on this and the last thread http://www.ft.com/intl/cms/s/0/34cb428a-849a-11e0-afcb-00144feabdc0.html#axzz1NADZPJ5g http://www.ft.com/intl/cms/s/0/553d6ec4-8311-11e0-85a4-00144feabdc0.html#axzz1NADZPJ5g for non-sunscribers. Let’s try that again: http://www.google.ie/#hl=en&biw=1276&bih=599&q=cosmetic+surgery+will+not+save+the+eurozone+munchau+FT&oq=cosmetic+surgery+will+not+save+the+eurozone+munchau+FT&aq=f&aqi=&aql=&gs_sm=e&gs_upl=1953l9031l0l27l21l0l0l0l1l172l1549l13.6&bav=on.2,or.r_gc.r_pw.&fp=8aa1fd91aadee845 http://www.google.ie/#hl=en&biw=1276&bih=599&q=%22turning+a+corner%2C+facing+a+crossroads%22+FT&oq=%22turning+a+corner%2C+facing+a+crossroads%22+FT&aq=f&aqi=&aql=&gs_sm=e&gs_upl=34157l44688l0l45l35l7l0l0l1l187l3109l14.14&bav=on.2,or.r_gc.r_pw.&fp=8aa1fd91aadee845 Oh that’s ugly. Sensible article that. What left leaning types in Ireland have to understand is that he is writing to complain about austerity being applied too early in the cycle in countries like the US and UK. These countries have their own currency and central bank and the market doesn’t think they might be forced to, or choose to default. They are choosing the wrong policy. To some extent he is also criticising some of the EZ core – as they kind of have their own currency and central bank too. Also key to this analysis is that you have to decide whether you are looking at a cyclical contraction or trough, or like in Ireland, you are looking at a more fundamental disruption than that. You are supposed to substitute government spending for temporary downturns in private spending – if its just cyclical. With respect to Ireland Krugman has been consistent and they key line is this one: “The problem was made worse by the fact that the 1999-2007 boom left prices and costs in the debtor nations far out of line with those of their neighbors. ” He used to go on to say that the country therefore faced years of deflation as an inevitable result of the currency union, by I think he has got bored of repeating that because his US audience is no longer scared of deflation there. The question Irish economists should be asking the Irish people is basically, “Do you want to drag the deflation out over a divisive decade or get on with it now by actively squeezing prices and costs to get back in line quickly”. If they want to get a move on then the Croke Park fairy needs to be dumped and fast – ether that or start using government IOUs as a parallel currency to simultaneously hit domestic costs and prices. It seems to be working out for Germany as the remaining euro surplus flows to our Teutonic brethern and their Frankish friends. I believe the technical term is called farming. and well ……….. we are the livestock. In this energy constrained Euro continent the periphery must become good little Austrians so that the core can remain in their hybrid Monetarist Keynesian petri dish “Austerity would actually be expansionary, it was claimed, because it would improve confidence. Nobody bought into the doctrine of expansionary austerity more thoroughly than Jean-Claude Trichet, …”: I would have liked to see a quote or two in support of that. “Realistically, then, Europe needs to prepare for some kind of debt reduction, involving a combination of aid from stronger economies and “haircuts” imposed on private creditors, who will have to accept less than full repayment.”: And I would have liked to see a reference to a post ’07/08 meltdown instance where this generated growth. @Edward: The amount to which austerity contributed to the contraction seems quite small, based on what we know about the structure of unemployment, which is still concentrated most heavily among construction workers. We’ve seen very large falls in employment in several other sectors. If you see this as anything other than a demand-side contraction you need to make a case. I am more concerned by Ivan Yates epistle in the Examiner: http://www.examiner.ie/opinion/columnists/ivan-yates/there-is-a-way-for-entrepreneurs-to-survive-get-out-of-the-country-154987.html Yates is correct. However, he doesn’t touch on the ongoing efforts of bodies to improve their security to the detriment of unsecured creditors in situations where there are already serious doubts about a borrower’s capacity to repay their debt. It is a truism that one should spend more time worrying about those things one can affect rather than those things one cannot affect. There are three things this country could do to rapidly ameliorate its situation: 1. Bring in a specific temporary emergency process for dealing with defaulting mortgages. Provide the accounting certainty banks need. Require banks to reach a settlement or else be limited to a judgment which reflects the borrowers net assets and future ability to pay and not necessarily the full debt. Moral hazard my backside. If you are broke you are broke. 2. Introduce sensible bankruptcy legislation IMMEDIATELY. 3. Put the bank resolution framework in place. It is in the IMF programme and we are shut out of the markets anyway so it is not going to “panic the hoop”. The US Senate already has new bills published to deal with mobile phone privacy and FBI snooping of private information in data centres where these scandals are only weeks old. The bankruptcy legislative reform has been rumbling on for years. It is time for a wholesale reinvention of the drafting process. There is too much consultation and not enough cojones at this time of appalling crisis. The Law Reform Commission should only be asked to comment on emergency legislation already drafted. It is certainly a great regret that neither Richard Bruton nor Joan Burton, who both displayed awareness of these priorities, are in the Department of Finance. Instead, we have Michael Noonan and Brendan Howlin chasing their tails in relation to cuts and the EU. Patrick Honohan said in relation to getting Blackrock to analyse the banks that it is amazing how the talent comes to you when you splash the cash. It would be worth splashing the cash to get in a few of the people who help Senators daft legislation and a few of the people who helped the UK Conservatives have their Office for Budget Responsibility Bill ready before they even got into Government. meant to say “could rapidly do to ameliorate ” rather than “could do to rapidly ameliorate” @Kevin – “It was more of an attempted prebuttal, so to speak.” Much more austerity being heaped on those that didn’t actually cause this mess and I can see some head-buttal happening. On a related sidebar, have a look at the CSO link that Kevin O’D kindly provided and notice the areas where employment is down, and where it’s up. UP: Public admin & defence;compulsory social security: 90k in 2004 to 107k now Education: 121k in 2004 to 149k now Health and Social Work: 177k in 2004 to 234k now Also, note that none of these have peaked and dropped..they’re all still going up. DOWN: Agriculture Industry Construction etc.. @zhou Paul Hunt has been abducted by aliens so I will make the point. “You can’t swing a cat in Ireland without hitting a sacred cow or a vested interest”. Lawyers and bankers and public sector unions are all unprepared to be thumped by a swinging cat and the politicians just slot into their places in the system of accommodating them. It gets them their turn in office and if they can stay there for two and a half years they get a whopping pension for life. Everybody is incentivised to fit in and play the game. The absence of bank resolution legislation two and a half years after it was apparent they were probably bust, the Croke Park blanket guarantee against further pay cuts and compulsory redundancies as it was becoming apparent the state was going bust……oh, but wait, wait, we can do something, there’s always the carers and the disabled….. @grumpy Agree the sooner the better in terms of Govt spending cuts, but the recent throw back to 1980’s following Dr. Fitzgeralds death suggests that the issue for him at the time was the deflationary worries associated with a sharp shock reduction in Govt spending. The issue today is more complex and the complexity is the additional debt burden that the average household has now compared to the 1980s. Please explain how the quicker pain that MK and others advocate can be administered without the disaster, that is mortgage debt, spiraling out of complete control. Krugman is just pissed off as the Euro continental priesthood is mounting a serious challenge on the Anglo-American Buccaneers of old. That model may be buckling under pressure as there is less bounty on the high seas now. Oh what is poor Hibernia to do ? Priests or Buccaneers ? Perhaps becoming slaves of Barbary pirates is a option……………….. http://www.youtube.com/watch?v=hukIJJcCdFs @grumpy Vested interests usually block legislation being enacted. I don’t think they have blocked legislation being drafted. This is a matter of capacity and lack thereof imho. The draft bill to turn creditor’s seniority over equity on its head also evidences a lack of capacity/competence. @Yields The official funders are going to insist on austerity. That is very clumsy pressure from outside and it is a domestic political choice how to distribute that. They are imposing an adjustment trajectory and in return for this they expect to be able to tell Ireland that private bank creditors must be repaid in full no matter what. That’s the deal. No debt writedowns – and that effectively includes mortgage debt, is part of that deal. The market will lend to the state for it to apply a different deflationary trajectory – that may be more sensible – but the state does not find the rates of interest acceptable or tenable. So If it wants to borrow, the state does as it is told by, basically, the EZ (Germany – which did its own deflationary trick years ago and is not going to be told by Ireland and Greece that it didn’t work). Getting the deflation done quickly is not some frothing at the mouth right wing plot – in the case of Ireland, it is a way of regaining economic and political sovereignty at least to some extent, by using its reality or its prospect as a lever. Lets be clear, it is something you would do reluctantly. Employing government IOUs for paying some government expenditure as a de facto parallel currency (usable for the purchase of some domestic services) might be a way of and smoothing the effect of a sudden closing of the Euro deficit by doing some of the borrowing domestically, bypass the Croke Park stranglehold to enable quick, simultaneous deflation of costs and prices However, in a while the past and current government policy will have done what the Serbs and Israelis did as their basic tactic – created facts on the ground. The creditors are being repaid and / or re-guaranteed, so unless you want to say some of the sovereign debt should not be repaid – because it came from socialised bank debt – its game over. You don’t need to be pushing for a one year return to primary balance in order to point out that there is a rational policy of “me last” towards Ireland’s deflation and that the vested interests and powerful, organised groups are set to resist the most effectively and further distort the economy to its detriment. That is a separate phenomenon and I find it disappointing that so few Irish economists are warning the public about this. If the slower deflation via the “bailout” is to be followed then you still have to try to structure it appropriately. a sophisticated form of mob rule is more or less what is currently distributing the effects of the deflation. That is not good enough. @ zhou I think the vested interests usually work to undermine the will for the government to acquire or keep the capacity to act against their interests. Krugman is right..the confidence fairy has not appeared. Today Greek 10 year at 17% and two year at 26.17% and according to Greek media the PM is announcing a raft of measures including further pay cuts. But the markets obviously don’t believe that further austerity will work. So what is the point? Is Trichet destined to be the banker who broke the Euro…it’s looking increasingly likely that could be one outcome. @zhou enlai one problem is that people hide assets I would have no problem with limiting judgments to assets available and faster bankruptcy procedures so long as significant criminal penalties (fraud?) attached to those who were shown to have abused them @Grumpy Regaining economic and poltical soverginity ? You were reading those Christian brother text books again weren’t you. Hibernia has always been somebody’s else’s bitch – her only limited option given her feeble mind is who to sleep with and even then that is not always a choice based on any affection. @Peter Kinane Top article. Trichet in FT expressing these kinds of views. Wouldn’t know exactly what Krugman is thinking of, of course. http://www.google.ie/#hl=en&sa=X&ei=hVHaTf7dK9OahQflv6S4Bg&ved=0CBYQvwUoAQ&q=%22Stimulate+no+more%22+Trichet+FT&spell=1&biw=1259&bih=599&bav=on.2,or.r_gc.r_pw.&fp=8aa1fd91aadee845 @Grumpy. Lawyers and bankers and public sector unions are all unprepared to be thumped by a swinging cat and the politicians just slot into their places in the system of accommodating them. It gets them their turn in office and if they can stay there for two and a half years they get a whopping pension for life. Everybody is incentivised to fit in and play the game. …The official funders are going to insist on austerity. ……… Outstanding analysis of situation. @Zhou. There are several things that can be done to get the deficit down, that would not have a very severe effect on growth. Essentially it boils down to hitting the savings component of income rather than the consumption component. The problem is that the savers are the ones deciding policy. It may be less crude than the Galway tent, but vested interests tend to get their way. Here are few issues that would help. 1. Politely ask that all Irish pension funds put 25% (or indeed 50% ) of funds into cash and lodge on PO savings (approx 4%) for next five years. 2. Impolitely change the tax free (income and CGT) designation of any fund that does not do the above. 3. Sur Tax all State pension payments at 40% (ie 41%+40%) where total income less State pension >€60,000pa. 4. Stop increment payments on all scales below €40,000. 5. Stop, by order futher increases in Semi States (see today’s paper). 6. Stop the clear-felling policy that Coillte seems to have embarked on for the past two years with a significant loss of jobs. Where there is a will to share the pain, there is a way. The problem is there is not a will. We are not in this together. @christy I agree there would have to be significant penalties for fraud above and beyond those already existing. @Joseph Ryan/Grumpy I don’t see what role lawyers are supposed to have in blocking any of the proposals which Joseph Ryan or I have proposed. I don’t think the banks are canvassing for the preservation of the current bankruptcy regime which is unwieldy and expensive for them. I also don’t think they would be that opposed to a mortgage resolution scheme as long as it was harsher than no-recourse mortgages and there was no room for fraud as suggested by christy. However, I do agree that pension holders and depositors are dictating policy. They have two votes. They have their democratic vote which they exercise in greater umbers than other sectors. They also have their financial vote where they can remove their money from the banks causing problems for the State. On top of that, virtually all of the ruling and political classes are drawn from this section of society. @Gavin: Wouldn’t know exactly what Krugman is thinking of, of course. AFAICR, Krugman, like Mark Thoma, noted what Karl Whelan had to say about Trichet and his expansionary fiscal claptrap. But I ration my trips to Krugman’s blog these days since I’m too stingy to pay the subscription. @ Hugh Sheehy Exactly, decrease in value added employment (wealth creating) increase in some non-value state employment (wealth spending). Both necessary but needs to be rebalanced due to corrent circumstances. @zhou “I don’t think the banks are canvassing for the preservation of the current bankruptcy regime which is unwieldy and expensive for them. I also don’t think they would be that opposed to a mortgage resolution scheme as long as it was harsher than no-recourse mortgages and there was no room for fraud as suggested by christy.” Unfortunately, the banks are not the only vested interests. What political price a resolution scheme that also made repossession and resale easier? It would suit the very rich and the already destitute, but most Irish people under payment stress want to have their cake and eat it. The clarion call is for a mortgage write-off, not a limited recourse bankruptcy scheme. @Ceteris Paribus “But the markets obviously don’t believe that further austerity will work.” I believe this is a political calculation rather than just an accounting one. Clearly (well, clear to most non-politicians) at projected levels Greece’s debt is unsustainable. It is also clear, though, that even debt relief is not going to fill the hole in current spending. It is a remarkably similar position to the one Ireland is in. Without austerity, there will be no return to market access. With austerity the debt burden is unsustainable. With debt relief, the political pressure against austerity will rise to a level that precludes it. There’s always another election to win… Coillte forestry policey has been a disaster since day one – anybody who knows anything about forestry harvesting will agree. The fragmented and isolated nature of the mainly sitka spruce plantations are uneconomic to harvest in the main. The only area to have sufficient economy of scale and suitable accessible landscape in Cork and perhaps Munster is the Nagles. On the rougher more extreme landscape of the west the planting is a mere subsidy and a inefficient one at that. The problem as far as I can see is that the returns are only compared to sheep farming which have become uneconomic now that the fleece is almost useless. A subsidy smaller then the present forestry grants could be directed towards the return of Boolleying cattle (transhumance) using Kerry or Highland cows.(more labour intensive then sheep farming) Forestry in the west is a dead dodo anyhow since the end of the cold war and the opening up of Russia. Its best to just clear fell and graze on a more sustainable basis. The last thing most sensible people want to see is useless wind farms and forestry on the last of our pristine hills. The Slieve Mish is the last of our mountains without fences or much forestry in the south west – do you want to destroy this for a fist full of euros ? http://www.youtube.com/watch?v=Ic-vh3uxmu4 @zhou “I don’t think the banks are canvassing for the preservation of the current bankruptcy regime which is unwieldy and expensive for them.” In effect the ECB is doing so. No restructuring, restucturing bad. The banks are though, canvassing for the preservation of the current bankruptcy regime for banks which is non existent, so the status quo can be preserved. It has been expensive for the state. With the brilliant logic of the ECB, if the banks can’t go bust then the banks can’t go bust; ergo there is no banking crisis……..move along please. Not sure anyone blamed the lawyers principally for all of that. Interesting article in the WSJ today on hedge funds buying up European bank assets. Apparently activity has ramped up over the last few weeks. The interesting statistic is that they are getting a 50% discount on the assets. Now where would that leave our bank deleveraging.From memory, 13b was set as the haircut on 70b of bank assets to be sold. Based on the actual market that would leave another 22b of losses to be accounted for.Maybe MK was right?? @ceteris paribus “Maybe MK was right??” Shhh. Only numbers that already exist are allowed to be counted. Contingency be damned. @ G. Kostick, Krugman: “Nobody bought into the doctrine of expansionary austerity more thoroughly than Jean-Claude Trichet, …”. Trichet: “Second, given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.”. Trichet continues: “With hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: “stimulate”, “activate”, “spend”!”. So, this seems quite different from Krugman’s attribution to him that “austerity would be expansionary”. Trichet: “… contribute to consolidate a confident economic environment by ensuring price stability in the euro area as we have done for more than a decade. We expect governments to confirm their determination to consolidate their public finances. That commitment is as important today for the G20 paradigm of “strong, sustainable and balanced” growth …”. Emphasis: “for the G20 paradigm”. Give me the ECB monetary and fiscal policy makers any time over those of the Fed and Mr. Krugman. Krugman: “In Europe, by contrast, the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems.”. I hope the ECB also produces its own policy on global trade. And I hope the ROI does not make a further nuisance of itself. @hoganmahew “most Irish people under payment stress want to have their cake and eat it. The clarion call is for a mortgage write-off, not a limited recourse bankruptcy scheme.” I am ignoring their clarion calls because they simply won’t get what they want in the simple terms they want it! About 15% of eligible voters do not vote in gen elections (the 30% value quoted is distorted because the voter registers are completely out of date). The 15% is from INH 2007 survey. That translates as a 2:1 split between voluntary v circumstantial. The centrist parties, FF, FG and Lab and most indos all drink out of the same trough. Leaves little residue for far outs. Votes are good. There are now three classes of citizens in this state. The Vested who sometimes pay a little or perhaps no tax. The About to be Impoverished who always pay – a lot. And the Already Poor who pay VAT and Excise only. Fiscal rectitude dictates that second and third class get both an income cut and a tax hike. Problem is, both second and third class are the primary consumers. We have had Financial Reforms (no and lax regulations or commodity position limits). Fiscal Reforms (incentives, breaks, write-offs, interest reliefs, pension and insurance write-offs). Now we need Bankrupcy and Mortgage Reform. Fair’s fair? Yes? No! That would be tantramount to encouraging immoral, un-ethical, possibly even fraudulent behaviour. Couldn’t have that now, could we? Please remind me about those mass demos by borrowers demanding cheap, 100% mortages and all. I seem to have missed that. @DoC: Interested in your comments wrt forestation. Always though this was a good idea. When we have to return to a mainly agri economy with restraints on liquid fuels, what might be an optimum balance between the different areas of ag? Any ideas? Brian Snr. It is a truth universally acknowledged, that blog commenters who demand links by way of evidence for some claim, will not click on the links provided and locate the evidence. Nor will such a one be swayed by direct quotation, notoriously the most uncharitable form of paraphrase; not even if emphasis is added: There is the additional argument positing that credible fiscal deficit reductions through expenditure cuts lead the private sector to expect a lower future tax burden, especially when the nature of the cuts make future tax reductions more likely. This can generate higher consumption expenditures and more investment. In countries with healthy household balance sheets, a virtuous effect can take place when governments announce and implement a reduction of the deficit. Expansionary fiscal contractions arise when the virtuous effects are large enough to offset the negative government demand effects. There is some evidence suggesting that this outcome is not just a theoretical curiosity. As Krugman likes to say, reality has a well-known Keynesian bias. It must therefore be rigorously excluded from the discussion, in the interests of balance. @Peter Kinane In the very paragraphs you quote, Trichet is saying that austerity will be expansionary. Or, which amounts to the same thing, that stimulus will be contractionary. Trichet is, of course, wrong. @Brian Woods Snr Fiscal rectitude dictates that second and third class get both an income cut and a tax hike. Problem is, both second and third class are the primary consumers. It could certainly be argued that the concentration for the austerity measures on both those catagories you have mentioned have made a deep recession even deeper. @Dork re your comments on forestry. Its best to just clear fell and graze on a more sustainable basis.The last thing most sensible people want to see is useless wind farms and forestry on the last of our pristine hills. The hillsides may be pristine but the hillsiders are either unemployed or emigrated. I try to operate in the realm of common sense rather than economics. You compare the returns with sheepfarming. Try comparing the returns at a virtually zero labour cost and then see what the answer is. As for not being able to compete with Russian timber. Well, you would find yourself on the side of the IFF with that one. They want to buy mature forests for nothing, clearfell, dump the timber on the world market and not even bother with replanting or indeed restoring grassland. Just leave a wasteland seems to be the idea. A wasteland for the citizens, full pockets for the financiers. And Coillte are now doing their work for them. It is not that new land is not being planted. Existing mature forestry is being clear-felled. There will not always be cheap timber or Gas from Russia. The Ukrainians have felt the cold chill of Russia interests a few times now. In summary your view of forestry does not stack up but at least you are open about it. Coillte on the other hand is carrying out a radical new policy by subterfuge. I do not work in forestry but I am aware of several people who got seasonal work for years replanting for Coillte, but none in the past two seasons. Now that is a neat way to improve profits at Coillte. Who knows the Chief Executive, one of the best paid people in the country, may even persuade the board to give him a bonus for 2010, in spite of government policy. The Chief Executive of Coillte is reputedly paid more than Barack Obama and David Cameron together. Both those people have to stand up, outline their policies, subject them to public scrutiny and defend them. We should do the same with Coillte and all Semi-States. And if we are going to do ROI (return on investment) calculations, we should at least ask the question. Whose R and whose I are we talking about. @Kevin Donoghue: But I ration my trips to Krugman’s blog these days since I’m too stingy to pay the subscription. The blog isn’t behind the paywall, and any articles linked from it can still be viewed. @Brian Woods snr I have been a avid hill walker for many a year sleeping in pretty much every hill and bog west of Cork and most of Scotland / some of the continent – I have a good back country feel for our hills and know enough about ecosystems to tell how degraded they are relative to their wild state. So I have to confess I hate sitka spruce forests with a passion – they are dark damp places that do tremendous damage to our soil and its natural drainage. Scots Pine or larch plantations if planted with care are much friendlier and brighter places and although more slow growing (hybrid japanese larch is no slowcoach however) provide valuable timber – although I think the larch cannot be exported to the UK because of some Beetle or insect infestation. Anyhow the fragmented small holdings of plantations are frequently badly kept by farmers with more experience with livestock so therefore unless there is a recreational / environmental role they do not make much sence. Its best to keep highland cattle on the hills with the steeper rougher ground turning to Birch scrub over time and thus preventing erosion and bog slippage ( the experiment on Mount Brandon with Kerry cattle has never been environmentally successful as the sheep densitys have not dropped enough when the cattle graze in the summer) The Irish hills are in a very bad state especially since the crazy sheep ranching / subsidy farming of the 70s and 80s. Bog hags are endemic on the tops of hills that still hold peat and you even get crazy fencing on ridges at 600 , 700 and even 800 metres ! This practise is particulary bad on the hills of Coomsaharn lake west of Glenbeigh but its pretty much everywhere. Such a effort to put up new fencing at such a altitude must be extremely taxing and require a gross subsidy – certainly in a tradional cattle based grazing system this would not be needed when using Gascon and British highland breeds. Some scattered planting of Birch may be nessary to help recovery as the tree itself introduces nitrogen into the soil much like clover (its a natural coloniser and improver of highland soils). Anyhow the entire highland land management area of Ireland needs to undergo a revelution and could learn much from some of the scottish Highland estates who since the 80s have begun to reform their practises – however it needs to be tailored for farmers with small holdings in comparison to Highland estates and therefore a heavy emphasis on Highland , Dexter , Kerry and Gascon cattle is called for as this would be more self regulating then a formal park / estate structure and possibly much cheaper. @ Kevin Wlsh, I read him as saying that austerity will “contribute to consolidate a confident economic environment” (for expansion). Yes, I believe it would “contribute” to such an “environment”. I see this as importantly different to what Krugman and you are implying it means. (At least you stood up and were clear what you were referring to). @Joseph I remember having interesting conversations with Scottish foresters during the summer of 2009 – a estate which previously was running nearly half a dozen stripping/cutting machines was down to just one due to lack of demand , also a nearby silica mine was recently closed as it supplied Waterford crystal with raw materials ! Forestry simply does not provide the employment it did in the 50s and 60s as technology has moved on http://www.youtube.com/watch?v=CD2V8GFqk_Y If you want a higher labour density then sheep ranching, well then Bolleying cattle is your man – it is by far the most productive use of the land and always has been given the neolithic energy constraints of prehistory and now since sheep farming was just a moment in time (200 years or so ) when the empire needed wool in vast quantities – its time is up , it is merely a economic legacy and is present due to inertia in the minds of men (and mismanaged subsidies) I would have thought that it would be responsible before publishing Krugman to have some fairly recent quotes of what he was attributing to, and criticising of, Trichet. It’s about three years since the meltdown in the USA. Where is the evidence that they’ve got their act together – that Krugman should look down his nose at the ECB? @ JR and DoC: Thank you both. Very interesting comments. I have a small forest (its more like a large wood!) of oak, ash and beech. Coming along nicely. Given a long-term perspective – say 30 years, then a properly instituted, regionally integrated forestry programme should be a mandatory strategic objective. Much to think over. Thanks again. That comment about CEO of Coillte salary is astonishing. GUBU in Spades! Brian Snr. One reaction I often have when seeing arguments for “more spending” and “less austerity” is unrelated to the typical economic arguments. It’s a more visceral reaction related to looking at the list of hard-money states (Holland, Germany, Austria, Finland, etc) and looking at the list of soft money states (Greece, Spain, Portugal, Italy, etc.). Now, I know that it’s hardly a scientific argument, but if it wasn’t for the fact that the big countries of both kinds have major demographic problems looming, it’d seem pretty straightforward to conclude which approach works better over any reasonable period of time. Even on shorter timeframes, Krugman often hints at dreadful comparisons with the 1930s depression….spiralling deflation and its consequences….but he rarely seems to give recognition to one of the possible outcomes on the other side…spiralling inflation. That can have its own dynamic and can be a difficult genie to put back in the bottle. If the confidence fairy is a potential no-show in the austerity scenario, it’s a potential refugee in the borrow and spend scenario. Looking at countries with a preference for devaluations and inflation and comparing them with countries with a preference for hard money hints that the refugee phenomenon may be a worse problem than the no-show issue. @ Kevin Walsh, Perhaps something of a rounding off of this: Krugman says: “In Europe, by contrast, the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems.”. He seems to be ridiculing Trichet policy with some kind of inference that it has not paid off after more than a year. But he implies the policy involves “balanced budgets”. Maybe he would tell us where the conditions have been met, such as balanced budgets. @ Peter Kinane, and others In the light of your question – which I thought genuine not rhetorical – I was trying to find what might be Krugman’s evidence. (Thanks Kevins for your contributions). As it is clear that Prof Krugman himself should know, I emailed him myself, asking for links, and he has very kindly just replied. So the two links just below have just come through from his email address, and I add my initial email below so you can see what he was asked. http://krugman.blogs.nytimes.com/2010/07/05/plan-xvii-for-europe/ http://krugman.blogs.nytimes.com/2010/07/23/jean-claude-and-the-invisibles/ ________________________________________ From: Gavin Kostick [Gavin@fishamble.com] Sent: Tuesday, May 24, 2011 4:10 AM To: email@example.com Subject: Quick Question from Ireland Dear Prof. Krugman, I read your articles with great interest. I also read, and occasionally comment on http://www.irisheconomy.ie. Your recent article. “When Austerity Fails” has been posted on this site and has caused some debate here. In particular, where you say: “Nobody bought into the doctrine of expansionary austerity more thoroughly than Jean-Claude Trichet, the president of the European Central Bank, or E.C.B. Under his leadership the bank began preaching austerity as a universal economic elixir that should be imposed immediately everywhere, including in countries like Britain and the United States that still have high unemployment and aren’t facing any pressure from the financial markets.” Could you clarify which J-C Trichet/ECB speeches/articles/other are being referred to here? Myself, I’ve posted a link to an FT article covering much of the ground you describe: http://www.ft.com/cms/s/0/1b3ae97e-95c6-11df-b5ad-00144feab49a.html#axzz1NFsRHEA8 (“Stimulate no More”), and others have pointed to the work of Prof. Karl Whelan of UCD. Are there other obvious papers/speeches that you have in mind? A simple link would most welcome. Your President spoke very well here yesterday. All the best, Gavin Kostick Literary Manager Fishamble: The New Play Company Dublin Ireland @ Peter Kinane, and all Have just posted some links which are hanging for moderation but I do hope they get through. I have been emailing prof Krugman about this and he has emailed back with relevant links, plus this final comment from him for now. “There was also an interview with La Stampa, I think, on the ECB site.” @ Hugh Sheehy, “It’s a more visceral reaction related to looking at the list of hard-money states (Holland, Germany, Austria, Finland, etc) and looking at the list of soft money states (Greece, Spain, Portugal, Italy, etc.). “: “etc.”: Perhaps the USA, UK and the ROI of the noughties (soft money via the banks) would qualify there. ‘Of course’, it depends where one is starting from. If one is starting from extremely depleted resources, then soft money robbing of savers and of those trying to be productive, into the hands of others, is not a good idea – “a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors”. If starting from plenty of idle (concentrated) savings and low productivity, then ‘robbery’ helps to move resources to new, possibly more active hands. Having read the Krugman article and the Munchau article in yesterday’s FT, and listened to Pat Cox last night re Bini Smaghi, it is clear that the ECB has failed. Not only has it failed, Trichet appears to have lost the plot. Members of his board are engaged in a moral crusade throughout Europe instead of trying to fix the system the are responsible for managing. If somebody doesn’t take the Euro Zone crisis by the scruff of the neck and deal with it, we could be witnessing the end of the euro and a really major banking crisis before long. Moral crusades will not solve anything. Neither will the ECB as currently constructed. @ Peter Kinane, and all For the sake of debate I’ve also emailed Jean-Claude Trichet on this, and will post any reply here as it comes. @Gavin Kostick Congratulations on getting a reply from Krugman. I don’t imagine many people do. Not that he strikes me as too stuck-up (quite the contrary), but he lives a very hectic life. To me it seems quite clear that he is not misrepresenting Trichet & Co. at all. One of the articles (his own articles) that Krugman references in support of his criticisms of Trichet says that Trichet’s argument for fiscal consolidation is overblown because – and I quote – “the reality is that bond markets don’t look at all worried”. That was July 2010. @Paddy M: The blog isn’t behind the paywall, and any articles linked from it can still be viewed. Hopefully you’re right. I got a warning last month that I was close to my quota of free NYT page-views, so I’m cautious. Actually I wouldn’t greatly mind paying a few bob for Krugman’s blog if it was billed separately. But there’s no way I’m ever going to subsidise David Brooks and Maureen Dowd. It seems to me that Krugman is simply badly informed about the situation in Europe and the opinions of various decision makers. His interpretation of Trichet’s views is a case in point. Let’s dissect the evidence regarding Trichet so far: 1. The FT opinion piece quoted by Kevin Donoghue. Trichet is speaking about a general economic issue and is very careful in framing his statement. He limits his argument to “countries with healthy household balance sheets”, for which there is “some evidence” that the expansionary credibility effects can outweight the “negative government demand effects.” He is certainly not making a statement about the effects of austerity programmes in the crisis countries, which hardly can be included in countries with “healthy household balance sheets”. 2. Trichet’s main argument for public consolidation is the following: ” In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.” In the light of events, this does not sound unreasonable to me. 3. Krugman’s claim “austerity would actually be expansionary, it was claimed, because it would improve confidence”is, in case of the crisis countries, simply wrong. If you look at the program documents for the three crisis countries, for each one the economic projection underlying the program assumed a sizable decline in output. The ECB was a party in preparing this documents, so to claim that Trichet was expecting expansionary effects is just complete rubbish. @ Gavin Kostick, (Prof. Krugman) and all, It is good to have those links, though perhaps they are not as useful as one might expect. The first one is a second hand account of Trichet, by Reuters or the NYT. (Ok, perhaps first hand text accounts are not available). Presumably we see the rate at which the ROI and other EZ countries (and the USA) destructed and are still sending out a tsunami of destruction. So, the EZ has to try to absorb this negative force, and, if it survives that, do something about the conditions through which it developed – substantially, freely borrowing policy or “debt issuance” – and rebuild. http://www.nytimes.com/2010/07/05/business/global/05iht-ecb.html?src=busln Reuters: “Mr. Trichet repeated his opposition to the idea of Europe-wide debt issuance to spur growth.”. The USA has (continued) to employ a policy of, what he might regard as, debt issuance. This policy seems to be what Prof. Krugman approves. Where is the consequent expansion, which presumably shows up the Trichet policy? The second link, which he indirectly provides, you already provided and his main quote from it is the one I used yesterday: * Trichet: “Second, given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.”. * So, nothing new really in the links provided. Nothing much in support of the criticism of Trichet. No evidence of a better policy. @Hugh Sheehy I’m not sure what your problem is with Krugman’s statement that “the reality is that bond markets don’t look at all worried” in July 2010. Note that he is responding to Trichet’s claim that “an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.” Neither of them is discussing the market for the PIIGS’ bonds. @ Peter Kinane and all But just for the record for those without time to click links: You quoted Trichet as: ‘* Trichet: “Second, given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.”. *’ And ended “‘So, nothing new really in the links provided. ‘” Yet Krugman says in the second link about this very piece: “Ask yourself, what evidence does he present in that passage? None, because the reality is that bond markets don’t look at all worried. What model does he refer to? None; the vague reference to “non-linear phenomena” is a giveaway that there’s no there there. So what are we to rely on for his definitive judgment that “consolidation is a must”? His “understanding” that “confidence is potentially at stake.” This is a basis for policy that affects hundreds of millions of workers? Meanwhile, I don’t know whether I’m reading too much into this, but Trichet seems to be backing down a bit on the claim that fiscal contraction is actually expansionary — maybe because the alleged evidence for that proposition has been pretty thoroughly debunked, with everyone who’s looked at it seriously realizing that all of the alleged cases involve either an export boom, a sharp fall in interest rates, or both, which makes them irrelevant to our current situation.” So I would have thought that is new for this thread since yesterday. Note Kevin and Hugh above picking over this. @ Grumpy On the subject of scrip, have you looked at the One4All, available via the PO? I was given one of these as a Christmas Gift. The range of places you can take it is impressive. Is this the sort of thing you have in mind? http://www.anpost.ie/anpost/christmas/the+perfect+gift/the+perfect+gift.htm @Anonymous. Let’s dissect the evidence regarding Trichet so far: There is an old maxim which says: ‘What what I do, not what I say’. maybe we should use that maxim is assessing the evidence against Trichet’s performance. Regarding your point 2 above: Trichet’s main argument for public consolidation is the following: ” In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.” In the light of events, this does not sound unreasonable to me. If Triichet is concerned about non-linear events lets consider a few non linear events that should concern him. 1. The imposition of private debts on public persons. That is surely a a pretty major non linear event that he has promoted and has his full support. 2. The collapse of the Interbank market in Sept 2009 and the continuing problems since then in bank funding. Another non linear event, but not a surprising one, as the whole interbank market was a castle built on the sands of a ponzi scheme. He is the person with responsibility for managing this non linear event. Not very successfully either. 3. The deliberate downranking of depositors in the status of their security right throughout Europe, but particularly in Ireland as bank funding went from unsecured bond holders who ranked equal to depositors to secured ECB or bond funding that ranks above depositors. A downranking not yet fully appreciated by the masses but they will in time. 4. The non-linear event of the complete loss of confidence of probably a majority of Europeans in the ability of a nominally named Cenrtal Bank to fulfill that role as it understood in the minds of ordinary citizens. That includes the an LOLR capability and the promotion of an economic and monetary policy that has the welfare of all the citizens at heart as distinct from the welfare of elite financiers. If some of those actual non linear events were addressed perhaps the anticipated non-linear events that Mr Trichet is concerned about may not occur at all. @ JR: “… it is clear that the ECB has failed. Not only has it failed, Trichet appears to have lost the plot.” This is wonderful news. If you are going to fail, you should do it in a truely heroic, spectacular and massively successful manner. This has been achieved – well almost. All that has to happen now is that they grant themselves equally heroic awards. Heroes of the Great Patriotic Debt Campaign. I notice that the un-thinkable – personal debt restructuring, is starting to get a few more mentions. Any Biblical scholar on-board? The Debt Jubillee – whence it came? Brian Snr. An additional wrinkle to all this is the absolute levels of debt and deficit and their growth rates across the EU. Looking at that most unreliable of sources, http://en.wikipedia.org/wiki/Economy_of_the_European_Union , 2010: Debt to GDP: 80% Deficit: 6.4% The Maastricht criteria weren’t just chosen as arbitrary numbers. They were chosen as striking the best balance between long-term growth and strictness. That some governments have seen them as a target rather than a limit is regrettable. Reinhart & Rogoff are reasonably clear that a debt of over 80% GDP is the point where an economy starts to slide into decline. In that context, Mr. Trichet’s words, as quoted by Peter Kinane above: “Second, given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.” are apposite. We have seen the effects of disbelief in sustainability in Greece, Ireland, and Portugal. Now it appears to be infecting Belgium and Italy. The question becomes what is the best way to reduce the risk. Some of us argue that stopping adding to the debt and starting to pay some of it back is the best solution. Others are arguing for inflation. I find it difficult to conceive of wage inflation given global pressures, so absent a reintroduction of protectionist tariffs, I think it would be an impoverishing experience. Still others want debt writeoffs with at least some monetisation. In the past this has been considered inflationary. Personally, I doubt that it would be these days (given deflationary forces still extant). Would it be enough? Well, not if all it meant was that debt could be accrued again… @Peter Kinane: …a second hand account of Trichet, by Reuters or the NYT. (Ok, perhaps first hand text accounts are not available). As readers who have been dutifully clicking links will surely have noticed, speeches and interviews given by ECB officials are collected on the ECB website: http://www.ecb.int/press/key/date/2011/html/index.en.html Brain Woods Snr Heroes of the Great Patriotic Debt Campaign. A beautiful image. Though a great price was paid by the common person we have preserved the three pillars of modern European civilization, the FIRE sector, the hard Euro and most of all – our dignity <pulls trigger, slumps forward, bleeds on EU growth estimate fantasy> As an aside, if anyone failed to catch Adam Curtis’s new documentary “All Watched Over By Machines of Loving Grace “ on the BBC last night it contained, almost as an aside, the repeating pattern of the last few crises of international capitalism where the IMF and the exchequers of larger economies are subverted by the financial sector to save itself by sacrificing the nation inhabited by the current ungrateful peasants (that would be us). Curtis is the gentleman who did “The Power of Nightmares” and “The Trap”, both entertaining syntheses of the modern political condition. @Hogan “Reinhart & Rogoff are reasonably clear that a debt of over 80% GDP is the point where an economy starts to slide into decline.” It would appear that this argument is supported by data on Italian growth which is projected to be .6% this year with debt level of 120%. Apparently they grew at a very good rate in the 70s and 80s before accumulating the debt levels they now have to support. Of course other factors also influence growth. @gavin kostick “On the subject of scrip, have you looked at the One4All, available via the PO? I was given one of these as a Christmas Gift. The range of places you can take it is impressive. Is this the sort of thing you have in mind? http://www.anpost.ie/anpost/christmas/the+perfect+gift/the+perfect+gift.htm ” I think “scrip” may confuse some people. It is debt that the state owes, which has to be accepted for some domestic payments. That makes it “money” – a parallel currency. In essence yes, but the extent of the goods and services that are obliged to accept payment in IOUs would be important in determining where the Ireo / Euro exchange rate settled. An alternative way to manage / influence it is by putting a future date at which the Irish state promises to convert them into Euros and at what rate. You pay 50,000 in Euros to say, a part time radio presenter earning 570,000 currently at the state broadcaster, with the additional 520,000 paid as Ireos (IOUs). The split it something youy would have to thrash out. This way you get the state’s employees and contractors to effectively fund a substantial part of the country’s borrowing requirement – by lending long term to the state. If there was a market exchange rate that devalued the Ireos then you deflate quickly costs in the domestic economy in Euro terms, and as for the effective pay cuts – does anybody without a vested interest still think they can and should be avoided? It is one way of doing it, a swift way that reduces the dependence on foreign lending – and no, I am not claiming it would be totally straightforward. @BW & Hogan Re personal debt write offs: I notice a quote today on the wires from the venerable Mr. Elderfield on the subject: “..Elderfield softens line on debt relief Tuesday, 24th May 2011 07.04am Financial regulator Matthew Elderfield has hinted strongly that he would back debt forgiveness by the banks for stretched borrowers. He said it was “perfectly possible” that schemes to achieve this could be launched. Me Elderfield said he had spoken about the matter to the chairman of AIB, who was working on some ideas in this area. “It’s perfectly possible that individual banks might take initiatives on debt forgiveness,” the regulator said. Mr Elderfield said there was now more capital in the banks in the light of the 24bn euro recapitalisation. “The hope is that there’s overcapitalisation and you’ll get some of that capital back,” he said. “I think there is more capacity in the system now for the banks to work through a rescheduling process and take individual decisions.” Mr Elderfield had previously all but ruled out debt forgiveness schemes on the basis of the lack of money to fund them, the lack of international precedent, and the difficulties in creating a system that didn’t encourage people to stop paying their mortgages. However, he said yesterday that he was “open-minded to see what emerges from the banks..”. I believe it was indicated here before in a previous thread that the potential for over capitalisation of the banks did leave this as a possible outcome i.e. additional capacity in the ‘system’ to cater for this eventuality or should I suggest near certainty. I’m still of the view – and perhaps I’m not alone – and I alluded to it yesterday that austerity in the manner contemplated simply cannot happen without some form of debt relief. It’s fantasy to believe otherwise. The story told on last nights RTE ‘Frontline’ programme confirmed to me what has been going on in the real economy for the past 4 years and both Regulators and those in command have been in quasi denial about for the majority of that time. The Regulators Mortgage review Group and its recommendations now look and seem as daft as they were originally commentated on when released over the past year particularly the following from last Novembers’ final report: “..Key Recommendations from the final phase of the Group’s work Debt Forgiveness • We do not recommend a formal debt forgiveness scheme having regard to the broad range of policy considerations which are outlined in the main body of the report…’ It seems that father economic time has caught up with the Review Group and the growth fairy, as Mr. Krugman refers to, is likely to be marked absent or at the very best prone to only sporadic appearances. Those appearances are not frequent enough to deliver the required economic goodies to alter the course of the good ship Eire in time to avoid the unavoidable and that is a debt write down scheme delivered countrywide. Its been suggested here and elsewhere that a properly structured debt write down arrangement could be the start of a beautiful economic relationship between the citizens and its financiers – only if those who have the power exercise it and see it for what it is and that is a rejuvenated growth fairy that will propel ALL citizens to economically better times. The solution is literally staring us in the face – but lets avoid the ‘affordability’ route of any such schemes particularly for mortgages as social unrest awaits if this is pursued. In relation to mortgages the ONLY way to proceed is to fix the historical asset pricing error in a semi scientific fashion – recovery follows. qed. @ Gavin Kostick, I am not clear what your point is regarding the quotes. I see the Trichet piece as saying, perhaps based on his understanding of economics, that consolidation is necessary. I agree with that position, indeed we probably need some shock therapy to cause big money which expects 20% profit every five minutes to change their spots – *”‘Of course’, it depends where one is starting from. If one is starting from extremely depleted resources, then soft money robbing of savers and of those trying to be productive, into the hands of others, is not a good idea .” (G7 (USA) policy for years has been to ‘solve’ problems by “debt issuance”. Thereby economics eventually becomes farce. Consolidation becomes necessary, thereby helping to provide an environment more suited to expansion- -production, as distinct from speculation on inflation). So, nothing new for me in Krugman referring us to that piece. Trichet says that his “understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake.”. Krugman says he provides no support (of whatever type he expects) of that position. I accept that it is presented as pretty much self-evident, as it probably is to the German sphere – but then Trichet was hardly going to be explicit about, his possible opinion of, USA policy and its consequences. So, Krugman dismisses this position on the grounds that it is not supported as he would expect. It would probably be difficult to find much ’empirical’ support if we’ve had a debt issuance policy to recessions in the G7 for decades. Re “… which makes them irrelevant to our current situation.”: Our current situation is probably extremely unique, in several ways, and I do not necessarily see that the causes are being adequately addressed and hence don’t necessarily expect expansion any time soon, short of very good fortune in the dynamics of life. I think the model that Krugman seems to recommend, albeit perhaps a very stretched version of the original, is now exactly what is _not_ required. If a model – “debt issuance” – has reached the point where it is no longer delivering growth, indeed is delivering G7 bankruptcy, helped, I suggest, by rapid trade liberalisation and Bronze Age premises – then it is probably appropriate to carefully consider alternative conceptual positions, which involves higher level intellectual faculties, unfortunately for an age when programming to a job passes (via a subtle secondary programming) as very good education. Even then, I would not expect a rapid recovery from disaster. @ Kevin Donoghue, I was not aware of that site, might be useful. @Gavin On the parallel currency question there is a comment for you at 3.00pm stuck in “moderation” – seems to happen quite a bit lately, so if you check the blog later and don’t go looking for it, you will probably miss it. @ Shay B. Noted that little piece – wonder who actually persuaded Clinton ( I just caught a snippet)? Did the ‘persuadors’ actually realise the potential consequences? – sure as shooting the politicians didn’t. @Hogan/ceteris Are there not a few issues involved. 1. The research on unsustainability of debt /GDP above the 80% quoted. 2. The validity of austerity measures. 3. The devil in the detail of those austerity measures. And most importantly 4. The credibility of Trichet and the ECB to call for austerity measures while protecting certain classes of creditors from the obvious austerity measures applicable to that class. @ceteris paribus “Of course other factors also influence growth.” Clearly they do and surely not one of them is absolute, but still, whether it is chicken or egg, high debt levels and low growth go together. Making a leap of faith, it could be that high debt levels, apart from the fiscal cost of them, reduce the ability of government to borrow more when required by the business cycle, as government has not been putting money away when times were good. It seems to make a nonsense of the idea that governments don’t repay debt… This seems like an interesting academic debate which as regards Greece in particular seems a little divorced from the reality on the ground. The elite in Greece gains massively from corruption and evasion of tax at the expense of the poor who for example cannot afford to bribe for priority on hospital lists. So should the IMF pull out? The trade unions up to now have a veto on disposals from the state’s property company holdings valued at €280bn. If Greece wants to retain its corrupt system, it should be faciliated to leave the euro and an agreed restructuring. It would likely end up much poorer with limited access to int finance markets for years. It would end up having to go back to the IMF for help. In Ireland, those who argue against ‘austerity’ tend to be also against change. @ YoB: “… that austerity in the manner contemplated simply cannot happen without some form of debt relief.” I’m 101% with you on this one. Let’s imagine its the Irish Divorce campaign again. Now you see it, now you don’t. “Oh gosh! There it is again!” In the advent of a debt write-off (of res property mortgages) I expect that the Vested (like the Mitered) will make a religious-like whinge about the morality, the ethics and the need for vigilance against temptation. Now remind me about the chap who overturned the Bankster’s desks and kicked them out of the Temple precinct. Some folk have VERY selective belief systems. Brian Snr. I would like to note that Krugman has over the past couple of years repeatedly stated his belief that the Fed’s monetary easing would have little positive effect, precisely because it wouldn’t raise inflation in any significant way. So far at least he appears to be on the money. Personally, I would rather have a central bank that wasn’t helping the situation to a central bank that decided to raise interest rates while several of the countries covered by the central bank are in the grip of a debt crisis. @grumpy I suppose the question is whether banks would be obliged to accept such scrip in payment of debts denominated in euro. If not, any such plan would lead to a wave of bankruptcies. If so, would the ECB stand for it? @MH In Ireland, those who argue against ‘austerity’ tend to be also against change. I think you are absolutely right on that point. For many, arguing against austerity is a cover to protect their vested interests. Most of those people couldn’t give two hoots about austerity as long as it didn’t hit their pocket. These people also use the ‘burn the bondholder’ issue for the same reason. Firstly they know it probably won’t happen (though it should) but more importantly it keeps the focus away from top level and other necessary restructuring issues. Lets be realistic with the English language, the country doesn’t have to endure austerity in order to move more quickly to closing the deficit. Again, to focus on the language, it is true that a lot of the low hanging fruit have been picked. I am using low hanging as in the lower strata of society. The juiciest fruits on the top branches are as ripe and as unyielding as ever. There are formidable alliances from across the political spectrum preventing the country from takings the steps necessary for the recovery phase. And there are formidable rewards to be garnered by hanging in there, for a year, two years and now coming up on three years. It is remarkably similar to the 1980’s in that sense. All that said, Mr Trichet and the ECB have no moral right (or indeed legal right) to foist an austerity package on any nation. They failed at the first fence with the bondholders. Ireland also failed at the first fence with the top 600 civil servants. In both cases it is the modern day equivalent of ‘Royalty looking after their own. It is difficult to be optimistic in a situation where, Is feidr linn. Ach ni fheadar is mian linn. @Micheal There is little doubt that there is corruption withen both Greece and Ireland to a extreme degree – this is a characteristic of republics – their flaw is a tendency towards populism. But your analysis of who benefits should extend larger then national boundaries which are mere tokens now in this globalised world. A fat dumb civil servent in Greece probably spends more of his income in Athens then in London. The austerity that you speak of will merely transfer consumption elsewhere as the money supply must always keep growing. Yes , always ask who benefits but try not to use a microscope to analyse a Big Hairy Hungry Bear – wait at least until he is tranquilized. @ Michael Hennigan Reading your post above it struck me that you were really talking about Ireland and not Greece. I believe they call it transference. So, I replaced the word “Greece” with the word “Ireland” and it reads as follows: “This seems like an interesting academic debate which as regards ‘Ireland’ in particular seems a little divorced from the reality on the ground. The elite in Ireland gains massively from corruption and evasion of tax at the expense of the poor who for example cannot afford to bribe for priority on hospital lists. So should the IMF pull out? The trade unions up to now have a veto on disposals from the state’s property company holdings valued at €280bn. If ‘Ireland’ wants to retain its corrupt system, it should be faciliated to leave the euro and an agreed restructuring. It would likely end up much poorer with limited access to int finance markets for years. It would end up having to go back to the IMF for help. In Ireland, those who argue against ‘austerity’ tend to be also against change.” Bottom line, is that where Greece goes Ireland will go, accept we will link to sterling. @ Peter Kinane I give up. We seem to have been at cross-purposes throughout, and after ‘probably extremely unique’, I completely lost track of your last post. You seem to be holding Krugman and Trichet to differing expectations of levels of proof, with the a priori position that Trichet is right. So everything that is put in front of you by me and others is ignored or bent towards the conclusion you already have. The comment by Grumpy that as Ireland may not be in a regular boom – bust, then Keynsian rules may not apply is more worrying. I cling grimly on to the economists who have pointed out that the bubble, vast though it was, is only a small portion of growth over 1992 – 2007 or so. Speaking of Grumpy @ Grumpy My comments get hung up too, and now and then vanish. So briefly, whatever form this IOU currency takes, it will have to be extremely user friendly – and I would like to see it useable in local shops. @Shay Begorrah The Curtis docu was, as ever superb, if a little chilling (he’s definitely read Le Bons “Crowd”) reminded of the quote about Lord of the Rings and Atlas shrugged, that one engenders a lifelong obsession with unbelievable heroes, leading to emotionally stunted adulthood, unable to deal with the real world. The other involves orcs. NB: JC Trichet and Peter Sutherland are talking at the LSE 13th June, ticketed. Political leaders have passed the parcel to the ECB and thus the strong reaction to the prospect of restructuring. The FT reports today that although accounting together for only about 5%of eurozone GDP, Greek, Irish and Portuguese banks today take about €242bn of ECB liquidity – 55% of that provided to the eurozone financial system. The ECB stipulation that it provide liquidity only to solvent banks against adequate collateral has been pushed to the limit. Under the securities markets programme, it acquired €75bn in government bonds, almost two-thirds of which are Greek. It also has on its books perhaps €150bn in other financial assets put up as collateral by Greek banks, much of which is backed by Athens. JPMorganChase calculates that, with €81bn in capital and reserves, eurozone central banks could withstand even a 50% “haircut”, or discount, on Greek bonds. But if writedowns on Portuguese and Irish bonds followed, eurozone governments might be forced to provide billions of euros to rebuild the ECB’s balance sheet. One or two countries leaving the EMU wouldn’t be a disaster; if restructuring has to be agreed and a country is not commited to reform, then it’s the best course of action. Agree a write-off deal and let the country do a deal with the IMF, China or whoever. There are no free lunches. @MH The ECB stipulation that it provide liquidity only to solvent banks against adequate collateral has been pushed to the limit. What a pity that stipulation didn’t apply to all institutions a few years ago. There are some definite actualities on the ground right now. 1. There are still hidden losses within the European banking that are being camouflaged by the insistence that bond write downs cannot happen and that banks cannot be allowed to go bust. 2. The Interbank and bank bond markets are finished for several years for all but the biggest banks. Thinking of a return to the market for Irish or other peripheral country banks even in medium term is uterly delusion in terms of the ‘non-linear’ banking events that have happened. 3. The Interbank/bank bond market is so fragile even for supposedly good banks, that to allow it to continue in its present form is economic and social lunacy. But it is being kept that way beacase of the vested interests in the financial industry. There is a simple solution to all this for EZ banks and countries. All EZ bank funding be coordinated through a ECB clearing house that determines the rates based on a rating of each bank. A small insurance premium is charged on all bank funding (Bond and interbank) to cover potential losses and to ensure funds are available to close banks. It is so simple that I for one cannot understand why it has not been done a long time ago. “There are no free lunches.” Unless you’ve joined the free lunch club, the wealthiest 1% need only apply, the free lunch clubs bills are paid for by the other 99% or “tax payers” as they are called. But we need them at that table dammit, cos we clearly can’t handle the truth. @ Gaston Kostick, It seems to me Trichet was saying in July 2010, that current monetary-fiscal policy of heavy reliance on stimulus, G7 wide, had brought us to the brink of disaster, policy which Krugman seems to recommend we continue to employ. Was there proof when adopting that policy that it would _not_ bring us to the brink of disaster. I do not see that the continuance of stimulus policy in the USA brought growth or removed the threat of financial disaster. Trichet is recommending a change of policy, to consolidation. Krugman seems to want proof in advance that it will work and seems to ridicule Trichet that, given whatever slowing of stimulus has occurred in the PIGS countries, they are not already thriving. I suspected from the outset that Krugman was making cheap noise. Having looked into the matter in this thread, I see my two paragraphs above as a summary of what I’ve found and, based on it, my suspicion stands. @Peter Kinnane Why doesn’t Trichet and the ECB stick to their own job and try to runa an EZ banking system for once. Pontificating on economic matters is all very well. I could even do that- I even try it times. When Trichet and the ECB have installed a robust EZ banking system that compels financiers to take hits, is capable of closing down insolvent banks without foisting the debts on others, and the ECB can constitute a board of responsible people minus the Chicago set headbangers, we can all sit up and pay attention to him. Until that point, he and his organization should try to stick to the job they were given which so far they have made a complete mess of. @Brian Woods Snr I’m on your wavelength insofar as this issue is concerned. The time for fairness and/or equity for all is long gone. We require solutions and a fix and by its very nature a fix guarantees winners and losers. But waiting and hoping for the economic tooth fairy is a guarnateed loser. Hope is not a strategy. Others have questioned if a debt forgiveness program would in fact deliver the demand catalyst so desparately required to re-ignite the domestic economy – my answer to this is that we’ll never know until we try. In any disaster zone risk taking is normally a prerequisite before recovery – following the party line and the rule book is always a loser strategy – insofar as bank recaps and Basel III rules is concerned we have followed the rules to the letter and its failed to deliver. And it will continue to fail. So the OECD can today suggest that the bank recaps are fundamental to recovery but as indicated here before the evidence with respect to this strategy actually delivering anything other than pain for the bank financiers aka the citizens is non existant. Reverse course and try a new tack. @ PK: “If a model – “debt issuance” – has reached the point where it is no longer delivering growth…” This problem was indeed flagged some time back. Marginal Product of Credit (diminishing). There is some anecodtal evidence that it may actually be negative. Either way, it spells the end of the Permagrowth paradigm. Something analogous is happening with energy. Limits of engineering leverage of energy have been achieved in the developed economies. Chindia still has some way to go. Principle problem here, and with the Emergings, is getting fossil fuels at prices which keep the Marginal Product of Credit on an increasing trend. Diminishing discoveries, declining production (of liquid crude) and increased domestic use in producer countries means less exports. Any global trends will probably be visible by 2015, possibly by end of 2012. Have to wait and see. Brian Snr. @ BW, “Marginal Product of Credit (diminishing).”: Probably, indeed perhaps has been flogged to disaster stage. And it seems to be what Trichet is saying needs addressing (and for which he is being ridiculed). @Peter Kinane’s The facts are against you, I’m afraid. The fiscal stimulus at the federal level in the US was counterbalanced by cuts at the state level, and much of the stimulus was used ineffectively due to Republican insistence on using it to fund tax cuts for the wealthy. The UK was recovering, until George Osborne went on his austerity crusade, at which point the recovery stalled. The UK is a particularly revealing case, due to the surveys of business confidence that showed that austerity was bad for business confidence. Germany had a very mild recession, but it recovered on the back of a fiscal stimulus. And then we have Ireland, where very severe tax hikes and spending cuts had very little effect on the deficit. @ Kevin Walsh, You don’t actually quote me or give a summary of you understanding of what my position is, before launching into a reaction. I find that it is important to be clear where one is starting from, if one is to go anywhere. In any case: I should think it is very difficult to find reliable figures for stimulus at federal level and cuts at state level in the USA, and I would be looking at a period of at least twelve years, so as to include the ‘stimulus’- -liquidity at the time of the dot com crash. It would probably also be difficult to provide hard data on the change in wealth of the USA over that time, and what factors to include. However, using my wits, as you have used yours, I think the USA economy is increasingly becoming a basket case. For a while after the dot com stimulus, you might have said it was growing. Perhaps the 97 crash would then have caused you to change your mind. Likewise, a current assessment based on some figures, to be fairly rigorous, would require a look at the underlying principles. You say the UK was recovering until Osborne introduced austerity. I wonder if that opinion calculates borrowing for consumption as borrowing for production. Again, my opinion is that the UK is not doing well. Germany may be a different case. If a country is not nearly bankrupt and the economy is dragging a bit, then stimulus could have a positive effect. In the case of the ROI, again I wonder what formula you are using – whether continued massive incurrence of debt would have been treated as a negative, or ignored, in the calculation which one would then presumably contrast with the figures subsequent to the “severe tax hikes and spending cuts”. When a country virtually goes bankrupt and during that process the general equilibrium of the economy gets very skewed, recovery is likely to be a very slow process. In any case, I was really only picking up on Krugman’s ridiculing of Trichet. To go on and actually attempt to make rigorous sense of the issue of stimulus versus austerity, and the optimum levels of those, and under what starting conditions, then pretty basic principles have to be looked at, such as the factors to “budget/fiscal deficit”. @ KW: “The facts are against you, …” This was the start of your reply to Peter Kinane. I beg to differ with you, politely, I hope. The US has gone down the economic and financial Krapper (sic). Their Recession never went away. It was artfully disguised. The QE stimuli were both successful failures – but heck, successful financial failures are all the rage nowadays. So why stop? The USBLS data confirms the US is in a real bad way, but you have to poke around in the data to get an accurate view. On no account believe the MSM and business TV Spinolae. Its fearsome pap – with a few honourable exceptions. The UK: You do not need a survey to tell you that ‘austerity’ is bad for business confidence. You just need a single functioning neuron. Osborne has snatched the CBI’s Oliver Twist empty gruel begging bowl and tossed it aside. Poor little rich lambs! But they can devalue their way out of their Gov debt predicament. That will be a Ball-of-Laughs for us! Germany: A totally different case. They had (some) foresight and refused point-blank to allow their manufacturing base to be dismantled (as opposed to US and UK) and free-gifted to Chindia with its 500 mil jobless. That’s reckless endangerment of your citizens. Ireland: We are in an economic Regression. We are already back at late 1990ish levels. I’d make friends with folk who have farms – or even a vegetable allottment. Watch that space and any increase in Farmer Markets activity. Actions speak louder than words. Hazardous Bends Ahead! We have only got started on this paradigm shift Kevin. Brian Snr. @ Kevin Walsh We could have had a fiscal stimulus in Ireland but those with power in the economy wanted to retain their bubble gains and the ones who had to take either unemployment or huge drops in income have been in the unprotected private sector business areas. Almost all the 400,000 net jobs added in the economy were bubble-related and the washout was bound to be brutal. http://www.finfacts.ie/irishfinancenews/article_1022395.shtml @Kevin Walsh: The facts are against you, I’m afraid. Facts, is it? For the sake of your sanity, heed the message: http://xkcd.com/386/ @Kevin Walsh, Michael H If you want a less than encouraging view on how the previous government allowed the Irish economy to become totally distorted with public sector and construction spending and the current govt is still in dream land then do the following. 1. Read Michael’s article on jobs in Ireland, linked above 2. Add a datapoint like the fact that Google Ireland’s revenues alone must be nearing 10billion Euro a year (almost all export revenue – http://www.guardian.co.uk/technology/interactive/2011/mar/24/google-accounts ) 3. look at the jobs data I mentioned from the CSO report which shows that only public sector jobs have increased. It’ll give you a view of an economy that still has its good bits, but where the overhead has been blown out of all proportion, where much of the “exports” are not adding anything like their nominal value to the Irish economy, and where the current government still doesn’t “get it” at all. Parts of the economy are gone and – as in the Springsteen song – these jobs ain’t coming back. We have to build new jobs and we will struggle to do that anywhere as quickly as we might because the govt is likely to insist that a few insiders maintain their bubble gains at the expense of others. As for Krugman, the recent data for the US and an increasingly apparent need for a QEIII does not clearly support his assertion that digging an even deeper debt hole is the best way out of a debt hole. Still going. As indicated above I’ve emailed Jean-Claude Trichet, with a similar one I sent to Paul Krugman (above) for his take on the subject. I followed this up yesterday, and just now I have received the following: ‘Dear Mr Kostick, Thank you very much for your emails. Please be informed that we are currently working on your request and will get back to you as soon as possible. With kind regards, EUROPEAN CENTRAL BANK Directorate Communications’ For those who have not lost the will to live, I will post back here when and if I hear more. @ Gavin Kostick, I think you should show what they would be replying to Krugman: “There was also an interview with La Stampa, I think, on the ECB site.” It’s still there of course; 14th October 2010. The interviewer’s question (which is of the familiar type, I have something to tell you, he asked) is in boldface: A balanced budget is the objective of the Stability Pact, but some euro area countries have never even come close. And the IMF, while recommending debt consolidation, admits it will be very painful in the early years. We must take fully into account the confidence channel. When a country moves in the direction of fiscal soundness, this is not only good for growth from a medium and long-term perspective, but it might also be beneficial for growth in the short term. Because it enhances confidence in segments of the economy that had lost some of their confidence, and that is good for consumption, investment and job creation. People would not engage in more consumption, entrepreneurs would not invest actively, and savers would not be forthcoming if fiscal stability was impaired or threatened. I’m not sure whether Krugman is quite right in saying that nobody bought into the doctrine of expansionary austerity more thoroughly than Trichet. But I’d be surprised if any prominent official in Europe, Japan or America plugged the idea as much as he did. @Michael H I’m not terribly interested in arguing the causes of Ireland’s swift fiscal deterioration, and I see it as a distraction from the topic of the thread, which has little to do with the follies of McCreevy et al. I will say that regardless of whether the fiscal consolidation that has taken place in Ireland has been fiscally productive or counterproductive (a truly daunting counterfactual), it was done for sensible reasons. I don’t see a sensible reason for the ECB’s recent rise in interest rates. Given the debt levels in peripheral economies, it seems reckless and irresponsible, to put it frankly. @ Peter Kinane I await with baited breath. “Dear M Trichet, I read your articles with great interest. I also read, and occasionally comment on http://www.irisheconomy.ie. Prof. Krugman’s NY Times article “When Austerity Fails” has been posted on this site and has caused some debate here. In particular, where Prof. Krugman states: “Nobody bought into the doctrine of expansionary austerity more thoroughly than Jean-Claude Trichet, the president of the European Central Bank, or E.C.B. Under his leadership the bank began preaching austerity as a universal economic elixir that should be imposed immediately everywhere, including in countries like Britain and the United States that still have high unemployment and aren’t facing any pressure from the financial markets.” I have emailed Prof. Krugman to ask for particular speeches and articles to support this paragraph, and he has kindly sent some links back which I have posted to the site. In the interest of fairness and open debate, I was wondering if you have a most recent article/speech/source of evidence, that you would feel most accurately reflects your current position on the possibility of ‘expansionary austerity’, particularly, if selfishly, with regard to Ireland. A simple link would be most welcome. All the best, Gavin Kostick Literary Manager Fishamble: The New Play Company Dublin Ireland” Reply from ECB, 8th June, following email sent above. Dear Mr Kostick, Thank you for your email of 24 May 2011. Please find below the following references that might be of your interest: Introductory Statement of 5 May 2011: Turning to fiscal policies, current information points to uneven developments in countries’ adherence to the agreed fiscal consolidation plans. There is a risk that, in some countries, fiscal balances may fall behind the targets agreed by the ECOFIN Council for the necessary and timely correction of excessive deficits. It is essential that all governments meet the fiscal balance targets for 2011 that they have announced. Where necessary, additional corrective measures must be implemented swiftly to ensure progress in achieving fiscal sustainability. The implementation of credible policies is crucial in view of ongoing financial market pressures. At the same time, it is of the utmost importance that substantial and far reaching structural reforms be implemented urgently in the euro area in order to strengthen its growth potential, competitiveness and flexibility. In particular, countries which have high fiscal and external deficits or which are suffering from a loss of competitiveness should embark on comprehensive economic reforms. In the case of product markets, policies that enhance competition and innovation should, in particular, be further pursued to speed up restructuring and to bring about improvements in productivity. Regarding the labour market, the priority must be to enhance wage flexibility and incentives to work, and to remove labour market rigidities. http://www.ecb.europa.eu/press/pressconf/2011/html/is110505.en.html Interview with L’Agefi: In Europe there are genuine concerns about the Union’s capacity to overcome the debt crisis facing the peripheral countries. The markets are highly sceptical. What can they be told in order to convince them of the relevance of the measures undertaken at the European level? – On the issue of fiscal policies, I believe that the European Central Bank, through me, can reiterate certain points. Firstly, we always said that when there was a single currency but no political federation, there was a clear need for budgetary supervision. This was hotly disputed. I can remind you how in 2004 and 2005 major countries, notably France but also Germany and Italy, were telling us that we did not need this surveillance framework for fiscal policies. We had to fight very hard to preserve it. Today, this episode obviously seems totally outlandish, bearing in mind what has happened since. Some, moreover, said that the Stability and Growth Pact itself was “stupid”. We always said that the careful monitoring of fiscal policies was essential, as were healthy policies. This remains true today. However, one should add another pillar of governance, particularly within the euro area, in the form of monitoring competitiveness indicators, and unit production costs especially; the changes to these must also be tracked extremely carefully. For six years at least, we have been telling all European governments to monitor very closely changes to competitiveness indicators and imbalances within the euro area. We emphasise the three pillars necessary for European governance, all three of which must be improved substantially: supervision of fiscal policies, supervision of competitiveness indicators, and structural reforms. The central banks across the whole of the Eurosystem – the ECB and the national central banks, i.e. the Banque de France in France’s case, for instance – have a very clear message for governments: Europe’s governance must be improved decisively, and governments are not going far enough. We expect a great deal from the dialogue with Parliament in order to push governments towards taking a decisive step. http://www.ecb.europa.eu/press/key/date/2011/html/sp110518_2.en.html Contribution to Bild am Sonntag: Several member states of the euro area have to adjust rigorously their economic and fiscal policy after having made mistakes in the past. All member countries must respect the principles of prudent fiscal policies. Substantial reforms are needed to ensure that common rules are improved and respected by all. http://www.ecb.europa.eu/press/key/date/2011/html/sp110515_1.en.html The speech in Frankfurt: We have seen more than ever the importance of a timely correction of fiscal imbalances. Therefore, we cannot wait months or even a year until policies are corrected. In the meantime, spillovers would hurt other Member States. In the past, the Council has often suspended the procedures of the Stability and Growth Pact, thereby weakening its credibility. This must not happen again. The newly agreed ‘comply or explain’ principle under fiscal surveillance still leaves too much room for discretion. Moreover, it does not cover the new macroeconomic surveillance framework. http://www.ecb.europa.eu/press/key/date/2011/html/sp110318_1.en.html We hope that this information is helpful. Kind regards, EUROPEAN CENTRAL BANK Directorate Communications Press and Information Division Kaiserstraße 29 D-60311 Frankfurt am Main Tel: +49 69 13 44 74 55 Fax: +49 69 13 44 74 04 @ Gavin Kostick, As far as the points in the reply go, I don’t have a problem with them. However, they don’t seem to contribute or detract from my understanding of Trichet’s position from the beginning and which I defended, principally: “In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances. With hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: “stimulate”, “activate”, “spend”!”. (I did not read his initial position as being specific to the ROI and so am not surprised that the reply is not). Comments are closed.