Here is a short article on crisis resolution strategies that I wrote for Eolas magazine. It was written before the debate over Morgan Kelly’s new resolution proposals. The piece contrasts a Plan A — involving a phased fiscal and banking adjustment, offiical assistance to cover funding shortfalls, and absorption of significant banking losses — with a Plan B that has an earlier focus on debt reduction. Morgan’s proposals — a Plan C? — combine immediate elimination of the borrowing requirement with eschewal of both official assistance and responsibility for bank losses.
Month: May 2011
Bernanke lays out the role for government policies in promoting R&D in this speech. While the set of issues surely differs between the US and Ireland, this is relevant for the local debate here also.
My colleague adds to the Morgan Kelly literature in this SBP article.
I mentioned on this site before how a number of academic economists, during the debate on whether Ireland should adopt the euro, referred to a design flaw that had been well recognised by US economists: the lack of a federal budget.
It was known that the Irish business cycle was out of sync with the eurozone core and that the timing of ECB interest rate changes would not be appropriate for Irish conditions. A large part of such asymmetries (or ‘region-specific shocks’) are offset in the US at the federal level: a $1 decline in US regional income relative to the national average induces a fall of around 25 cents in federal tax liabilities and an increase in inward transfers of about 10 cents.
Karl Whelan’s recent proposal re Irish bank debt was to federalise it. Morgan’s was similar to one I advocated recently on this site: monetize it. Both entail responsibility being shared at the federal (i.e. European) level.
Paul de Grauwe warned, as far back as 1999, that the “failure (to create a European government with similar responsibilities to present national ones) creates the risk of the break-up of the monetary union”.
I have just now stumbled on a speech made by ECB President Jean-Claude Trichet in Dublin in May 2004 which rejected claims of such a design flaw, as follows: “Moving to the second topic of my speech, i.e. fiscal policies, let me stress that we Europeans have been very bold in creating a single currency in the absence of a political federation, a federal government and a federal budget at the euro area level. Some observers were indeed arguing that without a federal budget of some significance the policy mix would be very erratic, depending on the random behaviour of the different national fiscal policies of the member countries. They were also arguing that without a federal budget it would be impossible to weather, with the help of the fiscal channel, asymmetric shocks hitting one particular member economy. In this respect, the very existence of the Stability and Growth Pact actually allows (us) to refute these two arguments: first, the Maastricht Treaty and the Pact provide a mutual surveillance by the “peers”- i.e. the Ministers of Finance – of national fiscal policies; second, by calling upon Member States to maintain their budget close to balance or in surplus over the medium term, the Pact allows the automatic stabilisers to play in full in countries facing an economic downturn, without breaching the 3 % ceiling for the deficit.”
The full text of Trichet’s speech is here.
The Government rightly continues to make the case that there is a common interest in lowering the interest rate on EFSF/EFSM borrowings, among other adjustments to the programme. Writing in the Sunday Independent today, Peter Mathews – in one of the milder articles in the paper – goes quite a bit further and accuses “EU partners” of “profiteering” (see here).
Last January, the European Financial Stabilisation Mechanism charged Ireland an interest rate of 5.51 per cent for money that it borrowed at 2.59 per cent. A month later, the European Financial Stabilisation Fund charged Ireland an interest rate of 5.9 per cent for money that it borrowed at 2.89 per cent. On this basis, the EFSF earns a profit margin of 3.01 per cent and the EFSM earns a profit margin of 2.93 per cent.
These margins are draconian. The majority of the interest that Ireland pays is not used to pay for the EU’s borrowing costs. It is excessive profit for the countries that are lending us money. For every €1m that Ireland pays in interest costs, Ireland must pay another €1.08m so that our EU partners make a profit. This, clearly, is not a bailout. It is exploiting our vulnerability. It is financial bullying.
It would appear that Peter believes that the EU is taking on zero risk in lending to Ireland. (Formally, at least, the EFSF has eschewed IMF-style preferred creditor status.) I would be interested if readers agree that these official funders can rest assured their loans are riskless.
The Sunday Business Post provides its usual welcome calm analysis of the options (no web access until Monday). Understandably frustrated with the pace at which EU governments are responding in terms of providing a mutually-advantageous exit route from the crisis, its lead editorial advocates taking a tougher line, notably with Anglo (and presumably) INBS) senior debt.
With our government bond interest rate soaring and our banks locked out of the markets, we haven’t got a lot to lose. We are most unlikely to be able to return to the markets on the schedule set down in the EU/IMF programme late next year, or in early 2013. It would be much better realise this and arrange some restructuring of the deal now – and there are many ways this could be done. [Emphasis added]
Just looking at the first sentence, my interpretation of the first clause is that the resulting dependence on external support means, unfortunately, we do have a lot to lose. With popular pressure for a tougher line ramping up, it seems a worthwhile issue to debate.