Brian Lucey on Ireland and the Euro

Brian Lucey’s Irishdebate session from today is available at this link Brian ran it pretty much like an office hour fielding questions and it was a lively session with good questions. The questions asked to Brian are not visible on the screen as in the live version so some of the youtube video might be unclear but it is mostly easy to figure out what the questions were.


Professor in Finance Brian M Lucey will be discussing “Planning for a post Euro Economy” With every week that passes it is becoming unfortunately clear that under present arrangements the euro cannot continue. We have seen political dithering of the worst kind, persistently, with the resulting vacuum in terms of policy being taken up by the European Central bank. Although one can criticize the ECB for many of its activities (not least the bewildering refusal to contemplate the other side of the fence in relation to Anglo) is to its credit that has at least stepped into the breach. However of all of the European institutions it is probably the least democratic, as independent central banks have to be. Every ECB action, no matter how well-meaning, in the absence of political and therefore democratic-based approaches further undermines the democratic legitimacy of the euro. Trust in the ECB has and will continue to dwindle. In any case ECB intervention in bond markets has at best only a temporary effect, and it is ultimately up to governments at national and European level to implement policies that restore fiscal discipline. The academic research on bond yields is thus while in the short term like any asset they can be moved by speculative positions in the medium and long-term contract very well against economic fundamentals.

20 replies on “Brian Lucey on Ireland and the Euro”

The entire Basel Gang has made the quaint idea of fiscal austerity a very sick joke.
The most important thing should be about getting the western world towards a more rational pre 1987 leverage ratio.

If we do not it would be the equivalent of naturalists criticizing Polar bears for not successfully adapting to equatorial jungle habitats.

But I guess Polar Bears could learn to eat Tallaght monkeys if they had the right strategy.

It ain’t looking good….
“The EU’s €440bn EFSF bail-out fund was supposed to take over on the rescue task, relieving the central bank. It has been a disastrous flop, unable to raise money itself at a viable cost after toying with leverage plans that greatly concentrate risk for creditor states. The net effect has been to accelerate contagion to the core.
This leaves the ECB as the only lender of last resort, the one body that can stop monetary union spiralling out of control. “It’s ECB bail-out or bust. And it’s looking like bust,” said Nobel economist Paul Krugman.
German Chancellor Angela Merkel was unrelenting on Wednesday, echoing the Bundesbank’s hard line. “According to our interpretation of the treaties, the ECB does not have the means to resolve these problems.” …..from an article by Ambrose Evens Pritchard at the Telegraph.

So far Merkel has allowed herself to be pulled in reluctantly as events unfolded. Keep in mind she is dragging an unenthusiastic electorate behind her. But she has budged time and time again. The ECB continues to dole out 1 year loans as if they were a US bank issuing HELOCs during the boom. Admittedly there is a great deal of uncertainty with Italy now looming large on the default horizon. Italy is a wealthy country with a government that up to now has been very Irish in its economic outlook. The restaurants are full, the naysayers should commit suicide, sounds familiar. Italy will not be allowed to fail, the repercussions of failure are far too serious.

We are still in the game even though we made some very serious mistakes. Hopefully lessons have been learnt, home work is being done and the siren call of a debased currency which will lead quickly to inflation that erodes any advantage quickly does not become overly attractive. Debasing currency is addictive and usually results in round after round of the same. You all know what happens to the standard of living so I will not belabour the point.

@ Mickey Hickey
I say this respectfully, so take it in the spirit it in the spirit in which I mean it.

I am sooooo sick of hearing “country x is too big/important/indebted to fail”. It is always a riff that precedes actual failure by between 2 weeks and a month. And when it fails the only thing that changes is the variable x.

The fact is they could ALL fail! And there are good reasons for the failure. I know it is mundane now to say it but THEY ARE ALL BUST. The banks, and the countries. Let’s accept it and move the conversation on.

The key really is, they all need Germany to bail them out. And they all want the bail out now, but to talk about reform after they are bailed out. Sortof like how the wall street crew got their bail out and then cheerfully accepted reforms that would reduce leverage, impose restrictions on predatory practices. How did that work out?

They need Germany to continue to rack up trade surpluses which ensures that the Euro remains a stable currency. The bail outs are a collective effort by all the countries in the EuroZone (17). Germany is in for close to 30% because of its 80 million population Ireland is in the low single digits, Italy around 20%. Italy is actually/factually too big to be rescued by the rest of the EZ countries. If Italy fails you will hear the NY banks thudding to the ground all the way to Brooklyn. Italy will not fail, one or two countries will exit the EuroZone and business will go on as usual. Europeans expect government to work and in Europe they do. What happened in the USA was not mirrored in Europe except in Ireland where the Anglo-Irish debacle bears close resemblance to the worst of what happened in the US. Mentally I am not ready for them all to fail so I will face up to a few shots of brandy to ward off reality.

@ Mickey Hickey,

You’re far too generous to other Eurozone governments, the Germans included.

Spain ran the largest current account deficit in the world financing construction and consumption spending.

Germany, according to BAFIN (I got this from AEP) is sitting on banking losses of approx 30% GDP. This from not only investments in the periphery, but pretty much every sort of dodgy toxic investment they could get their hands on (think Landesbanken).

Austrian banks are incredibly exposed to eastern European economies and currency fluctuations, as are Italian banks (think Unicredit) and Swiss banks also.

The only thing that saved the Swedes from another financial crisis is the immolation of Latvia.

We really aren’t that special. We’re just early. And yes, I do agree with you about this, stupidly responsible for an insane guarantee that should never have been given or honoured.

Regarding currencies, how did the devaluations work for a) the Nordic countries in the 90’s, and b) Turkey in the 90’s? If I remember correctly, they devalued by ~30%?

Mickey hickey
The Germans do indeed stand to lose massively if the whole thing goes and I agree that US banks are on the hook for CDS losses if or when that happens. I don’t worry about Brooklyn, though, ‘cos we’ve got a tree.

I wonder how much money has been lost over the last 15 years or so on the “it would be really bad for this to happen so it won’t” basis of investment? Mexico wasnt going to fail in 94 , Russia in 98, Argentina in 01. Every one of them got the ” won’t happen” treatment. Yet every one failed and often the consequences of the failure were worse than expected.

It seems to me that Germany is the only credible “bailer-outer”. The rest will be asked to contribute, but German is the only one large enough and rich enough to actually make a difference. Their problems are huge and Germany made them too. The choices today are not, bail it out or don’t. The dilemma is if I bail it out now, am I helping or am I creating a bigger mess three or five years from now that nobody can fix”? The plan to be a minute late and a euro short every time is Merkel’s way of making sure that Europe’s last opportunity to hold together is not squandered.

EU Democracy has been downgraded to sub_Junk status …

Look at Italy – not a single elected politician in Government. A seamless coup by the Financial System over Democracy …

Today is the anniversary of students being shot dead in Greece in 1973 by the military junta …. they were seeking democracy; today they have a variant of a Financial System coup …

Look around at Ireland … and suck reality!

it is amazing just how much high powered financial talk has gone on over the last few months ,lots of theories have been put forward,but in the end it came down to Mirkel saying a amazing sentence the EEC faces the biggest challenge since WW2, I nearly spilt my beer!! maybe history was not her strong point but it was Germany that caused WW2 trying to grab all of Europe now after all the talk she says what we need is closer intergration,so what is left, well all that is left is for Germany to take over the running of all the countries in Europe ,unthinkable well then the only other way now that Greece,Italy Spain are on the verge of collapse is to let them default take the hit with the banks and move on,or the European central bank has to buy the bonds which Germany says it should not do,it favours the IMF to ride to the rescue,the only problem with that is the IMF would never get it’s money back because Greece,Spain and Italy do not have a central bank to print it once they get out of the mire,taking the line they are will end in collapse in less than six months.


The Italy situation is shocking. But the market won’t get what it wants. Austerity won’t cut the mustard.


Capitulation of Italian democracy is …… [I’m not beckett] …. a coven of economists are circulating a petition [but strangely not challenging the collapse of democracy ….. [btw what is the collective term that I’m looking for …. ah yes – economists don’t really do collectives (-;]

To the Parliament of the Republic, to the Political Parties

In this difficult period Italy needs an authoritative government which is able to act with determination in both the European and global context. Although we do not neglect the recent serious responsibilities of the Italian ruling class which has been unable to bring about a process of modernisation of the country necessary to put it back on a growth path, the Italian economic stagnation in the last decade has its main cause in the European macroeconomic context, and particularly in the absence in the Eurozone of fiscal and monetary policies aimed at sustaining economic growth, full employment, trade balances between the Monetary Union members, and with which to provide a greater distribution equality within and among countries.

The European crisis, worsening particularly after the financial market attack on Italian sovereign debt, finds its origin in the lack of this pro-growth context, and can only partially be explained by the progressive collapse of credibility of the former government. The absence of the traditional role of lender of last resort within the mission of the European Central Bank (ECB) is an additional explanation of the dramatic assault on Italian and other Eurozone sovereign debt. The financial measures adopted by the Eurozone governments to sustain the sovereign debts of the European periphery, like the EFSF, have been revealed to be largely inefficient at solving the financial crisis of the small peripheral countries, let alone to face that of the larger peripheral economies. The contractionary fiscal measures that have accompanied the European financial support provided have worsened the recession and the financial crisis of those countries. At the moment the Eurozone is without a compass. Because of the opposition of the stronger European countries, it has even rejected the proposal advanced at the recent G-20 summit of a special emission of Special Drawing Rights by the IMF in order to support the sovereign debts under attack. The survival of the Monetary Union and even of the Single Market are at stake.

It is all building up to a crescendo. Technocrats or politicians won’t change the dynamic. Nothing can change the dynamic until the question is answered. Will it be QE or breakup ?

bit off thread IMF Speaks on the Conflationist Fallacy

Anglo_Irish, PDs & FF done in the EuroZone ….

Working Paper No. 11/269: The Eurozone Crisis: How Banks and Sovereigns Came to be Joined at the Hip

Author/Editor: Mody, Ashoka ; Sandri, Damiano

Summary: We use the rise and dispersion of sovereign spreads to tell the story of the emergence and escalation of financial tensions within the eurozone. This process evolved through three stages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly due to common global factors. The rescue of Bear Stearns in March 2008 marked the start of a distinctively European banking crisis. During this key phase, sovereign spreads tended to rise with the growing demand for support by weakening domestic financial sectors, especially in countries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.

@ Paddy Hackett

Constantin has made and continues to make outstanding contributions to the debate in very clear, precise uncomplicated language not to mention his brillant graphs and charts. Furthermore, he has out forecasted the whole of the DoF the whole of the ESRI even the 3,000 odd souls down at the CBI as for the joke economists employed by the trade unions I won’t go there. Only to say that they are unemployable if they ever loose their jobs. Of course he is feared anyone that does not believe in massive transfer payments and free lunches for the poor proletariat is to be feared.

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