The Macro-economic Impact of Changing the Rate of Corporation Tax

Today the ESRI has published a research bulletin summarising a paper entitled: The Macro-economic Impact of Changing the Rate of Corporation Tax by Thomas Conefrey (Central Bank of Ireland) and John FitzGerald (ESRI).

This paper considers the impact of changes in the rate of corporation tax in Ireland affecting the business and financial services sector. A model is estimated that relates services exports and output to world activity, competitiveness and the rate of corporation tax. This model indicates that a reduction in the rate of corporation tax in the 1990s stimulated exports and, even allowing for profit repatriations by foreign firms and replacement of lost tax revenue, it resulted in an increase in domestic output. The increase in profitability suggests that some of the increased output involved relocation of profits to Ireland by multinational firms.

The Research Bulletin is available here.

The Banking Sector and Recovery in the EU Economy

Today the ESRI has published a research bulletin summarising a paper entitled: THE BANKING SECTOR AND RECOVERY IN THE EU ECONOMY By Ray Barrell (NIESR), Tatiana Fic (NIESR), John Fitz Gerald (ESRI), Ali Orazgani (NIESR) and Rachel Whitworth (NIESR)

This paper considers how banks within Europe have become larger and more international as Europe has moved towards a unified financial services market, but this trend has been reversed since the crisis. In order to establish the effect of these structural changes on output in Europe, we use a micro data set to investigate the impact of size (as measured by asset size) on banks’ net interest margins. We show that larger banks offer lower borrowing costs for firms, which raises sustainable output. We then use NiGEM to look at the impact of banks becoming smaller and moving back into their home territory. We investigate the impacts on output according to country size, showing that the effects are generally larger in small countries, and also larger in economies that are more dependent on bank finance for their business investment decisions.

The Research Bulletin is available here.

The full version of the article is available at a fee here.

Lack of Debt Forgiveness Not Realistic

From today’s Irish Times,

Debt-forgiveness scheme not a realistic option, says Hayes

THE GOVERNMENT is set to resist growing calls for a debt forgiveness scheme for homeowners in mortgage distress.

Minister of State for Finance Brian Hayes said yesterday a proposal to write off up to €6 billion in personal mortgage debt was not a realistic option.

A spokesman for Minister for Finance Michael Noonan also indicated such a scheme was highly unlikely …. Mr Hayes, however, said there were “two huge problems” with the proposal.

“With any debt forgiveness, it will raise questions of fairness for people paying 100 per cent of their mortgages who are not getting any help from the State. It’s a huge issue for that group, who are already straddled with huge mortgages and who have not sought debt forgiveness.

“Secondly, the Government has put huge store behind the two pillar banks. To introduce debt forgiveness totalling €6 billion at a time when the Government is bringing those banks out of the A&E wards would be very difficult to justify,” he said.

These comments strike me as odd when one considers the underlying policy towards the Irish banks set out in the Financial Measures Programme (FMP) report, released last March and compiled with extensive (and expensive!) input from international consultants.

When Mr. Hayes talks about the “huge store behind the two pillar banks” I’m guessing he’s referring to the money being used to recapitalise them. Well, the recapitalisation requirements for these banks were dictated by the findings of the FMP report. 

The report estimates total lifetime losses on the €74.4 billion owner-occupied mortgage portfolio for AIB\BoI\EBS\ILP at €5.7 billion in their base case and €10.2 billion in the stress scenario. These loss estimates were then used to come up with the capital requirements for each bank, most of which has been met by putting public money into the banks.

For those who say that they don’t think that their money should be used to help write down other people’s mortgage debt, there’s bad news and good news. The bad news is that it’s already happened.  The taxpayer injections from the NPRF are covering mortgage debts that won’t be paid back. The good news is also that it’s already happened, i.e. implementing a debt relief programme won’t involve any additional costs to taxpayers over and above those already announced.

What this means is that the banks are sitting on mortgage losses that will be around €6 billion even if the economy recovers in line with the government’s projections.  This €6 billion represents debt that simply will not be paid back and taxpayer funds have already been injected to cover these losses.  At present, however, the banks are preferring to write these losses off as slowly as possible.  But whether the day of writing down is put off some more or whether the banks actively engage in a write-down programme, these losses are being incurred.

Brian Hayes may believe that the “extend and pretend” approach currently being adopted, while failing to resolve the debt nightmares of many citizens, is at least beneficial for the health of the Irish banks.  I don’t believe this to be correct.

A number of international financiers that I have spoken to recently have expressed serious disappointment at the slow speed with which Ireland is moving to write down mortgage debt. Their attitude is that they could deal with the Irish banks if they could see evidence that mortgage losses will indeed be limited to about €6 billion. However, at present, they do not see any “workout model” in place for dealing with Irish mortgage debt.  In the absence of seeing how such a model will operate, they will continue to be nervous about the size of the unexploded “mortgage bomb.”

What this means is that it will be beneficial for both the banks and their distressed customers to get on with implemented a well-designed debt relief programme. Indeed, prior to the comments from Brian Hayes and Mr. Noonan’s spokesman, I was under the impression that the government would implement such a policy. Certainly, the public statements of Jonathan McMahon, head of banking supervision at the Central Bank, indicate a preference for the banks to get on with writing down with bad loans.

What should a well-designed mortgage write-down programme look like? Brian Hayes raises the issue of fairness as if nobody has ever thought about this before. In truth, a lot of thought and effort has gone into dealing with personal debt problems around the world and there is a lot to learn from. We’ve also been discussing it on this site for a long time, e.g. this post I wrote eighteen months ago.

A well-designed programme needs to deal with mortgages on a case-by-case basis. In some cases, this can involve modifications of mortgages in bilateral deals between banks and their customers. In some cases, those who get modified mortgages will get to stay in their homes. In other cases, they will not.

In more serious cases, a process of negotiations between debtors and their creditors will be required, i.e. a personal bankruptcy procedure. The revised EU-IMF programme from April (page 15) contains a commitment to introduce a revised personal bankruptcy regime as well as a new non-judicial debt settlement and enforcement system. It claimed then that discussions were ongoing and would be completed shortly.

In light of the EU-IMF commitments on debt regimes, the stress test results and recapitalisation, and the stated approach of the Central Bank, I think the comments from Mr. Hayes about the inability to write down €6 billion in mortgage debt are unfortunate.

Let’s hope there is more progress being made on this issue than these narrow-minded comments suggest.

Waste policy

My op-ed in yesterday’s Sunday Times (behind pay wall) expands on last week’s post. Here’s my version of the text:

The proposed reform of waste collection is a step in the right direction. Incineration is needed to meet our EU obligations. A few waste companies will lose money, but other companies and households will be better off.

The Department of the Environment is now moving to change the regulation of waste collection from “competition in the market” to “competition for the market”. Competition in the market does little for lower fees as few households shop around for the cheapest waste collector. Economies of density is another other reason to welcome this move. In my street, we have three bins (black, green, brown) and four companies collecting bins. Every fourth Monday, no less than 12 waste trucks drive up our road to the delight of the children and the annoyance of drivers. Three trucks (one company) could do the same work for a fraction of the cost, as they would spend less time driving and more time collecting waste.

That company would have a local monopoly. Monopolies charge more than competitive companies, but there would be cost savings for households too. Monopoly power is easily checked in this case. Waste collection concessions should be tendered, and granted to the company that guarantees the lowest fees for households. Such concessions should be renewed regularly, say every two years, to keep up competitive pressure.

The proposed change in regulation is a change for the good, therefore. It follows the recommendations in a number of reports, including the International Review of Waste Management Policy, commissioned by the previous Minister, and the Gorecki report of the ESRI.

A level-headed change in waste management is welcome in itself. The previous Minister openly campaigned against government waste policy, but did not change it. This was a source of much confusion and agitation. Investment and renewal in the waste sector ground to a halt. It can now start again.

The most urgent problem is that the European Union has put a cap on the amount of waste that can be landfilled. That cap has been in force for over a year now, but the government has yet to formulate a coherent plan on how to meet the target.

Incineration will be part of the solution. The proposed change in the rules for waste collection has been interpreted as a move to favour incineration. That is nonsense. The markets for waste collection and waste disposal are separate. Some people seem to think that waste collection and disposal must be done by the same company, but there is neither a legal nor an economic reason for this.

A number of Irish waste collectors have diversified into waste disposal, focusing on methods that curried political favour before the last election. Returns in waste collection are not great. Waste disposal looked more lucrative with the EU cap on landfill. That changed with the prospect of a large incinerator in Poolbeg. Incineration is, after landfill, the cheapest way to (legally) dispose of waste. Irish waste disposal companies have complained loudly about incineration – because they know they cannot compete. Waste collectors would be fools not to send their waste for incineration.

The Poolbeg incinerator is not without its faults. There would be few environmental or health concerns if it is properly run, but it is not sure that the Environmental Protection Agency has sharp enough teeth to stand up to a large, multinational company. The incinerator is financed through a mechanism that is, as far as I know, unique to Ireland. If the incinerator turns a profit, the spoils go to the shareholders. If it turns a loss, the taxpayer makes good the difference. The Poolbeg incinerator shares this peculiar model of privatizing gains and socializing losses with, among others, toll roads, renewable energy, and of course banks.

This does mean that the incinerator can charge lower fees if it needs to increase its market share. The Minister decided not to impose a levy on incineration. As there are small external costs from incineration, this is an implicit subsidy. The incinerator will therefore be a fierce competitor in the waste disposal market. Irish waste companies are right to be worried.

At the same time, the reform of waste collection is good news for them. Profit margins should be better if local monopolies are sold through a competitive tendering process.

The tender process should be well organized. That would be a task for the county councils. A number of county councils still run their own waste collection business. It is hard to see that tenders of private companies would get a fair hearing. The tendering should therefore be outsourced to an independent body or the public waste collection businesses should be privatized. The Commission for Utilities Regulation should oversee the tendering.

[UPDATE: See new CEPR paper; h/t Constantin Gurdgiev]

But if the new regulations are properly implemented, households and small companies should benefit. The government is working to reduce the costs of waste collection and waste disposal. Many things can still go wrong, but there is movement in the right direction.

Not so stupid

While perhaps it is just an August effect, the broad quality of the analysis of European crisis-resolution efforts has been disappointingly poor, with a message the often does not go much beyond self-satisfying statements about the stupidity of European policy makers.   

To make sense of more recent developments, I think it is critical to go back to the previous Franco-German summit at Deauville in October.    The Deauville accord put in place plans for the permanent bailout mechanism to replace the EFSF in 2013.    Understandably, debt restructuring was envisioned for countries needing new programmes under the ESM to limit both contingent liabilities and moral hazard.   Unfortunately, however, this attempted strengthening of market discipline proved devastating for the creditworthiness of countries where any doubts existed about their ability to stabilise debt levels.   Ireland can be seen as the first casualty, first getting sucked in and then actually seeing its bond yields rise steadily as the extent of default risk under the new arrangements became more evident.   The ambivalence about default among key Irish opinion makers did not help.   We then saw Portugal get sucked in as doubts emerged that it too might get sucked into the “black hole” of an EU/IMF programme given the limited nature of the exit options.    The realisation that the structures that had been put in place were effectively a machine for self-fulfilling debt crises really came home as the creditworthiness of Italy and Spain began to ebb away.  

The July 21 summit was a welcome attempt to move away from this “market discipline” regime.   Although you would hardly know it from the commentary, and recognising there is a long way to go, the summit has been highly successful from an Irish perspective.    The combination of the interest rate reduction, lengthened maturities and a more open-ended commitment to countries without imposing debt restructuring has led to a dramatic fall in Irish bond yields.   10-year yields have fallen from over 14 percent to under 9.5 percent.   Even more dramatically, 2-year yields have fallen from 23 percent to under 9 percent.    Clearly, the measures taken at the summit were not enough to stem the doubts about the creditworthiness of Italy and Spain, and their yields continued to drift upwards in the days following.   Subsequent intervention by the ECB – really the only entity with the firepower to make a credible commitment to a sufficient backstop – has been quite successful in shifting from a bad equilibrium where expectations of default change the fundamentals and risk becoming self-fulfilling.   

None of this is to say we are anywhere near out of the woods.    More bad luck has come with increasing signs of a significant global slowdown, which jeopardises debt sustainability for many countries.   There are also lingering doubts that the ECB and other major central banks have the stomach and political support to do what is necessary to act as backstop for financial systems, though I believe these doubts will prove unfounded.   

Having this strengthened backstop is effectively to move decisively towards what Peter Boone and Simon Johnson label a “moral hazard regime.”   It is no surprise that the governments of countries taking on more risk to backstop the system want strengthened fiscal discipline to replace market discipline as far as possible, not least because of the constraints of domestic politics.   This is what the Paris summit was all about, although the efforts may have been a bit clumsy and there is a long way to go to workable institutions.   Commentators here might ask themselves how they would react if Ireland was in the stronger group and taking on a large contingent liability relating to weaker countries.    European crisis-resolution mechanisms are moving in the right direction as the nature of the trade-offs is better understood.    We could have a more constructive and informative debate if we spent less time harping on about the stupidity of others. 

Mortgage Balances and Projected Losses

I’d written the comments below before seeing Stephen’s post on this, so I’m not trying to correct anything in it, just adding my own two cents.

I didn’t attend Morgan Kelly’s talk at ISNE yesterday so all I know about it is what I’ve read in today’s newspapers (e.g. this piece in the Irish Times) in which Morgan is quoted as saying “We are talking sums in the region of €5 billion to €6 billion which would be necessary to spend on mortgage forgiveness”. This evening, I heard a piece on RTE’s Drivetime in which Brendan Burgess of was questioning various figures that were attributed to Morgan and arguing that Morgan was unnecessarily scaring people about the scale of mortgage defaults.

I’d like to make two (hopefully) clarifying points on this issue. First, the sizes of the owner-occupied and buy-to-let mortgage books for Irish properties of the four guaranteed Irish banks are not something that there needs to be any disagreement about, as the balances as of December 31 last year were published in the Financial Measures Programme (FMP) report of March 31 (page 19).

Second, rather than being a scary figure, Morgan’s estimate of between €5 billion and €6 billion for a substantial mortgage relief programme is, if anything, a bit low relative to what the Central Bank’s figures in the FMP report indicate is necessary.

On the size of mortgage books, here are the facts. As of December 31 last year, BoI, AIB, EBS and INBS had a combined €97.7 billion in Irish residential mortgages with €74.4 billion being owner-occupied and €23.3 being buy-to-let (Table 7, page 19 of FMP report).

On estimates of losses on the owner-occupied portion of Irish residential mortgages, the FMP estimates total lifetime losses on the €74.4 billion portfolio at €5.7 billion in their base case and €10.2 billion in the stress scenario. The amount of these losses to be realised over the next three years is estimated to be €3.5 billion in the base scenario and €5.7 billion in the stress scenario (see Table 9 on page 23).

This shows that Morgan’s estimate of between €5 billion and €6 billion corresponds to either the lifetime losses assumed by the Central Bank in the base case or the three-year losses associated with the stress case.

As I said above, I don’t know how Morgan came about his figures but the five to six billion figure for mortgage writedowns seems to me to be in line with the Central Bank’s official policy.

Furthermore, my reading of statements by Jonathan McMahon, head of banking supervision at the Central Bank (e.g. here and here) is that he is keen to see the banks get on with implementing debt writedowns that are in line with the Bank’s assumptions about mortgage losses. The banks have been recapitalised under the assumption that the losses in the FMP base case are going to occur, so it is surely time to start dealing with this problem.

Perhaps rather than have an unnecessary debate about figures that are actually published and can’t really be disputed, Morgan’s talk can serve as a useful starting point for a debate about exactly how mortgage debt write-downs should be implemented.

Debt forgiveness, one more time.

This Irish Times article reports Morgan Kelly’s keynote ISNE lecture where he discussed debt forgiveness and, in particular, mortgage debt relief. From the piece:

“We are talking sums in the region of €5 billion to €6 billion which would be necessary to spend on mortgage forgiveness, which by our standards are not very large,” he said.

“This sum to sort out tens of thousands of people with big problems does not seem enormous.”

Seamus Coffey has some thoughts on Prof Kelly’s argument here.

Readers should know I’m in favour of debt forgiveness for households, and have been for some time. It may be worth discussing the pros and cons of such a policy again.

Update: Jagdip has some thoughts on this debate on NamaWineLake.

Results of the smart meter trial

There’s a peculiar piece in today’s Independent. The reports of the CER’s 18 month smart meter trial were published in May.

The trial found statistically and economically significant changes in consumer behaviour due to the introduction of time-of-day pricing, with cost savings for both producers and consumers that together more than offset the costs of metering (unless the wrong communication network is chosen).

The trial also found that in-house displays further modify electricity use, but insufficiently so to justify the additional cost.

Real-time pricing was not trialed, nor were smart devices, micro-generation, electric vehicles, and micro-storage.

External Adjustment and the Global Crisis

Readers may be interested in this new research paper that looks at current account adjustment over 2008-2010.

Summary: After widening substantially in the period preceding the global financial crisis, current account imbalances across the world have contracted to a significant extent. This paper analyzes the factors underlying this process of external adjustment. It finds that countries whose pre-crisis current account balances were in excess of what could be explained by economic fundamentals have experienced the largest contractions in their external balance. External adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Changes in other investment flows were the main channel of financial account adjustment, with official external assistance and ECB liquidity cushioning the exit of private capital flows for some countries.

Ireland’s Atlantic Oil & Gas

Minister Rabbitte responds to an earlier piece by Fintan O’Toole in today’s Irish Times.

It may well be that there are large amounts of oil and gas off Ireland’s west coast. It may well be that, after rapid advances in exploration and exploitation technology, these fields can be developed commercially. That would boost the Irish economy in 15 years time or so.

None of that is certain. It is clear, however, that oil and gas exploration companies have renewed their interest in the Irish part of the Atlantic. The assessment of the 1970s showed that the Irish resources are hard to develop. 20 years of low oil prices and, more recently, the Corrib controversy did not help. But with the current high oil price, the success off Brazil and the promise off Angola, the Irish Atlantic is back into the picture.

This is good news. However, Mr O’Toole and Mary Lou McDonald TD seem to want to kill the goose before it has laid its first egg, perhaps golden. I agree with the Minister. No oil or gas has been struck and this is not the right time to spook companies with talk of high taxes and nationalization.

Leaving Cert Results

Here is a quick look at the overall Leaving Cert performance of students taking Economics in the Leaving Cert.  Just over 8% of Leaving Cert students took Economics as a subject.

This year around 3,700 took the Higher Level Paper and it can be seen that the distribution of marks was consistent with the previous two years.    There were 1,063 candidates for the Ordinary Level Paper.

A breakdown of the marks for all 34 Leaving Cert subjects can be seen here.

There were no candidates for Ancient Greek and Hebrew Studies. Of the papers that were taken the lowest number of candidates was the 32 who sat the Higher Level Agricultural Economics paper.  The most attempted paper was the Ordinary Level Maths paper with 37,505 candidates.

The number of students that took the Higher Level Maths Paper did indeed set a record low as was previously discussed here.

Constitutional changes

Karl is quoted here as saying that the Franco-German proposal that we insert borrowing limits into the Irish constitution will not solve our current debt problems. This is obviously correct, as is the point that such an amendment would not have made a blind bit of difference during the bubble years.

There is also the point that a constitutional amendment is a much bigger deal in Ireland than in some other countries, since it can only be changed by means of a new referendum.

Here are two questions:

As per Derek Scally in the Irish Times, is this a taste of things to come, or much ado about nothing?

What are the chances of the Irish government winning such a referendum?

Do fiscal spillovers matter for recovery?


In the drive to fiscal policy coordination, the potential of fiscal spillovers should feature more heavily, especially for small open economies like Ireland. Sadly they don’t, as this new research shows. Other models hold out more hope (but in a static setting), but the principal findings are that small open economies can’t rely on larger trading partners to help them overcome large cyclical slumps in output.

Money quote from the first linked piece:

“Even under very high multipliers, a 1% of GDP fiscal expenditure stimulus in Germany would raise the GDP growth in Ireland by only 0.3 percentage points after 2 years, in Portugal by 0.1 percentage points, and have virtually no effect on growth in Greece. Similarly, fiscal policy changes in Germany alone have only a small impact on the trade balance of the peripheral countries, and are thus unlikely to contribute to the reduction in peripheral countries’ imbalances.”

This is worth considering in the context of monetary, and perhaps fiscal, union in the EU. The source document for the spillover calculations is this IMF report.

Waste collection

The Dept Environment is now moving to change the regulation of waste collection from “competition in the market” to “competition for the market”. The reason is simple: Economies of density. In my street, we have three bins (black, green, brown) and four companies collecting bins. Every fourth Monday, no less than 12 waste trucks drive up our road, to the delight of the children and the annoyance of drivers. Three trucks (one company) could do the same work for a little more than a quarter of the cost. Even after allowing for monopoly mark-ups, there would be cost savings for households. Market power would be limited if tendering is competitive and concessions are short (waste trucks are mobile).

A perfectly sensible move by the Department so.

In today’s Irish Times, this is spun (and again) as a way to promote incineration. This is nonsense. At the surface, “competition for the market” was a recommendation in the International Review commissioned by the previous minister, and in the Gorecki report of the ESRI.

The markets for waste collection and waste disposal are largely separated; economies of vertical integration are small. Nonetheless, Irish waste collectors have vertically integrated with waste disposal. The competition in waste collection is such that hardly any money is made. The market for waste disposal would be lucrative with the EU cap on landfill and without additional incineration, but the Poolbeg incinerator would undercut the price of any other disposal technology except landfill. If waste collection would be run as a profit center, waste would be sent for incineration.

Competition for the market will allow waste collectors to make money in their core business again.

Water Meters

I had an op-ed in the IT last Thursday. Discussion is not great on their site. Here’s my edit.

The government aims to create a national water utility to install water meters and charge for water use. The general thrust is commendable, but it may become an expensive failure.

Taxes will need to go up and public spending down to close the government deficit. This will hurt the economy. However, consumption taxes do less damage to growth than income taxes. The government is right to introduce water charges.

A flat water charge would be unfair. Exemptions for those unable to pay are crude and expensive to administer. A flat water charge would not induce water conservation. We produce about 450 liters of drinking water per person per day (l/p/d). The average person probably uses some 150 l/p/d. It is not fully known what happens to the remaining 300 l/p/d. Part is lost through leaky mains, part is used illicitly, and part is lost through leaks in the house or garden. Experience in other countries, and in the group water schemes in Ireland, shows that water charges would substantially reduce household water use. People would also press the water providers to reduce wastage in the distribution network. As the number of meters increases, it will be easier to locate leaks and illicit use. The government is right, too, to introduce water meters.

The government wants to install water meters in 2012 and 2013. That is ambitious: 1.4 million meters in two years, 2800 meters per day. There is also a plan to replace all household electricity meters with so-called smart meters. This has been carefully planned and trialed over the last three years. The smart meter roll-out will be done by well-established companies. In contrast, the installation of water meters is to be led by Irish Water, a company that does not yet exist. I would be surprised if there will be a water meter in every home in Ireland by Christmas 2013. Flat charges may be with us for a long time.

In fact, there is a possibility that water meters will follow the path of voting machines, as learning from past mistakes is not the strongest point of the Irish government.

Water meters will be unpopular, as they remind people of water charges. Installers would need permission to put water meters in the home. Some homeowners will withhold such permission. The idea is therefore to install water meters just outside the property boundary. This is easier but much more expensive. 1.4 million connections will need to found, and 1.4 million holes dug. The water meters would be far from the smart electricity meters and therefore need a separate communications network. This may cost up to 800 per meter (€1.1 billion in total) according to one estimate.

There is a simpler and cheaper option that has worked well in other countries. Households can install water meters themselves, or ask their plumber to. Households with a meter would pay whatever water they use. Households without a meter would pay a flat charge. If the flat charge goes up over time, more and more households will install a meter. If the costs of water meters are a concern – a good plumber could install a certified meter for less than 200 – then Irish Water could give a voucher for 200 worth of free water upon registering the water meter.

The government has repeatedly promised that there would be free water allowances. Only excessive water use would be paid for. This is nonsense. It does not promote water conservation, and it is bad social policy. Like water, food is essential, but the government does not hand out sacks of potatoes. Instead, there are benefits for those without income and tax credits for those with. Benefits in cash are better than benefits in kind, because the household can choose what potatoes to buy, or pasta. Similarly, water should be charged from the first liter onwards. The revenue from the first 100 l/p/d or so should be used to increase benefits and tax credits.

The government may also seek to transfer the responsibility for drinking and sewage water from the county councils to a new, semi-state utility called Irish Water. There is merit in this too. Water treatment plants are largely build, designed and operated by private companies, but guidance and supervision by the county councils has not always been up to scratch. A new national water company would professionalize water management. If assets would be transferred from the counties, Irish Water should be able to borrow money at a lower rate than the government.

There are dangers too. In the past, semi-state monopolies have served their employees and their political masters well – but customers and owners got a raw deal. The government should create a Commission of Water Regulation at the same time as it creates Irish Water.

Or maybe sooner. The prospect of digging 1.4 million holes in the ground is great news for the construction industry – and a number of companies are actively trying to convince the government that this is the only option. It is not. It would be better if all options would be considered, and the best one selected after an open debate.

Some eurozone readings

Nick Cohen is gloomy here.

Roger Bootle gives a market perspective on potential endgames, one of which echoes Paul Krugmanhere.

And here is Kantoos, echoing Olivier Blanchard, Ken Rogoff, and many others.

To those who think that an inflation rate of 5%, say, for a few years, would mean the end of the world, one has to ask: is this really the worst potential scenario that you can envisage us facing in the years ahead?

Democracy, the euro, and the nation state

This report from the Guardian is consistent with Thomas Klau’s argument that current eurozone governance arrangements are pushing “democratic debate and voters’ choices to the margins”. It also suggests that in the long run the present way of doing things will prove politically unsustainable, in a union of democratic states. Whether Klau’s preferred solution is likely to come about is another question entirely.

Bad Idea from NAMA

From this week’s Farmers Journal, with acknowledgement to Gregory Connor:


The state ‘bad bank’ NAMA has bought troubled loans at steep discounts from the Irish-owned banks at a cost of over €30 billion. Many of these loans cannot be serviced by the builders, developers and property speculators who borrowed the money in the first instance so the collateral, in the form of completed and uncompleted buildings and development land, is being seized by NAMA. The intention is that NAMA will realize these assets over time. It has sold very little to date but the clock is ticking and NAMA is due to be wound up within ten years of its inception, so there are just eight-and-a-half years to go.


Some of NAMA’s assets are in the form of completed residential property. Outside Dublin the market appears to be pretty slow, with only a trickle of transactions and very little availability of mortgage credit from the banks. There seems to be a bit of a buyers’ strike too – buyers with cash see no urgency about doing deals until prices dip a little more, and asking prices remain unrealistic in many cases.


So NAMA is getting impatient and has come up with an attractive-sounding wheeze: if you can get a mortgage to buy a home from NAMA, they will throw in, for free, an insurance policy which covers the risk that prices could drop further.

The scheme would work like this. Nama reckons a house it has for sale is worth €100,000. The purchaser is asked to put up €10,000 in cash and get a mortgage from a bank for €72,000, paying NAMA €82,000 in total.  Nama notionally pays itself the remaining €18,000 and records the house as sold at €100,000.  After an agreed period, say five years, if the fair market value of the house is more than €82,000 the purchaser must pay NAMA the difference up to a maximum of €18,000.  If the fair-market value of the house is €82,000 or less, the homeowner pays no more.

Assuming the initial €100,000 valuation is reasonable, this is a good deal for the purchaser and a bad deal for NAMA, which can never get more than the reasonable value of €100,000 but could get as little as €82,000. In effect, NAMA has given the purchaser a valuable price insurance policy for free. Gregory Connor, an economics professor at Maynooth, has calculated that the discount being offered to the purchaser, allowing for the value of the free insurance policy, is pretty big: on plausible assumptions, the buyer is getting a discount of €12,000 or so.

Before you rush off to phone NAMA, bear in mind that you own NAMA, or more correctly, you will pick up the tab if NAMA loses money, since its debts are on the state balance sheet. The scheme has a number of other drawbacks. Not everyone is an economics professor at Maynooth and able to work out the sums. The scope for confusing purchasers (and the taxpayers) should be clear. Moreover NAMA is not the only, or even the main, seller of residential property in the years ahead. The non-NAMA banks (ones such as Ulster and National Irish) also have re-possessed assets to sell and there are even a few non-bust builders out there trying to stay afloat through selling completed dwellings. Plus there are tens of thousands of individuals interested in selling every year in the normal course of events. None of these people can offer the big upfront discount and assumption of risk built into the NAMA scheme, since they do not enjoy the comfort of reclining on the state’s balance sheet. The NAMA scheme, in brief, could seriously distort the market, and looks anti-competitive. The Financial Regulator and the Competition Authority could have some things to say on this aspect before too long.

The banks have finally been re-capitalised and are now better placed to recover their ability to hold on to deposits. There are prospective purchasers in the residential market who must be a reasonable risk for 75% or 80% mortgages, provided prices are realistic. No doubt NAMA is fearful about the ‘realistic’ bit, but what value is there in anything other than market-clearing prices for residential property at this stage? One real drawback with this scheme is the temptation to use it to hold prices up artificially. The best outcome for the residential market is a more normal flow of mortgage credit to solid borrowers and the discovery of a lower price level which clears the over-supplied market steadily over the next few years. If NAMA paid too much for some of its assets, that is unfortunate but there is no point compounding the error through financial engineering gimmicks which distort further an already dysfunctional residential market.  

Smart Economy Jobs in Irish Regions

Guest Post by Dr Chris van Egeraat of the Geography Department at NUI Maynooth and Chariman of the Regional Studies Association Irish Branch.

Enterprise Ireland announced that 445 jobs will be created in 24 new high potential start-up companies which have been supported by government through Enterprise Ireland in the second quarter of 2011. The announcement follows on the 310 new jobs announced earlier this year as part of the first quarter results of Enterprise Ireland’s High Potential Start Ups programme.

Many of the companies involved operate in the sectors that the Government has identified as part of the Smart Economy strategy, including biotechnology, life sciences, ICT and financial services. This is good news for Ireland but from a regional development perspective it is important to consider the extent to which different regions benefit from these developments.

Interestingly the press release includes a breakdown of number of projects and related jobs by location. Unfortunately, the information pertains to 16 of the 24 investments only, and the press office was not in a position to provide details of the other eight investments because of the commercially sensitive nature. The data allows us to between the Greater Dublin Area (including Kildare and Wicklow), the rest of the South and East (S&E) Region and the Border-Midlands-West (BMW) Region.

The results are striking. Three quarters of the new projects are located in the Greater Dublin Area and a further 12 per cent in the rest of the S&E region. Only 12% of the projects are located in the traditionally lagging BMW region. The results in terms of jobs are similar with merely 12% of the jobs located in the BMW region.

The data for the first quarter of 2011, suggests that this is not a once-off result. In the first quarter the GDA accounted for nearly 70 per cent of the new projects, while the rest of the S&E region accounted for a further 16%. With 15% of the new projects, the BMW region again performed poorly. The press release for the first quarter did not provide complete data for jobs.

To put these figures into perspective one can compare these with the geography of employment in all Irish-owned agency-assisted companies by regions in 2010 using figures from the Forfas annual employment survey. Currently the Dublin region only accounts for 31 per cent of jobs in indigenous assisted companies with the rest of the SE accounting for 41 per cent. The BMW region still accounted for 28% of the jobs in 2010.

Clearly, there are some limitations to the new data on the geography of recent project and job announcements, not at least the fact that we don’t have access to the complete dataset. However, if the results do represent a real trend, this will have important implications for the economic development potential of Irish regions and raises questions about the role that different regions can play in the Smart Economy as promoted by the Irish Government.

The regional trends outlined above highlight the timeliness and relevance of the upcoming Irish Regions in the Smart Economy Conference, organised by the Regional Studies Association at NUI Maynooth. For further details:


Irish Society of New Economists

The programme for this year’s Irish Society of New Economists conference is available on the website  The conference is organised by  Svetlana Batrakova, Alan Fernihough, Rob Gillanders and Mark McGovern of UCD. They have done a terrific job and the programme is very varied, with talks across many fields of Economics. Keynote speakers are Morgan Kelly of UCD and Peter Neary of Oxford.

It will take place on Thursday 18th and Friday 19th August. All are welcome to attend (there is no conference fee). However those going should email the organisers in advance ( beforehand, as the building rules require pre-registration for entry.