Gavin Kostick, Paul Krugman, and Jean Claude Trichet

Commenter Gavin Kostick has done impressive work on our behalf following up with Paul Krugman and Jean Claude Trichet on the austerity debate.   The fruits of his efforts are contained on the Paul Krugman: When Austerity Fails thread, but many readers will probably have missed them on this fast moving blog.

The reply from the ECB and links provided by Paul Krugman are reproduced after the break.   Thanks Gavin.  (I also take back my dig from yesterday about the ECB’s poor communications.)

Dear M Trichet,

I read your articles with great interest.

I also read, and occasionally comment on

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 CompanyDublin

*Paul Krugman supplied the following links to Gavin

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.

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.

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.

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.

We hope that this information is helpful.

Kind regards,

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 0

52 replies on “Gavin Kostick, Paul Krugman, and Jean Claude Trichet”

We have the horrid prospect of European authorties who are either economically retarded or economic hitman – in the grand scheme of things it does not matter really.
I remember reading the FT some months ago when they gave a clear graph of broad money creation withen the Euro.
Goverment debt did not increase much in the last decade until recently when goverments acted to save the shadow banking sectors arse.
Credit money exploded during EMU however.

If this blog could produce another plain as muck graph like this it would be greatly appreciated,as wading through the ECBs site and its autistic nonsense is too much for this Dork.

According to the OECD forecasts, Iceland will have a budget deficit of less than 3% in 2011, down from 7.8% in 2010. Ireland will still have a budget deficit of about 10% in 2011.

Gross financial liabilities at the end of 2011 should be at 121% in both countries. (Note that the OECD definition is a bit different from the Eurostat definition of gross public debt)

What does that tell about Krugman’s claim that there is no austerity in Iceland? And about Trichet’s claim that austerity can be positive for growth? And about the potential for Ireland to return to the bond market?


“Some, moreover, said that the Stability and Growth Pact itself was “stupid””

What we actually did was refer to it as the “Stupidity Pact”.

It was based on the idea that no recession in any EZ state would ever or could ever be significant enough to warrant a deficit beyond an arbitrary figure. This was and is stupid – but not as stupid as the willingness of countries likely to have high volatility or “beta” in their gdp, to sign up to the idea.

1. Kudos to Gavin for getting responses from two such esteemed figures
2. Now to find time to digest said responses!!!

Well done Gavin.
Krugman’s second link refers to Lords of Finance (subtitled The Bankers who broke the World) and the possibility of a sequel -Lords of Finance: The Next Generation. The observation may be prescient. The Dow closed with it’s longest losing streak since 2002 and a trillion dollars has been wiped out since April. The housing market is dead with values continuing to fall and unemployment rising again. I am wondering if this stage of the Great Recession (year 3) parallels The same period of the Great Depression when serious mistakes were made by Central Bankers.

‘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’

OK. Some states are corrupt and some state spending is manifestly unsound, but that’s a goverance issue, to which markets offer no solutions. They are interested solely in return, and increasingly in short-term return. ‘Players’ are as happy to make money from socially destructive projects as from constructive ones. ‘Credible’ means profitable, no more and no less.

Unless one is interested primarily in quick returns, the market is therefore a poor guide. Its clear that M Trichet is a market spokesman, and thus a poor guide for governments. The solemn tone doesn’t really conceal the reality of the vested interests.

M Trichet, like Mr Greenspan, is a child of his time. Blowing serial asset bubbles, while controlling CPI, and engineering the socialisation of private losses. A lovely, clever, profitable game. Unfortunately that game is extremely dangerous and irresponsible. Time for a bit of governance methinks.

Continuing the off topic trend. Anyone watching Vinny Browne. Very interesting comments and/or lack of comments by P.Honohan.

Well done indeed Gavin.

Mr. Trichet, all that and not one mention of bank supervision or regulation – what a banker.

@ David Burke

The big margin in gold/silver has already been made between 06- 10/11. If you had been in early you would be almost 100% return.

If you can, punt now looking for 5-10% per annum, more or less depends on how bad you think things are going to be over the next 5 years – as I say it is a punt.

Been selling down to original capital since start of this year (profit taking) and happy to leave the rest in for a year or two – but not buying.

By the way David I am anything but an expert on this – just an ordinary man doing the opposite.

If you are looking for a short term punt – wheat, barley and potatoes for 2.5% which is massive margin in the commodities market. England and half of Europe not going to make target this year for sure.

There are a lot smarter than me out there that’s for sure.

Don’t go with the flow & good luck. 😉

Mr. Trichet all that and not a mention of bank regulation/control – what a banker.

@ David Burke

Triple and double digit margin (on both) already been made over the last 4-5 years depending on hold – anything less may be available depending on how you think things will pan out and if it is enough for you.

Good luck.

Thanks for the hold Gavin and my apologies for going ‘off thread’.

@David Burke
The ECB will monetize after their clients take the remaining state assets in the weaker members of the euro zone and generally assert the remaining bits of control over their vassal jurisdictions.
It quite clear they are artificially keeping the value of debt money high for this purpose – however it is economically inefficient to do so forever.

The euro has free gold on its balance sheet and is my belief for some time that Golds strength since the games of 99 are a clear signal that the euro has been driving the price of Gold since its inception.
Its because goverment money has not expanded to keep up with credit – in such a system Gold must be bought by credit to keep the system from crumbling and in this system non goverment euro money / cash fills the vacuum on the opposite side of the balance sheet(euro cash unlike other currencies is not goverment money)
I think the euro already has the highest ratio of cash to credit in the currencies and I expect it to explode withen the next few years.

But do not expect hyperinflation in the euro zone if dollar reserves flow towards its balance sheet – they may just manage to keep CPI inflation constant to achieve credibility amongest the masses.


The fact that Iceland has a low deficit says nothing one way or another about the existence of austerity. We didn’t have austerity for most of the noughties, and during that period we were running surpluses.

Thanks for the kind comments. To be fair, I think it was JtO a good while back who alterted me to the value of going directly to the sources of information where such was possible.

As well as the links, Prof Krugman also sent a one-line message, which I posted and was followed up by Keven Donoghue, and, I hope he doesn’t mind, I repost below.

‘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.’

Well done Gavin.
This communication from the ECB is much better than anything Mr. B.S. has come up with.
Problem is that it almost looks like an apology for the mess that’s about to come

Okay, here’s my quick go on where I’m at on the ‘expansionary austerity’, debate.

A year ago I would have offered you two reasons I’d heard of of for ‘expansionary austerity’.

(1) The ‘crowding out’ one, which was more commonly put in the UK, where the ‘dead hand’ of the State needed to get out of certain areas to let the private sector flourish. Thus cutting would lead to increased economic activity as the private sector was ‘set free’. Shades of this argument are active re Greece (50bn in possible self-offs). But after the latest McCarthy report (5bn max, mainly not good value in selling right now), not so much in Ireland. I’m aware selling off is not the same as fiscal austerity, but the ‘crowding out’ argument shades across policy.

(2) The restoring confidence (‘confidence fairy’) one. That is, by balancing the books, the surge of confidence within business and the markets in the state, will more than off-set the actual damage being done by said consolidation.

I’m satisfied that this latter position has been put forward by JC Trichet during his time on office.

I’m also satisfied that so far, the damage to Irish growth via austerity packages has been more notable than any attached rise in confidence.

This feeds into the question of whether Ireland, as has often been suggested here, should move ‘more quickly’, to a balanced budget.

If the reason for doing this if for a Kelly-esque second move, then maybe. If it is merely to position the country away from Greece and Portugal, ie for confidence/creditworthiness reasons, then I go for a ‘no’ on that for the following reasons:

(a) The consequent damage caused to growth and jobs will be at least as bad as Lane/Bentrix suggest. I note (with some bafflement), almost 3 years worth of re-vised downwards growth forecasts for Ireland, as the effects of austerity come out ‘worse’ than initially expected.* The real damage to the economy will have (has had) at least as negative effect on confidence as the move to balance will be, theoretically, positive.

(b) More generally Ireland should stop behaving erratically. Shifting from excessive to defective spending (from one side of the MoU to the other) is still behaving oddly, and Ireland should stop behaving oddly. Given the platform on which the government was elected, sticking with the programme is tough, and hitting it bang on the nail, whilst preserving the fabric of the nation, is the impressive thing to do.

And finally this is because:

(c) Deploying sensible enconomic policy is an end in itself, rather than policy that is designed to ‘send a message’.

* I’ve started to assemble figures for Initial Growth Forecasts, vs., Revised Forecasts, Vs., Actual Outcomes for the last 5 years or so, to see how the repective forecasters (CSO/CB/IMF/ESRI/DoF/OECD) are doing. If anyone else has these on a single page, it would be nice to see them.

All the above assumes a centrist sort of position which really only makes sense to me within a further context, but I’ll leave that for now.

@ Gavin

‘Deploying sensible enconomic policy is an end in itself, rather than policy that is designed to ’send a message’

Unless economic sovereignty has been ‘ sort of accidentally’ ceded, and all ‘acceptable’ solutions are essentially adminstered ones. We have a partitioned dual economy, with high tech capital intensive enclave. Chemical exports are roaring ahead while chemistry grads are emigrating en masse. That’s the ‘bright spot’ in the economy.

No wonder the government is behaving ‘oddly’. The fog is thickening, the lack of strategic thinking is painful, and the muddling can only get muddlier.

There is only so much room for jaw-jaw, and there is work to be done. DoC has a nose for ‘market realities’. :

‘The ECB will monetize after their clients take the remaining state assets in the weaker members of the euro zone and generally assert the remaining bits of control over their vassal jurisdictions’

The later Pierre Bourdieu was a student of power, in all its respectable and respected guises:

‘All that is said here applies first and foremost to the State, which, like all historical gains linked to the relatively autonomous history of the scholastic fields, is marked by a profound ambiguity. It can be described and treated simultaneously as a relay, no doubt a relatively autonomous one, of economic and political powers which have little interest in universal interests, and as a neutral body which, because it conserves, within its very structure, the trace of previous struggles, the gains of which it records and guarantees, is capable of acting as a kind of umpire, no doubt always somewhat biased, but ultimately less unfavourable to the interests of the dominated, and to what can be called justice, than what is exalted, under the false colours of liberty and liberalism, by the advocates of ‘laissez-faire’, in other words the brutal and tyrannical exercise of economic force’

Pascalian Meditations: Polity press 2000 p127

That was written well before the financialisation of the real economy. Our state, and the EZ project, is going to be tested sorely before this is done. All credit for your efforts nonetheless.

I suppose they are both right in a sense. I can’t see how Ireland can conduct expansionary policies when it doesn’t have the luxury of printing its own currency. The no free lunch bedrock of economic thought would tell us that expansionary policies (fiscal expansion until private sector demand finds its footing, then fiscal retraction, with the in extremes option of monetizing debt) can work but it comes with a cost. Today, the US is following that route, and the cost is being borne by emerging markets (China etc) in the form of rising inflation and massive overheating (bubble like property markets etc). Also, the policy, by definition, must protect the financial sector, even though this seeds the next crisis and risks popular rage.

Europe doesn’t have these choices. Ireland can spend up a storm, but if markets won’t fund, then the ECB has to and Europe doesn’t have the luxury of a reserve currency, so it can’t externalize the costs of these policies. In that case, the danger of monetization is more real, and because it is, it necessarily means that Germans have to pay the costs of expansionary policies.

I know I have posted inappropriately harsh comments here about economists hiding a political agenda and I regret some of them. I have to come to terms with the fact that, in crises, economists are required to play politics. trichet, it seems to me, is trying to defend the integrity of the ECB, because that institution is the conduit through which the negative effects of expansionary policies would flow.

On gold, ha I haven’t seen an investment related q here before. It seems to me that the really parabolic stage of the price rise is ahead of us. Gold does well in two scenarios, when real interest rates are negative, and when the international monetary order is in flux. Inflation is ripping across the emerging world yet the fed refuses to move from it’s ZIRP policy. When it does move, it will be slow and may not even be a straight line type move. The USD is incredibly weak, and could weaken more if the EU and emerging countries raise rates. The day to sell is when US rates exceed inflation and that is a long way off.

@ paul quigley

Thanks for the reply. I’m painfully aware of the limitations of my grasp on the situation, and comments such as yours and others on the blog, I find very helpful.

You say:

‘That was written well before the financialisation of the real economy.’

When I ended with the get-out-of-jail, ‘All the above assumes a centrist sort of position which really only makes sense to me within a further context’, the international reform of Western economies away from the dominance of finance is part of the context I had in mind. But I wouldn’t want to be posting ever-lengthening posts.

Well done on both your forensic journalist skills and you analysis above (8.35).


‘If the circumstances change’ d would Trichet change his mind.
Lets say:
Demand falls in Europe/World wide. French and German unemployment at 14%. Fiscal deficits at 8%.
Would the prescriptions be the same.

Gavin Kostik is emerging as Ireland’s greatest all-round genius since George Bernard Shaw. Not only a giant in the field of the Arts, but now establishing himself in the field of Economics, which is a rare cross-over. I expect he’ll be managing the Irish rugby squad in his spare time by this time next year.

The poor ECB are being unjustly slated, not just on this site, but in the Irish media generally. They are simply doing what they were set up to do. Which, moreover, is precisely why Ireland broke the link with sterling in 1979, the start of the process which led to Ireland joining the euro a couple of decades later.

One of the primary objectives, possible THE primary objective, of a well-run central bank is to maintain the value of the people’s savings, and to prevent them being eroded away to nothing by high inflation and depreciation of the currency against other currencies. That is based on the observed experience of decades, possibly centuries, where peoples’ confidence in the value of their savings was found to be one of the necessary, although not on its own sufficient, requirements for general economic confidence and resultant economic growth. Unlike the crooked and lying Bank of England, whose jurisdiction my company pension fund (although not my personal savings) has the misfortune to come under, and which is currently being eroded away by high inflation, the ECB sets a high priority on this and has been quite successful in achieving it. Things like balanced budgets should be seen, not just as desirable in themselves, but as means to this end (i.e. maintaining the value of the people’s savings).

If we look at the history of the whole thing, Ireland broke the link with sterling in 1979, the start of the process which led to Ireland joining the Euro a couple of decades later, precisely for this reason.

Up until the late 1970s, the UK pursued a high inflation/devalue-the-currency-at-regular-intervals-to-compensate policy. At the other extreme was Germany, and some of the countries around it, which pursued a low inflation/stable currency policy. France came somewhere in between. The result was recurrent sterling devaluation crises throughout the 1960s and 1970s. Because Ireland’s currency was tied to sterling, Ireland was invariably and inevitably dragged in to these sterling devaluation crises. In 1979, Ireland decided that its economy was strong enough to break free of this vicious circle and so broke the link with sterling. One of the key points to note is that, when Ireland broke the link with sterling in 1979, it wasn’t in order to achieve a devaluationst against sterling. Quite the reverse. It was to stop Ireland’s currency continually being dragged down by the recurrent sterling devaluation crises of the previous two decades.

Unfortunately, it was bad timing. North Sea oil was discovered about this time and came on stream in a big way in the early 1980s. As a result, for the next couple of decades, the UK economy was relatively and artificially strong relative to the other economies of northern Europe. The era of recurrent sterling devaluation crises came temporarily to an end. There was one in 1992, but that was the exception. Overall, from around 1979 until 2007, and in total contrast to the period up to 1979 when it was in continuous and massive decline against the currencies of other northern European currencies, periods of sterling weakness were matched by periods of sterling strength. So, during this period, the reasons for Ireland having broken the link with sterling in 1979 no longer applied as much as they did in 1979 and became somewhat irrelevant.

Roll forward to 2007, and the picture changes again. By this stage, North Sea oil is running out, and the pre-1979 situation of the UK economy performing less well than the other economies of northern Europe is starting to re-emerge. Not only that, but so too is the pre-1979 UK policy of printing money in bucket-loads, allowing inflation to rip and allowing the currency to sink (while all the time lying about it, so as to fool people into lending the UK money at low interest rates). That is precisely why Ireland broke the link with sterling in 1979. It is only now (for the reasons given above) starting to pay off.

Look at the figures since June 2007:

In June 2007, 1 euro = 0.67562 pounds (£) sterling
in May 2011, 1 euro = 0.87788 pounds (£) sterling

change in harmonised price index between June 2007 and May 2011:

Ireland: -1.5% , UK: +15.0%

That is precisely why Ireland broke the link with sterling in 1979 and eventually joined the euro. Since 2007, Ireland has decisively broken free of the traditional and now-returning UK high inflation/devalue-the-currency-at-regular-intervals-to-compensate policy. Regarding the UK, as the figures show, the bulk of its gain in competitiveness, resulting from the sterling devaluation, has been eroded by its much higher inflation. This process is ongoing and even accelerating. Inflation in the UK is forecast to go above 5 per cent in coming months. Before long, the entire UK gain in competitiveness, resulting from the sterling devaluation, will have been eroded. When that occurs, nothing is more certain than that the UK, aided and abetted by the Bank of England, will engineer another large devaluation of sterling (while all the time lying about it, so as to fool people into lending the UK money at low interest rates). This, in turn, will stoke further UK inflation. The pre-1979 vicious circle of high UK inflation/devalue-sterling-at-regular-intervals-to-compensate has well and truly returned, but this time with Ireland no longer being dragged in. All the more so, since the UK sterling devaluation hasn’t worked. It has triggered soaring UK inflation, but no UK export boom. Manufacturing production figures were published yesterday for April: in Ireland, supposedly crippled by the high euro, it was up 4% y-o-y; in the UK, supposedly benefitting from weak sterling, it was down 1.2% y-o-y.

By all known laws of economics, the ECB-driven low inflation/stable currency outlook should lead to an improvement in confidence and growth as compared with the BofE-driven high inflation/depreciating currency outlook.

If we look at the Eurozone as a whole, and compare it with the UK, this is precisely what is happening. Forget what you read in the Daily Torygraph about how wonderfully the UK is performing, as a result of being outside the Eurozone, as compared with the Eurozone itself. For the first time in a generation, Eurozone economic growth is outperforming the UK. Consumer and business confidence in most Eurozone countries is very strong, but very low in the UK. Inflation in the Eurozone is much lower than in the UK. So is the budget deficit. Exports and manufacturing production are growing much faster in the Eurozone than in the UK. Many Eurozone countries are in balance-of-payments surplus, while the UK remains in heavy deficit. For this situation, the ECB deserves lots of credit, while the Bank of England deserves only flak for going along with a policy of printing money in bucket-loads, letting inflation soar and letting the currency sink (while all the time lying about it, so as to fool people into lending the UK money at low interest rates).

Turning to Ireland, we can see that it is mirroring the Eurozone performance in one respect, but not in another. Ireland’s export sector is matching, or even exceeding Eurozone performance. The low inflation is leading to an improvement in competitiveness, which is leading to an export boom, which is pushing the balance-of-payments into surplus. There are new investment, expansion and job announcements in this sector almost daily now (I counted close to 1,000 this week alone). I myself am fortunate to work in this sector (although only partially south of the border), and I am currently run off my feet with work. I simply can’t keep up. However, in total contrast, there has been, co-inciding with this export boom, a massive panic-hysteria-driven flight of capital from Ireland, as people move their savings abroad. This has crippled consumer spending and prolonged the slump in construction.

As to what should be done, the Irish Government and the ECB should stick to their guns. They should adhere to agreed budgetary targets, which, from the exchequer figures up to May, is what indeed is happening. They should be confident that, while the export boom is for real, the capital flight is nothing more than a panic-hysteria-driven bubble. They should make it their absolute priority to burst it, inflicting as heavy losses as possible on those who are behind it.

As I have posted many times, the current large outflow of savings from Ireland to the UK is perverse. It is occurring when, as the figures I gave above show, inflation in Ireland is now averaging 3% to 4% less each year than in the UK. Add in that nominal interest rates are much higher in Ireland than in the UK, and we can see that the REAL return on investing one’s savings in Ireland is currently far higher than investing one’s savings in the UK. In fact, investing one’s savings in the UK is currently bring a very high NEGATIVE REAL return. The fact that the UK government and the Bank of England have been successful in persuading so many mugs and suckers from Ireland to move their savings to the UK, at a time when soaring inflation there means that they are offering a very high NEGATIVE REAL return on those savings, is testimony to their skills, developed over several centuries of empire, in the arts of black propaganda. In many ways, one admires it. I am quite certain that many of the articles in the UK financial press in recent years, focusing on what a safe haven the UK is for people from Ireland to move their savings to, even if high UK inflation and low interest rates there result in those savings being eroded away in real terms to the tune of 4% to 5% annually, are inspired by some black propaganda department in Whitehall. Unfortunately, many people in Ireland have been suckered in this way and are now seeing their savings disappear, but JTO is certainly not one of them. The Irish government and the ECB should move decisely to break the psychology of these unfortunates. They should be aggressive in promulgating the view that those who are moving their savings from Ireland to the UK, while entirely to free to do so if they wish, are doomed to take a massive hit on the transaction. They should adhere to agreed budgetary targets and declare emphatically that Ireland will not default/devalue. But, they should also be far more aggressive in highlighting the fact that Ireland’s inflation rate is now consistently 3% to 4% lower than in the UK, that, along with this, its higher interest rates offer a far higher REAL return than in the UK, that Ireland is moving into balance-of-payments surplus, while the UK remains in deficit. In fact, I would go so far as to suggest the following: the government should erect a large screen on top of the GPO, with graphs in green and red, showing inflation in Ireland and the UK since June 2007, currency movements for Ireland and the UK since June 2007, real interest rates in Ireland and the UK since June 2007, the REAL return on Irish and UK government bonds since June 2007, and the current values of each 1,000 euros deposited in an Irish bank in June 2007 and each 1,000 moved from Ireland to a UK bank in June 2007.

Fortunately, help is at hand, and not before time. The ratings agencies in the West are crooked. They ignore countries avoiding their debts by allowing soaring inflation and devaluing their currencies. There is a new Chinese ratings agency (link below) which takes these factors into account, as they should be. This ratings agency has declared the US in default because it has allowed the dollar to sink. How much more true is that of the UK, which has had since 2007 much higher inflation still, and has allowed its currency to depreciate by 23 per cent versus Ireland’s currency since June 2007. The truth of the matter is that, to date, the only people in Ireland who have been defaulted on are those who have bought UK government bonds since June 2007 or moved their savings from Ireland to UK banks since 2007. Their plight has gone largely unrecognised, either on this site or in the Irish media generally, possibly because they are too stupid themselves to realise that they have been defaulted on. As they say, one should never give a sucker an even break.

Patrick Honohan appeared on the Vincent Browne programme on TV3 last night. The interview is available at around 30 minutes in on the following link. The most interesting bit starts around 32 mins in. It is worthy of a thread at some point IMHO.

Patrick discussed the question of how and why the state came to the position (still current) that there could be no haircuts to senior bank debt – whether covered by the ELG (the official state guarantee of certain bank liabilities) or, much more controversially, the unguaranteed bonds.
There appears to be new clarification here and I would suggest the video be watched carefully with note of the following.

1. Confirmation that BL was expecting a longer negotiation which would have possibly resulted in some explicit “burden sharing”, and was not happy that the negotiation was comparatively truncated (Patrick states in the interview that the country’s cash reserves allowing several months of funding were its negotiating hand – preventing the need for a last minute truncated negotiation as is often the case when countries go to the IMF on the brink of default). There has been previous controversy over this because of comments by Morgan Kelly.

2. Last Autumn there was public discussion of the question of whether there was some sort of side-letter or side deal to the MoU to the bailout, that required all the senior bank bonds including those not covered by the guarantee to be repaid in full without rescheduling. The opposition (now government) parties were very curious about this. If it wasn’t part of any deal, why would you pay out all those billions and billions of Euros? Patrick has provided the answer to this. He says it was not part of the negotiations and was not part of the deal. Why was it done, and is being done then? His answer is that BL was, paraphrasing, “BL was not given the political room to do otherwise. He would have liked to do otherwise but was pressurised by “the people””. We are not told who “the people” were.

I admire Patrick’s openness on this – as a CB governor – although, given that sooner or later the public would get to know, it might have been helpful if the government machine could have clarified this much earlier.

Now who are “the people”?

I have a gut feeling that is too spectacular to be believable by the mass of the people – however I have no evidence for this.
Advisors are not always present in a pure advisory capacity.

Anyway this crisis has done us all a great service – its displays the complete absence of poltical power amongest the official executive. BLs interest in Roy Jenkins is quite illuminating given Jenkins willingness to give up soverginity for synthetic money.

Its been worth the price of the ticket which has been pretty expensive none the less.


I was watching that last night. Very interesting.
Where did the real squeeze come from in terms of political room? ANd how big a squeeze was it?

Again, I suspect the ECB. And the fact of course that by that stage the only thing many ministers were interested in was getting their the lump-sum cheques. Substantial considerations in every sense of the word.

The national interest was way down the list of priorities for most ministers, with the exception of Lenihan to be fair to him.


” The truth of the matter is that, to date, the only people in Ireland who have been defaulted on are those who have bought UK government bonds since June 2007 or moved their savings from Ireland to UK banks since 2007.”

The Irish ten-year bond had a yield of 4% in 2007, yesterday it closed at 11.28%. No loss there, right?


In fact, I would go so far as to suggest the following: the government should erect a large screen on top of the GPO, with graphs in green and red, showing inflation in Ireland and the UK since June 2007……

Could I suggest a different location for the screens:

A few hundred yards away from the GPO, opposite the Social Welfare Office in Kings Inn Street. To provide something of interest for people queuing outside. You could sell advertising on screen. Christian D’Or, Gucci and a few others may be interested.
You could be on to a real winner with those screens.

@ JohnTheOptimist

‘I expect he’ll be managing the Irish rugby squad in his spare time by this time next year.’

Lke CLR James and David O’Donnell, I’m more of a cricketing leftie. I await the call. (Never pick a wicket-keeper/batsman).

You say:

‘As to what should be done, the Irish Government and the ECB should stick to their guns. They should adhere to agreed budgetary targets, which, from the exchequer figures up to May, is what indeed is happening.’

I say:

‘Given the platform on which the government was elected, sticking with the programme is tough, and hitting it bang on the nail, whilst preserving the fabric of the nation, is the impressive thing to do.’

In the context of this thread, I’d say we’re fairly close.

My interest is economics is personal – I like the theory and the maths – and social – I would like people to be able to live a full and flourishing life – but is also linked to playwriting.

“Society is inside of man and man is inside society, and you cannot even create a truthfully drawn psychological entity on the stage until you understand his social relations and their power to make him what he is and to prevent him from being what he is not. The fish is in the water and the water is in the fish.

Arthur Miller, “The Shadows of the Gods”.

They are all lying…from FT Deutchland
“When it comes to the construction of the next bailout for Greece, all the stakeholders are lying through their teeth to such a degree that one hardly knows who one should point the finger at first. The thing that unites them is that none of them want a solution that will really involve private creditors, irrespective of whether you want to call that a default, rollover or debt restructuring.”

“The decision in favor of another rescue package is based more on political will than on a sober analysis of the data. To their shame, the troika did not even try to find out whether the conditions that they had previously set for help have been fulfilled. In theory, an analysis should provide information about whether Greece has any chance of getting back on its feet in the medium term with the help of loans. The fact that the troika has so far avoided carrying out that analysis can only mean one thing: The rescuers do not want to know the answer, because they fear the consequences of an inconvenient outcome.”


The rescuers do not want to know the answer, because they fear the consequences of an inconvenient outcome

Funny that: I thought all that was needed was to keep flogging the horse. Maybe they thought it was the mythical Greek horse, Pegasus and that he just exhibiting a bit of Mediteranean lethargy.

No doubt we get a mythical explanation for the program failure at some stage.

I couldn’t help noticing the header where Gavin is assigned the title of “commenter” . The caste system is very endearing. Isn’t Gavin more of a “regular contributor”? Where would the blog be without the little people ?

@ Gavin

You are a rare bird, and we are all struggling to make sense of the world. The very fact that the makeup of this board is so diverse, and not confined to technical experts in economics, is an indication of the increasingly deep and systemic nature of the crisis.

The fish is indeed in the water and the water is in the fish. Bourdieu spent his (extraordinarily productive) professional life analysing ‘social magic’, which is how systems of power are maintained. One of the limitations of orthodox economics is that it is blind to some of the sociological basics.

Maybe it’s true, as Brklyn-rntr says, that Trichet is trying to defend the integrity of the ECB. If you read that as defending the integrity of the monetary system from inflationary threats, that’s for sure. Defending the system against predatory financial interests in another matter. As the Credit Lyonnais saga illustrates, his own record on that score is less than impressive.

As in all these scenarios, the free play of economic factors will eventually run up against social and polticial limits. A reduction in voter turnout does not mean that politics has gone away, but only the response it is taking other forms.

Good Man Gavin.

It is posts like this which encourage me to read and contribute to this site even though I specialise in European Politics and not Economics.

This also proves something many of us have realised for a long time which is that the site is closely followed in many parts of Europe and world.

Unfortunately this also has a downside as some of us must remain relatively anonymous. What we Irish consider to be”healthy respectful debate” is not always appreciated in other parts of Europe where democracy is still a relatively new and curious concept which is not yet fully ingrained among leaders who are recent converts.

Well done!


“Never pick a wicket-keeper/batsman”

Shush! How can you say that Gavin? In the last decade alone we had Adam Gilchrist, Kumar Sangakkara and MS Dhoni. Yes they may not delight a wicketkeepng purist but they get the job done and by golly they win matches.

I applaud your initiative of contacting Mr. Krugman, and some (i suppose low level) staff member of the ECB.
The ECB is undemocratic and blatantly supporting the financial industry in the 4 largest Eurozone members.
It does not have any argument to support its obvios bias and does not care that all top economists are saying its policy is wrong. The ECB knows its wrong.
Please refer to this excellent article by DR. Stiglitz where he predicited this situation of ECB bias during hardship in 2004.
Gavin I would be very interested in your solution for dealing with the ECB, do you suggest ‘taking a break’ from the Euro?

One of Mr. Stiglitz interesting ideas, a representitive from Workers Unions/groups on the executive board of the ECB.

I have sent this email to the following ECB exccutive board member adresses. Feel free to also send this message.,,,,,,

Dear Sirs,

I acknolwdge your achievements, experience, qualifications and research. I am sure you will in some part agree with this constructive critism and suggestion for the structure of the ECB.
The ECB is unrepresentitive of the European population and blatantly supporting the financial industry in the 4 largest Eurozone members.
It does not have any argument to support it’s bias and all top economists are saying its policy of non-restructuting and austerity is wrong.
There are many articles showing this critism on or by nobel prize winning economists. Even those economists who usually disagree strongly, such as Larry Summers and Nouriel Roubini, are all agreed that the EU periphery needs 1. Restructuring of debt, 2. Issuing of Euro-bonds (like brady bonds) and 3. Easing of Monetary policy.

Please refer to this excellent article by Dr. Stiglitz where he predicited this situation of ECB bias in 2004.
I make the following suggestions for changing the structure of the ECB:

1. I stongly support Dr. Stiglitz interesting idea that a representitive from Workers Unions/groups should sit on the executive board of the ECB.
2. Jean Pisany-Ferry believes that the gentlemans agreement that the executive baord is made of almost solely of citizens from Italy, Spain, France and Germany is wrong. Executive board member should be appionted on merit. I strongly support Dr. Pisany-Ferry on this point.

@ Chris

“Gavin I would be very interested in your solution for dealing with the ECB, do you suggest ‘taking a break’ from the Euro?”

I’m happiest on this blog when asking simple questions to which I wish to know the answer, digging out further information and learning about new ideas, people and things (Minsky is currently No. 1, with Bourdieu following closely).

But to have a crack at your question: the obvious answer to part one is ‘with a stacked deck’, but failing that.

It all depends on the outcome you’re looking for.

At the moment the outcome all I’m looking for is the triumph of Social Democracy, which means earned wealth stops going from the tax-payer to cover the losses of private financial sector, with the door open to more change as other issues arise.

In dealing with the ECB, and playing the ‘if I were the government’ game, I would suggest a ruthless upfront pragmatism. This means stopping passing on word-of-mouth responses and holding public statements to account. So for example, Governor Honohan said, ‘the people’ didn’t allow a certain outcome. My take on these kind of negotions would be more, ‘you are saying the Irish Government must do what now? As we are representatives of the people, we must report your position back to them, clear as a bell.’ Where a senior member of the ECB makes a speech in which the Irish government is not in agreement, the government should say so. The rule of thumb is ‘no disagreemnet is tacit acceptance’, so one should be clear where one does not agree.

In so doing, if one can, one should be aware of the best outcome for the people of the eurozone, not just in a nationalistic position.

“do you suggest ‘taking a break’ from the Euro?”

That’s a big deal. I wouldn’t rule it out, but I’m sure it would have unintended consequences, I would have to think about the shift that it would entail. I’m not sure what ‘taking a break’ really means.

Leaving the Euro, would, I think, shift the whole situation from an economic one to a social one. As a previous commentor said, it depends if you think national self-determination is more important than security.

If Ireland did so, it would mean a lot of known unkowns coming into play.

For example, and there are a lot of other thoughts on the threads:

(a) The MNCs may decide that our lovely corporate tax rate is not as important as being part of the Euro.

(b) If we pass the banks over to the ECB, then they would own the institutions and I would think that the chances were that the new owners would be very keen to maximise their income from the mortgage holders.

(c) Devaluation is complex.

Having said that, things can sometimes change very quickly and in ways that were previously thought impossible.

For example: if the ECB owned the banks, there might be a mass movement to refuse to pay mortgages.

I did meet Jon Gnarr formerly of the Sugar Cubes and now an elected rep., in Iceland, and I was struck by the excitement, positivity and reality of change.


Inflation rates in the UK are irrelevant when considering irish people who have shifted their savings to the UK as they are not spending them in the UK just storing them for safe keeping. At some point they will transfer their funds back (presumably when they need them). The only risk they are taking is on whether the exchange rate on the EUR-GBP will increase further. You suggest the value of the £ will fall further. This is possible, but given that it is currently at historically low levels against the EURO, and given the insecurity surrounding the future of the EURO, it is a risk many feel is worth taking. If the issues surrounding Greece, Spain, and Portugal increase then the value of the EURO will fall and irish people will have made an FX gain. The real concern people have is that the EURO will collapse and the value of their savings will disappear on the new Irish currency, which will sink like a stone.

Dear Gavin,

Trichet’s speech at the big annual FRB Kansas City conference contains all the Alesina-Ardagna-confidence-fairy argument you are looking for.


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