Ireland and Europe Post author By Philip Lane Post date September 4, 2011 The current international/official view of Ireland is to be found in the IMF press release on Friday, which is here. the FT editorial on Friday, which is here. The broader European/global picture concerns Wolfgang Munchau and Christine Lagarde in these articles Munchau Lagarde Categories In Uncategorized 32 Comments on Ireland and Europe ← Ireland’s Services Sector → The best university in all the land 32 replies on “Ireland and Europe” I see some bright spark in the FT thought they were being funny by ensuring they managed to get a ‘to be sure’ in (“To be sure, challenges remain.”). Very droll (not). I’m just digesting the Munchau article. Very interesting. If as Munchau suggests (and I can’t disagree with him), there is an ‘existential threat’ then let me be the first to lay most of the blame at the door of the ECB for their evangelical protection of bondholders, which has been the foundation of all the decisions made in the past 2-3 years… can’t burn the bondholders so we had better do austerity instead. Madness. It was always going to be a tough climb out of recession and the approaches being taken were always going to hobble nations trying to break out of it. I know the ECB are not the only ones at fault but they take the gold medal. There is some serious looking stuff coming over the horizon. What constitutes ugly, in Munchau’s usage? Lagarde again focuses on bank’s exposure to sovereign debt, full interview here: http://www.spiegel.de/international/world/0,1518,784115,00.html The financial system simply cannot deal with fudge…the fudge of the Greek debt alone has created toxic uncertainty. Crystalisation of losses, or a strong ringfence is needed, and yes some Euro banks will require more capital. There is absolutely no need for us to plunge into a second recession, and this one has been purely caused by politicians, which is ironic as they are rarely effective with the economy. @Philip Lane Well done for hauling the blog out of the parochial. Europe is where it’s at. Leaks from WSJ about Goldmans position on it. The bet issimple – when push comes to shove the Germans will prove incapable of holding the union together. The most likely scenario is failed Greek bailout with European bank collapse. Watch the liquidity dry up then! Odd thing is – Irish banks might be better than most. This is like playing chess on a choppy ferry crossing. The board shifts so much even bad moves may become good (or maybe not!) Very interesting article in the Telegraph this morning. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8740389/German-endgame-for-EMU-draws-ever-nearer.html Greece is toast and it doesn’t matter what Ireland does because events are outside its control? I didn’t realise Italy had so much debt to roll over in September. That’s a worry Silvio. Yes, indeed. I was wondering how long it would take before an effort would be made to distract attention from parochial matters, i.e, focusing on what we can do, and need to do, ourselves to get out of this mess. We don’t seem to have bare-arse gallowglasses any more to fight on both sides in foreign conflicts, or Patrick Sarsfields to die on foreign fields, but we can still talk a good international economic or financial battle. Sure, ’tis great sport and diversion altogether. It helps to take our minds off our own travails and we can ponder and argue about the moves of the great powers. For those who seem to have forgotten Ireland remains in the Troika’s treatment room. (Though I note that the good Governor was very keen to protect the amour propre of the Government and its machine by asserting that the Government would be doing what it is doing anyway – irrespective of the presence of the Troika. He probably got closer to the mark on that one than he intended!) It’s tough, but unavoidable, but Ireland has, in effect, become a regional economy within a larger economic entity and needs to align its economic fundamentals (both macro and micro) with the economies of the EU’s northern core – Germany, the Netherlands, Austria, Finland (with Denmark and Sweden – outside the Euro – almost fully aligned) – in the same way as the smaller Euro members (Slovenia, Slovakia and Estonia) seek to do. Some progress clearly is being made on the macro front, but much of the micro stuff remains in a state of chassis. In terms of the comparative price levels of final consumption by private households: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tsier010 Ireland has made some good progress. It has almost halved the gap over the EZ average from 25% in 2008 to 13.5% last year. (Yes, I know Denmark is almost off the radar and Sweden and Finland are in similar territory, but these economies have developed means to deal with this and are not in the Troika’s treatment room.) It looks like the tradable and more exposed sectors in Ireland have made quite a bit of the necessary price adjustment, but the response in the public, semi-state and private sheltered sectors has been sluggish – to say the least. The structural reforms demanded by the Troika are the laxative needed to address this sluggishness. But the application of this medicine is being fought tooth and nail, behind the scenes by the FODAR. (And they are being aided and abetted in this by the ‘super-industry’ of analysts, researchers, media hacks, commentators, PR operatives, lawyers, accountants, TU officials and mid-ranking officials in the government machine they direct and sponsor – and by the silence of those who know the damage they are doing, but fail to speak out.) The conflation of privatisation and structural reform has been a boon to them. They can wrap the ‘green flag’ around themselves as they protect ‘strategic assets’ and the ‘family silver’ from being disposed in a ‘fire-sale’. The possibility of privatisation is, and always has been, a secondary matter; the immediate focus has to be on structural reform. There is a huge amount that could to be done in this area that would reduce the excessive costs and charges being imposed on households and businesses. Reducing the price level of private household consumption would enhance competitiveness, boost tourism and, more importantly, increase real disposable incomes – in particular, for those on lower incomes. It would ease the burden of mortgage debt service – the current flavour of the month – and would be the most effective stimulus of the domestic economy available. But no. Protecting the interests of the FODAR is paramount and they shall prevail. So go on. Why don’t ye enjoy musing on the antics of the great powers. @Eureka Yes, a lot of very dangerous signs this Monday morning. The markets are a bit of a bloodbath and likely to get worse with the likes of Ackermann saying that current conditions resemble those of the 2008 meltdown. Italian yield on ten year at 5.4% so Trichet will have to take out the cheque book again while bunds are now only yielding1.91% for 10 year money. Looks like the end game has commenced. Interesting article on what is really going on in Greece… http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_04/09/2011_404795 And one I forgot.. Barroso sees Eurozone growth… Contrast with “A survey has shown that private sector economic activity in the euro zone slowed even more than initially thought in August. Euro zone growth hit a new two-year low level, with the Purchasing Managers’ Index (PMI), compiled by London-based researcher Markit, recording 50.7 points, whereas a first estimate gave 51.1. While any score above 50 indicates growth, the revision came after the manufacturing-only index sank to 49 points in August from 50.4 in July. “The turnaround in the euro zone economy has been alarmingly abrupt since the surging pace of growth seen earlier in the year,” Markit chief economist Chris Williamson said. “All of the largest member states are now feeling the pain of weakened demand and uncertainty about the months ahead, as austerity measures take hold and the region’s financial crisis continues to escalate.” After overall euro zone GDP growth slowed to 0.2% in the three months to June, Williamson said a contraction in the final quarter “looks a distinct possibility unless business and consumer confidence improve noticeably in coming months.” Figures for manufacturing last week showed that only Germany, the Netherlands and Austria showed growth in that sector, with France, Italy and Spain each slumping into negative territory.” from RTE @PR Guy ‘..If as Munchau suggests (and I can’t disagree with him), there is an ‘existential threat’ then let me be the first to lay most of the blame at the door of the ECB for their evangelical protection of bondholders, which has been the foundation of all the decisions made in the past 2-3 years… can’t burn the bondholders so we had better do austerity instead..’ How right you are. Don’t understand why the Govt can’t in all fairness tell the ECB that by the way we’re not paying any more cash to the Anglo bond bondholders – of any description. I fail to see how ECB members on the other side of the table could keep a straight face when the basics of the position are set before them. Can someone please explain to me what the basis of the ECBs decision making is in relation to insisting Ireland repays 100% of Anglos bondholders – no better still, have the ECB publish their reasoning behind this insistence and let’s all have a view of the inner workings of this seemingly warped organisation. It must be remembered the principal monetary policy tool the ECB uses i.e. interest rate setting, derives itself from inflation readings recorded across the zone. In many respects inflation readings are the purest of known capitalist economic metrics and yet the ECB sees no contradition in side stepping normal capitalist rules when it comes to bondholders but is evangelical like in bowing to these inflation readings when rate setting policy decisions are up for consideration. I simply don’t understand this gap in its decision making process – or perhaps I’m missing something. @ All The most interesting sentence in Lagarde’s replies in the Der Spiegel interview is: “The EFSF will now be flexible enough. It has been in a bit of a straitjacket. Now it has the option to buy on the secondary market in certain circumstances, to support the banks and provide guarantees”. @Yields or Bust “Austerity” leads to a default on debt contracts – the excess energy however remains……… it does not disappear – it flows to Gold. The 2% CONSUMER inflation target acheived chiefly through wage defaltion is the poltical mechanism used to sustain legitimacy in the currency as wealth flows to the shiny asset. The Euromasters prime directive is the destruction of the dollar as the worlds reserve currency – they want eurodollars flowing into their coffers. Its obvious now – how anybody can argue against this theory is puzzling to me. @DOCM The devil is in the detail “in certain circumstances” being the critical issue. @DOCM Btw,I liked the bit where the interviewer asked her did Sarky make her do it or words to that effect…a little like Bart Simpson. @ Paul Hunt Munchau says; ‘But when France, Spain and Italy all contract their fiscal position at the same time, in addition to Greece, Portugal and Ireland, the result is a co-ordinated fiscal retrenchment of the eurozone’ And since we are looking at the bigger picture, here’s the view from Beijing. http://mpettis.com/2011/08/some-predictions-for-the-rest-of-the-decade/ Even if the structural adjustments were made, Ireland cannot escape the macro processes. The global environment is deteriorating and the governments lack efficacy. Your frustration with our local power structures is palpable, but the problem goes far beyond economics. DMcW pondered on long term male unemployment in the Business Post yesterday. The jails are already full. @ ceteris Our version of PASOK is FINELAB, and the dilemma will be exactly the same. ‘One of the effects of experiencing a balance sheet recession with subsequent deleveraging is that trend growth falls and thus that the economy becomes liable to more frequent recessions. This applies to the US in particular but essentially also to the whole of OECD. This means that we will see more frequent but also essentially shallower recessions. The only qualifier here is really that some parts of Europe are now stuck in a depression locked in a vice of dysfunctional institutions and a lack of willingness and political capability to deal with the problems’ http://clausvistesen.squarespace.com/ Vox EU editor in chief weighs in, noting Europe is sleep walking to diasaster: http://www.voxeu.org/index.php?q=node/6942 Frankly I’m not optimistic that Merkel and Sarko are up to it. Forcing events such as a total stock market crash is about all that would work, and as we well know…economic data comes in arrears…so by the time they realize they _must_ get a hand on it….there will be self feeding downward spirals. and of course Ireland will stay quiet, as saying anything of value would be ‘controversial’…and our dear leaders never comit that sin. @Desmond Makes for sobering reading…especially… “Things that won’t work Eurozone leaders thought they had fixed the problem with their July 2011 package. Although this has not yet been passed – and it does need passing – the July package is essentially irrelevant to Phase 2. As Gros (2011a) writes, “…the EFSF will simply not have enough funds to undertake the massive bond purchases now required to stabilize markets. It was sized to provide the financing promised to Greece, Ireland, and Portugal.” Moreover, the EFSF itself may get caught in a vortex.2 The debt of Spain and Italy is a few trillion euros. The EFSF is capped at €440 billion, but the real problem is that it is capped at all. Once investors start to fear it might run out of buying power, they will try to take out their trillions and thereby validate their fears.3” As he concludes the stock market alarm clock may make politicians wake up and the alarms are certainly ringing loud and clear today @Paul Quigley, Yes. My frustration is palpable. By my reckoning we are probably half ways there on the internal devaluation about which Philip Lane used to have much to say – but not so much recently. But, as always, the second half is the more difficult and requires a concerted confrontation with the forces of darkness and reaction (FODAR). The wheels may come off the Euro, but it will then shrink to the northern core. We need to be in there. Cormac Lucey thinks we might be better off outside: http://www.sbpost.ie/guest-writer/germany-holds-euro-and-irelands-fate-in-balance-58425.html but I don’t see this as a realistic option. One thing though we can sure of is that if it were to come to a choice between cutting and running or completing the internal devaluation (which would keep us in reduced bloc) the FODAR would opt for the exit confident in the belief the damage to their interests would be less than under a completion of the internal devaluation. The FODAR would sacrifice the interests of the country to protect their own interests (in the same way that the banking FODAR extracted the blanket guarantee from government in Sep. 08 that put the solvency of the state at risk). test @Ceterisparibus “The EFSF is capped at €440 billion, but the real problem is that it is capped at all. Once investors start to fear it might run out of buying power, they will try to take out their trillions and thereby validate their fears.” That is the current cap though significant changes were agreed in the July 2011 ESM Treaty, which are to kick in by end 2012. (Go mbeirimid beo etc…) The Treaty sets up a new entity that is to take over the functions of the EFSF, among other things. The initial ceiling agreed in the Treaty as signed was €700 bn. That in turn can be increased by the Governors deciding to demand more capital from the members under Article 10. They have power to do this at any time. This new entity is also authorised to borrow on its own account. The text is here – http://consilium.europa.eu/media/1216793/esm%20treaty%20en.pdf Can’t get a comment longer than this in. Enough! @Paul A eurozone exit only makes sense when we have the will and ability to rejig all external euro debts into a freefloating Punt that crashes or maybe a 50% Punt tied to Sterling. We would be best giving up our remaing external pretensions and UN gobbledygook and perhaps return Dublin to a Home Rule system with Holyrood type powers. Its either rejoining the old Union or staying in the newer one – The Irish can no longer even manage to arrange a Piss up now , a threat of trade sanction from the French can only be resisted if we become a UK vassal again. Given the closeness of UK / French relations now I would not rule this out as a strategic goal / deal of these 2 powers. A sort of Paddy Suez deal without the messy stuff. Greek two year yield now hitting 50% and 10 year near 20%. is it about to blow? Bunds now 1.88% for ten year and the Dax off 5% on the day. http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/ Interesting preminition of the events that will happen when Greece defaults…. @ Ceterisparibus I think that the real issue is the question of how to restore confidence in and between banks which is why I find Lagarde’s choice of words so intriguing. What does she mean by “to support the banks and provide guarantees”? There are fewer major players on the pitch than many imagine, no more than about fifteen, banks and countries combined. They are busy lobbing shells at one another, with the creditors ostensibly on one side and the debtors on the other. The entire mess can be traced back to a colossal error of political judgement by the present leadership in Germany in trying to square the circle of the supposed treaty ban on any action by taking such action first bilaterally and subsequently collectively – the word is used by Schaeuble in his FT piece – outside the treaties. But this approach is legally incoherent. We will soon see what the constitutional court makes of it. On the number of players, I recommed the series of video interviews done by the FT Gillian Tett with Paul Volcker at the time the “Volcker Rule” was going through Congress, unfortunately greatly watered down. With the cases now being taken against the major banks, this particular chicken – failing to divide the retail and investment activities of banks to make them less systemically important (return of Glass-Stegall) – is coming home to roost. Josef Ackerman of Deutsche Bank now dismisses the call by Lagarde for mandatory recapitalisation but covers his bets by saying that his bank is well prepared; but staff reductions may be necessary! @DOCM I think the most telling figure is the 151 billion lodged overnight with the ECB by nervous banks. It demonstrates that all is far from well in European banks.Ackermann is playing a curious game and seems to be getting involved in politics…he is allegedly tight with Angela. But just how bad has it to get before some decisive action is taken. The ECB bought 13.3 billion of bonds last week and so far this week it is not having the desired effect..or maybe Trichet is bringing Silvio to heel today. But you would have to wonder about the Greek situation with two years now 50.3%. This has been allowed to fester to the point where massive losses are piling up everywhere. How much has been ‘lodged’ in the USA by nervous (European) banks over the past couple of weeks? @ Ceterisparibus “Getting involved in politics!”. Show me a banker that is not involved! FYI a paper from the eurosceptic Open Europe on the pending court judgement which readers of this blog may find of interest. http://www.openeurope.org.uk/research/Karlsruhefactor.pdf It seems that the court will safely navigate between Scylla and Charybdis and stick to its own national knitting and not try to do the job of the European Court of Justice, having no greater entitlement to do so than any other constitutional court in Europe i.e. zero. Unfortunately, its national knitting risks making both the EFSF and the ESM inoperable. @DOCM It is interesting to see all the speculation on the forthcoming judgement of the German constitutional court and, as you say, it may even make the EFSF and ESM inoperable. As a previous decision required the participation of the Bundestag it remains to be seen how the court might sanction repeated transgressions highlighted by the Bundesbank and the German President. From Der Spiegel ‘The Crown Jewel of Parliament’ The need to involve parliament in EU financial matters was already enshrined in a 1993 Consitutional Court ruling on the Maastricht Treaty on European Union. That ruling means there “must be no automatism” in permitting sovereign bailouts, court judge Udo Di Fabio said in the hearing at the beginning of July. There is an even more fundamental constitutional issue at stake, namely to what extent the German parliament is allowed to permit financial guarantees that currently amount to two-thirds of the German federal budget. In a previous ruling on the Lisbon Treaty, the court said the parliament must be allowed “sufficient political scope for revenues and expenditure” in its budgetary decisions. “Budgetary power is the crown jewel of parliament,” said Di Fabio. “But if the sovereign begins pawning its crown jewels, its freedom could be curtailed.” Probably wouldn’t be a bad idea to start planning for the crisis just in case…… First off – we need to be able to print money (the old punt would be fine) Second we need to stave off inflation – stocking up on oil now would be a fair plan. We need to ensure that we can implement fairly rapid control of food prices too. Thirdly we’d probably need to be able to implement capital controls immediately I dunno but we should start thinking about this @ All FYI the press release of the German constitutional court. http://www.bundesverfassungsgericht.de/pressemitteilungen/bvg11-055en.html Donal Donovan’s summary of the various avenues open in the context of national “inability to pay” is also of interest. http://www.irishtimes.com/newspaper/opinion/2011/0907/1224303634602.html Notably, the following extract: “The use of International Monetary Fund resources also involves a subsidy. But this is less overt to the taxpayer, since the financing mechanism of the IMF can be accounted for in different ways in national financial accounts and parliamentary approval for each specific loan is not required. Former IMF managing director Johannes Witteveen has recently proposed that the fund create an enlarged “debt facility” financed by all countries (including cash-rich emerging nations like China). This would spread the cost of the subsidy burden more broadly among the net contributors to the fund and might circumvent to some extent the political “lock” exercised by Germany on increasing the EU bailout facility”. Maybe the constitutional court has a view on the constitutionality of how German contributions to the IMF are dealt with! Comments are closed.