Month: September 2011

Ireland’s Fiscal Strategy

This article is in today’s Sunday Business Post (link tomorrow) and released here with kind permission of its editor.

There has been an intensification in the debate over Ireland’s fiscal strategy over the last couple of weeks, with Minister Noonan’s recent appearance before the Joint Committee on Finance, Public Expenditure and Reforms, the political party think-in events during this past week and the preparations for the imminent new Oireachtas session.

It is important to realise that Ireland retains considerable fiscal autonomy under the EU/IMF programme, such that there are genuine and substantive issues to be decided by the government during the coming weeks. The programme sets down a set of minimum targets for the overall pace of fiscal adjustment but there is considerable latitude in determining the appropriate mix of spending and taxation measures. Moreover, the government is free to pursue more ambitious targets that exceed the lower bounds that are specified in the programme.

For 2012, the government is required to introduce fiscal consolidation measures of at least €3.6 billion (importantly, including the carryover impact of the tax changes introduced in 2011). In addition, it is required to deliver a general government deficit that is no larger than 8.6 percent of 2012 GDP. Indeed, at the time of the deal in November 2010, the assumptions concerning the projected growth of the economy and the projected interest rate on the government debt meant that fiscal consolidation of €3.6 billion would deliver the minimum target of a general government deficit of 8.6 percent of GDP in 2012.

A closer look at the makeup of the overall target balance of 8.6 percent of GDP shows that it consists of three components. According to the Department of Finance’s Stability Programme Update (April 2011), the target overall balance is the sum of a cyclical budget deficit of 0.5 percent of GDP, debt servicing costs of 4.7 percent of GDP and a structural primary (non-interest) balance of 3.4 percent of GDP. (This breakdown does not allow for temporary or one-off factors that can be quite considerable in any given year.)

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Eichengreen on the eurozone

Here is the latest from Barry Eichengreen, who is a busy man since he will be giving his Presidential Address to the Economic History Association this evening. Congratulations Barry.

But do be careful Barry, go too far down this road and you’ll have the Irish Times accusing you of being on the far left or far right.

Establishment thinking

According to the Irish Times,

The pessimists argue the euro is going to collapse and that will make it all irrelevant, but these are the same people, from far right and far left, who urged burning bondholders, collapsing the banking system and refusing to accept the terms of the bailout.

So, if you are worried that the euro is facing an existential crisis and may be on the brink of collapse, if the right policy choices are not taken quickly, then you are on the far left or far right. Take that, Wolfgang Münchau! And you are also on the far left or the far right if you were not in favour of Irish taxpayers paying back unguaranteed bondholders. Take that, Morgan Kelly, Karl Whelan, and many others too numerous to mention! And of course, if you were in favour of not paying back unguaranteed bondholders, then this meant that you were either in favour of collapsing the banking system, or prepared to accept such a collapse as a consequence of the policies you were advocating (their wording is a little ambiguous here, but the last nine words of that quotation suggest that the former interpretation is what the IT had in mind).

(As an aside, who are these pessimists who argue that the collapse of the euro “will make it all (i.e. getting Ireland back to creditworthiness) irrelevant?” And should Irish policy makers not be thinking hard about what to do in such an event? Would it not be irresponsible for them to refuse to contemplate such an eventuality? And should we not be doing our bit to head off such an eventuality by pointing out to governments with more fiscal space than ourselves that the Irish experience clearly shows that even in a small, open economy the confidence fairy does not exist, and that a policy of generalised eurozone austerity will be disastrous?)

Nice to see such rigourous and nuanced thinking from the IT.

ECB Statement: Jürgen Stark resigns from his position

The statement is here.

Update: from Reuters, German Deputy Finance Minister Joerg Asmussen will replace Juergen Stark on the executive board of the European Central Bank, a source familiar with the plan said Friday.

(Asmussen was heavily featured in the recent VF article on Germany by Michael Lewis.)

EU Commission Review

The latest EU Commission Review of Ireland can be read here.