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.


New Contributors

We welcome Seamus Coffey (UCC) and Stephen Kinsella (UL) to the team of contributors to this site.

Bailout European economy Fiscal Policy

Commission publishes MFF budget proposals

The Commission’s proposals for the EU budget’s next Financial Framework (MFF) for 2014-2020 can be found here. Judged against the parameters I proposed to evaluate the MFF proposal from an Irish perspective, then the proposal is as good as we could have hoped for. RTE reported that “The Government has given a cautious response to the European Commission’s proposed 2014 to 2020 budget” which, given that this is the start of a difficult set of negotiations, is about as close to saying “we are delighted” as you are likely to get.

Economic growth Economic Performance Social conditions Uncategorized

Census 2011 – Preliminary Results

The preliminary results of last April’s Population Census are available here.

They show continued strong population growth, averaging 1.6% a year over the last five years.

The CSO is to be complimented on the timely production of this very informative release.


Open Government

The new Department of Public Expenditure and Reform is publishing the agenda and minutes for the meetings of its management board – available here.

Economic growth Economic Performance

Seamus Coffey on the Savings Rate

One of the point that has been made repeatedly about the Irish economy over the past year or so is that weak domestic demand is connected with a high savings rate. (Admittedly, the actual national income data on personal savings rates are only available with a long lag but the slow pace of consumption spending is consistent with this story). Many, including now Minister Noonan, put this increase in the savings rate down to discretionary precautionary savings and believe that once people relax about their future, domestic demand will take off again.

I’ve always been pretty skeptical of this argument. My take on spending patterns has been that the increase in the savings rate may be more connected to people who had previously been able to live beyond their means having to pay back debt because of the change in financial market conditions, while others who have always saved continue to do so.

The implications of this story for the future evolution of the savings rate are quite different. There is little reason to think those who have been saving all along (e.g. for retirement) will reduce their propensity to do so. Indeed, if they were reliant on their funds invested in Irish property or in Irish pension funds now subject to the new levy, then the opposite would be the case. And those who are apparently saving because they are re-paying debt are, in practice, feeling as if every euro they earn is earmarked for either debt repayment or managing to keep going. These people are also unlikely to suddenly start spending if the economy stabilises.

Anyway, I’ve meant to make that point on this blog loads of times but didn’t. Then Seamus Coffey wrote this excellent post and, in comment speak, I want to say “What he said.”

Banking Crisis

New Data on Loans and Deposits

The Central Bank has continued its excellent work in making more statistical data available with two new releases “Trends in Business Credit and Deposits” and “Trends in Personal Credit and Deposits“. I don’t have time to get into a detailed discussion of these releases but, on a quick look, there appears to be lots of new and interesting information in these releases.

Bailout EMU European economy European politics

Steinbrück: Admit Greece will need restructuring

Given the recent discussions of  the views of Professor H-W Sinn on this site it seems only right to point out that there are also other opinions in Germany. A number of current and former German politicians (Helmut Schmidt, Joschka Fischer) have been critical of the leadership provided by key politicians. Now the former finance minister Peer Steinbrück (still an active opposition politician) has found some clear words: “Greek default is inevitable – lets call a debtors conference.”


Credit-Less Recoveries

A new ECB working paper examines the nature of credit-less recoveries in the wake of banking crises: you can download it here.

Banking Crisis Inequality

United Left Alliance convention

My invitation to the above event at the week-end being unaccountably delayed, it’s interesting to see the Irish Times relaying the views of colleague Professor Terrence McDonough (IT do note correct spelling please.) here.

In summary:

“He said the country should default on its debt, leave the euro, build a single public bank, provide a jobs guarantee for all workers and nationalise the Corrib gas field.”

European economy Fiscal Policy Lisbon Treaty

Commission proposals for the next EU budget Multi-annual Financial Framework to be published this week

On Wednesday (June 29th) the Commission is scheduled to reveal its proposals for the next Multi-annual Financial Framework (MFF) which will set out the scale and composition as well as the proposed financing of the EU budget over the period to 2020. However, some reports suggest that Commission President Barroso is putting aside two days for the Commission College to agree the proposal so it may be later in the week before it sees the light of day. This is an important issue for Ireland, and this post discusses the issues to watch for in the Commission’s proposal.

Banking Crisis

Anglo Debt: Nods, Winks and Blind Horses

For the latest update on the government’s position on Anglo debt, I recommend this post from NAMA Wine Lake.


BIS Annual Report

The BIS annual report has been issued.

The overview of the BIS analysis is here.

The full download is available here.


Spreading Contagion

Here‘s my take on the week’s contagion-containment, from today’s Sindo.


Presentations from DEW Energy Symposium

The presentations by Kieran O’Brien, Rory Broderick and Dieter Helm from last week’s energy policy symposium held in TCD have been posted here.


Sinn Blames Those Overly Active Bloggers

Professor Sinn is back with a paper length version of his ideas about Target 2, co-authored with Timo Wollmershäuser.

I suspect people are a little bored with this now, so I’ll confine my comments to a couple of areas.

First, in relation to whether ECB operations have crowded out credit in Germany, Sinn now argues (page 19) that he has been “wildly misunderstood” and that he never meant to imply that the ECB was auctioning off fixed amounts of liquidity so that additional central bank money loaned to Irish banks would cause contracting credit in Germany. He appears now to be merely observing that because the Target 2 payments system facilitated movements of large amounts of money from Irish banks to German banks, then German bank demand for liquidity from the Bundesbank was bound to decline.

Well, who knows what Sinn did or did not understand about ECB operations when he penned his various pieces and really who cares? From my perspective, the key question is whether readers of Sinn’s articles (in particular, German readers) will have come away with the impression that ECB loans to Ireland were contracting credit in Germany. Interpret the following excerpts for yourself:

the credit to the Irish farmer comes from the Bundesbank at the expense of a similar credit provided to the German economy.


This is a forced capital export from Germany to Ireland

(Note of course, the transaction generating this supposed “forced capital export” in many cases was an Irish bank providing funds to a German bank to pay off a maturing bond!)

In relation to the idea that he mentioned the ECB auctioning off fixed amounts of liquidity, Sinn now claims (page 45) that there is a misunderstanding of what he said on this topic due to “an overly active blogger” (a reference to the perfectly admirable Olaf Storbeck of Handelsblatt) mistranslating something Sinn wrote in the Frankfurter Allgemeine Zeitung. And yet, here it is, in English, right in the middle in his VoxEU piece:

Moreover, strict crowding out is inevitable if the ECB controls the overall stock of central bank money in the Eurozone by way of sterilising interventions or auctioning off limited tenders.

I suppose Professor Sinn would point to the word “if” in the previous sentence and claim this was merely a hypothetical observation. But, it was his decision (and not Olaf Storbeck’s) to mention limited auction tenders as an argument for the idea that ECB operations will lead to crowding out of credit in Germany. Indeed, Sinn’s response has something of a Scooby-Doo feeling about it (“if it wasn’t for those meddling bloggers”!)

Second, in relation to his proposal that Target 2 balances be settled each year, as Fed districts settle their Fedwire balances, Sinn provides a non-response response to my point that Fed districts have no fiscal connection to the regions they serve and thus provide a poor comparison. The response that “the economic situation with 17 euro countries and 12 US districts is certainly comparable” is hardly an answer to the relevant question: What would happen if a Fed district bank did not have the resources to settle its Fedwire balance?

Sinn’s paper appears to concede that his VoxEU article’s call for annual settlement of Target 2 balances is unrealistic, as it would require a full year of GDP to be transferred by the Irish people. Implicitly, then, he appears to be moving back to his earlier proposal of setting annual limits.

As I noted before, this would effectively spell the end of a truly integrated Eurozone. No matter how many “euros” I appear to have in my Irish bank account, the ability to make a cheque payment to Germany from this account would depend on whether Ireland has reached its Target 2 limit. Why anyone would maintain a bank account in Ireland under such a system is beyond me.

As you might expect, the paper contains a number of other gems. Stuff like page 48’s “However, all debts need to be repaid or at least be serviced such that Ireland’s debt-to-GDP ratio, including its Target debt, returns to reasonable levels” is a particularly unhelpful mixing of a genuine sovereign debt problem with an imagined “Target debt” problem that would only exist if Sinn got its way.

Then there was my favourite. Page 16 tells us that the availability of loans from the ECB “saved the GIPS the need to take measures to recapitalise its banks.” And here’s me thinking we’ve forked over €50 billion and counting to make sure that our banks could repay the bond investors that loaned them funds for speculative property investment.


The Use of Metaphor in the Irish Economy, A Guest Post by Gavin Kostick

John Donne is remembered on the blog by the phrase, “no man is an island” indicating, a good deal before Adam Smith, the interconnectedness of our lives. Donne (1572 – 1631) was the Dean of St Paul’s Cathedral, and a metaphysical poet. He specialized in drawing unexpected comparisons between a theoretical, spiritual or abstract notion and a concrete, palpable object. For example, Donne compared mutual love to a pair of mapping compasses, which, where-ever the points are placed on the surface of the world, lean towards each other and are connected.

The history of language itself is the history of the movement from the concrete to the abstract. Our ancestors had a far larger vocabulary than we do, as they were more particular than general.

The power of metaphor consists in making the abstract once again visceral: philosophy ‘proved upon our pulses’, in Keats’s phrase.

But it is a suspect power as it may not so much illuminate, as rhetorically persuade, or falsify.

The history of political and economic thinking is filled with metaphoric physicalisation of abstract ideas – from Hobbes’s “war of all against all”, Smith’s “invisible hand”, Marx’s “spectre haunting Europe”, right up to Matt Taibbi’s “great vampire squid”, powerful gut images have managed to consolidate a set of ideas, capture the public imagination, frame debate.

Rarely a thread of the blog goes by without some arresting image. The following is necessarily a swift and limited survey of some of the kinds of imagery used during the Irish economic crisis so far, followed by some thoughts towards a fresh set of images that might be explored.

Fiscal Policy

Property tax policy consultation

The Department of Finance is consulting on the potential economic impacts of amending property tax reliefs.

A paper and a spreadsheet model are available from

Economic Performance

QNA Release for 2011:Q1

The quarterly national accounts for 2011:Q1 have been released. They show seasonally adjusted real GDP increasing 1.3% quarter over quarter and seasonally adjusted real GNP falling 4.3% over the same period.

Smoothing through the volatile quarterly series, looked at on a year-over-year basis, real GDP was up 0.1 percent and real GNP was down 0.9 percent.

Overall, the picture seems to be one of an economy in which output has stabilised. Given the substantial negative headwinds (fiscal contraction, falling credit, debt overhang and a frozen property market) this is a pretty good performance. Still, it seems too early to say that the economy is about to produce a period of job-producing growth.


Costs of Doing Business in Ireland 2011

This publication by the National Competitiveness Council can be found here.

Prices Regulation

NCC report on costs of doing business in Ireland

The National Competitiveness Council has just published the Costs of Doing Business in Ireland Report 2011.

You can download it from here.


New Public Expenditure Databank

The Department of Public Expenditure and Reform has launched a new databank, improving access to data on public expenditure back to 1994, with extra data to be added over time.

The website for the databank is  here.

More details here.

Higher education

Revised Employment Control Framework

The ECF for the higher education sector has been revised. Many elements from the last version have been changed. The last draft introduced a range of measures including: the need for specific pre-approval of all individual posts (exchequer funded or not) from a small central government committee; specific quotas for each university regardless of how successful or not they actually were in attaining research income; and decisions made on the suitability of academic hires on the basis of their alignment to government strategy documents.

The new version is a vastly improved document. All of the above elements have been removed. There are sector-wide quotas, in keeping with the need to reduce costs, but allocation with respect of research posts to each university will depend, as you would expect, on how much of the research funding the university actually wins in the competitions administered by SFI, HRB etc., Furthermore, the specific pre-approval process has been shelved as has the frankly puzzling attempt to impose quotas on posts secured from non-exchequer funds. The latter should surely be welcomed by everyone.

The main reason for a revised employment control framework was to deal with pension liabilities arising from contract research staff. In this regard, the new draft forces a fully-funded proviso on to all new grant applications, with grant applicants (exchequer or non-exchequer) now being required to cost 20 per cent of employee salaries into grant applications for pension purposes, starting with new applications. This is a blunt way of dealing with this issue, and there should be further debate on this. In general, the treatment of contract researchers as if they were civil servants in terms of contracts and pensions is one of the defining issues in Irish research at present. It continuously creates confusion on all sides. Attracting bright researchers to Ireland is a legitimate goal of government policy supported by much research on how to create thriving cities. Placing such contractual and bureaucratic impediments to this is counterproductive and groups that represent contract researchers have been among the most vocal in pointing this out.

Hopefully, the new document signals a more productive debate about higher education in Ireland and an improvement in the relations between the universities and the state, which seemed to have degenerated substantially at the beginning of this year. Universities do contribute to both economic growth and to the development and maintenance of healthy democracies in ways that go beyond the current linear big-tech innovation models being employed by government. Attracting top researchers into Ireland on a much larger scale funded by a much more diverse range of sources is one avenue that the country still has open as an attainable policy goal even at a time of dwindling resources and, in fact, reductions in property prices and the general cost of living may make Ireland a more attractive place for European-funded researchers as these grants have retained their nominal value.

Competition policy Regulation

Where competition fails…and where it works, A guest post by Paul Hunt

‘Competition and consumer choice’ has become a policy mantra to shake up dozy and inefficient industries and to benefit consumers.  EU and national policy-makers and regulators have expended huge effort – and continue to expend effort – to complete the internal EU markets in electricity and gas in line with this mantra.  But all that has been achieved is to move from vertically integrated national monopolists in the individual member-states to a pan-European oligopoly comprised of 12 members (responsible for 85% of EU energy supply) and some residual dominant national incumbents.  (Successive Irish government, not surprisingly, have implemented their own cunning variation on a theme.)

So how did this happen – and what can be done?  The Troika is demanding some action on electricity and gas in Ireland.  The solution outlined has relevance to sectors that, at first sight, appear unlikely candidates.

Competition policy

The Role of Competition in Ireland’s Economic Recovery

A number of the papers/presentations from last week’s Competition Authority conference are now available: see here

Last night’s The Frontline programme had an interesting discussion on competition in the market for GPs, among other topics related to the functioning of the health care system: see here

Coming soon . . . a guest post by regular IE contributor Paul Hunt on the failures of the “competition model” in key utility industries.


Monetary Dialogue Briefing Papers: June 2011

The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 30.6.2011). One set of papers (including one by me) discusses the prospects for monetary policy in light of the wide variations in the economic cycle across different Euro area economies. The other set of papers discuss issues related to restructuring Greek debt.

I’ll repeat my final couple of paragraphs here. These were written prior to the comments discussed here

The relationship between the ECB and the peripheral economies has become extremely complex. However, it is clear that ECB officials have regularly used the implicit threat that they can withdraw their support for peripheral banking systems, or else continue to provide funds to “persistent bidders” at interest rates that are perhaps considerably higher than are charged to other countries, as a way to obtain actions they deem necessary.

In relation to Greece, ECB officials have been using the threat of the withdrawal of the eligibility of Greek sovereign debt as collateral for open market operations to put forward their argument against any debt restructuring. In the case of Ireland, it is known that Irish government officials have requested that assurances be provided that the ECB will continue to provide sufficient liquidity to Irish banks over the next few years, perhaps via a special medium-term facility. However, no such assurances have been provided. And without greater clarity on the timeframe for repaying their loans to the ECB, it will remain impossible for even recapitalised Irish banks to obtain market funding.

The ECB’s strategy of threatening peripheral banking systems (and the regular coverage this receives in the media) has become one of the destabilising factors that have contributed to worsening the current crisis. It is time for this poorly-thought-out strategy to cease. The ECB’s obligations under the European Treaty mean that it cannot help peripheral countries via keeping interest rates low for the next few years. But it can continue to act as a lender of last resort to the banks in these countries in a way that reassures (rather than worries) financial markets.

To my mind, the latest “anonymous ECB official” comments represent a new lowpoint for that particular institution.