Jeff Sachs: Greece Can Be Saved

Jeff Sachs shows how a Greek default can be avoided through a different European approach to funding a troubled sovereign in this FT article.

Central Bank Research Bulletin

You can catch up with the research conducted by Central Bank staff by reading its latest research bulletin – available here.

Five Crises

Cormac O’Grada spoke on Ireland’s five crises in his Central Bank Whitaker Lecture last night – the speech is here.

Professor Sinn Doubles Down

I know this is getting silly now and everyone knows what’s going on with the Target 2 debate. Still, it’s entertaining to see Professor Sinn doubling down on his false claims about the operation of the Eurosystem.

By the end of 2010, ECB loans, which originated primarily from Germany’s Bundesbank, amounted to €340 billion.

Em, no. I don’t know how to explain this any better than here. But, like I say, really, honestly, no.

But, he’s on a roll now is Professor Sinn, so now we get a new nonsensical talking point:

If this continues for two more years as it has for the past three, the stock of refinancing loans in Germany will disappear altogether.

Indeed, Deutsche Bank has already stopped participating in refinancing operations. If German banks drop out of the refinancing business, the European Central Bank will lose the direct control over the German economy that it used to have via its interest-rate policy. The main refinancing rate would then only be the rate at which the peripheral EU countries draw ECB money for purchases in the center of Europe, which ultimately would be the source of all the money circulating in the euro area.

I literally laughed out loud when I read this. So Deutsche Bank don’t borrow from the ECB? Who cares? There have always been banks with surplus liquidity and banks that are short of liquidity. That’s why interbank money markets exist.

The fact that the ECB stands willing to make unlimited amounts of short-term loans to all Euro area banks at 1.25% is clearly the key influence on short-term rates throughout the Euro area.  Deutsche Bank may not be borrowing from the ECB but they certainly won’t be able to lend their funds out on a short-term basis at rates that are much higher than the ECB’s.

So ECB rates are clearly setting German short-term interest rates just as they set them elsewhere in the Euro area. (Note also the resemblance between ECB rates and short-term German government bond yields.)

So another scary sounding but ultimately baseless claim from Professor Sinn.

Michael Noonan on Shopping

Emmet Oliver reported in the Indo last week on Michel Noonan’s shopping proposals:

 ‘In an appeal aimed at those Irish people who are holding a total of €134bn in savings accounts, Mr Noonan said it was time to return to normal shopping habits.

“What we really need is for people to go into the shops and start buying again,” said Mr Noonan in a message to those who had the cash to spare.’

I am afraid I have had to advise Farmers Journal readers to ignore the Minister:

‘Consumer spending has contracted sharply over the last few years while there has been a real collapse in capital spending, public and private. Compared to 2007, consumers spent about 10% less in 2010. Over the same period, capital spending halved. Exports have done much better of course but the weakness in domestic demand has inevitably resulted in massive job losses in construction with employment cutbacks also in retailing.


Households have been trying to re-build their financial position and savings, including the repayment of debt, have been the priority. The government is in no position to spend more so it is understandable that there should be calls for a return of consumer confidence and renewed spending in the shops by households. It is however a profound misunderstanding to expect that a consumer boom would solve our problems and fortunately there is no sign of one happening.


Most of Irish output is exported and most consumer spending, particularly at the margin, goes on imports. If consumers were to flock to the shops, they would find relatively little to buy that is domestically produced. It would be good news for retailers but we cannot expect to thrive economically through buying and selling imports, any more than we can find salvation playing roulette in North Tipperary. A revival of demand for housing or for other products of the building industry would be welcome, if it could somehow be financed, but would stimulate no increased output or employment given the huge overhang of unsold houses, offices and shops. There is no point expecting jobs to be created in construction for many years to come.


What Ireland needs is a sustained revival in exports and in business investment. A consumer boom could even divert exports to the home market, with no effect on output. What do you think would happen if you were to buy an extra tonne of dairy products down at your local supermarket? The dairy companies, whose output of cheese, butter and so forth is constrained by milk supplies and processing capacity, would have less to export. The pattern of weak domestic demand facilitating a diversion of sales to exports is well understood and was noted again by economist Joe Durkan in the recent ESRI report. In other words, one of the reasons why exports have improved recently is because domestic demand is weak. Exaggerated expectations of the jobs impact from a consumer revival should accordingly be avoided.


A good example of the futility of this line of thinking was the car scrappage scheme, recently phased out. This scheme directly subsidised imports, doubtless saved a few jobs in car showrooms temporarily but would have had its greatest impact in France, Germany and Italy, where they make the cars. A subsidy on foreign holidays would stimulate a few extra jobs in travel agencies too, but is hardly the most promising job-creation strategy. The car scrappage scheme was a similar mistake.


The construction industry has been calling again for increased government spending on capital projects. They contend that this would stimulate jobs and tax receipts and point to Ireland’s alleged ‘infrastructure deficit’. There is no path to the necessary budget correction that consists of raising expenditure, nor is there much evidence of an ‘infrastructure deficit’ in any economically meaningful sense. Economic activity is well below the levels that were expected when many of the presumed infrastructure gaps were identified and it is inevitable and appropriate that public capital spending should be trimmed back to reflect this. There is no point adding ghost infrastructure to the millstone of ghost estates. Plus there is the little matter of the government’s inability to finance even its ongoing commitments, never mind the retention of an excessive capital programme. It is easy to identify extra capital schemes in the ‘nice to have’ category but quite a different matter to justify borrowing more money to finance them in the dire circumstances in which the country finds itself.  


Those sectors of the Irish economy which cater for domestic demand are big employers and could do with some relief. This could best take the form of reductions in excess cost impositions and the government is proceeding with plans to reduce commercial rents. There are problems also for retailers with local authority and utility charges. The construction industry will see no durable upturn unless private investment revives and that requires a restoration of business confidence and a resolution of the public finance and banking crises, neither visible through the gloom. The best contribution the government can make is to stick to the tough task of resolving these crises in the shortest possible time-frame. In the meantime, households should keep their purses zipped and ignore the siren calls to head for the shopping centres’.

Finally salutations to Jimmy Deenihan, the Minister for Arts, who has just announced curtains for the Abbey Theatre’s proposed re-location to the GPO at a reported cost of €290m. A Bertie Bowl for the carriage trade if ever I saw one.