More Fiscal Arithmetic

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On this recent thread

http://www.irisheconomy.ie/index.php/2011/12/09/fiscal-rules-stocks-flows-and-all-that/#comments

Karl Whelan points out that the 0.5% deficit/GDP rule envisaged in Friday’s ‘fiscal compact’  eventually yields a debt ratio at only 17% of GDP. This happens whether you start from zero or from Greece. Karl’s assumed growth rate is just 1%. If you assume 2% the debt ratio asymptotes to only 10%.

This helps to understand where the unlikely average deficit figure of 0.5% came from. The more natural choice of 0% yields the asymptotic abolition of the sovereign bond market, currently being pursued on a shorter time-scale by other means.  Asymptotic abolition cannot be acknowledged in such an important (they were awake ’til 4 am) communique. Somebody might spot it.

The Maastricht 3% deficit, were it the annual average, yields an asymptotic debt ratio of 60%, with nominal GDP rising at 5%. But 3% is to be an upper limit in this fiscal Nirvana, and so is the 60%. Summiteers were thus posed with the following very tricky problem: how to add an average deficit ratio to the 3 and 60 from Maastricht without looking ridiculous? 

The figure cannot be too high, since it would be too close to the 3% upper bound, and cannot be too low, since it abolishes the bond market (slowly). You are not allowed to ask why the extra average deficit rule had to be added to the Maastricht limits at all. This was a frightfully important summit, and tough new fiscal rules had to be imposed, to save Europe….

Actually the decline from 100% (possible peak debt/GDP ratio for the Eurozone as a whole) at a deficit of 0.5% per annum is pretty slow – takes 20 years to fall below 80% – so plenty of time for more summits. Karl goes on to hint that an ultimate debt ratio of 50% or so might be more prudent than 17%, without giving reasons. Here’s one.

Basel III has spawned something called CRD 4, capital and liquidity proposals for European banks. The liquidity part does not (yet) specify a quantitative ratio of liquid to total assets but could turn out to require 20% or 25%. If balance sheets end up at something sensible like 150% of GDP (UK currently 400%), this implies say 35% of GDP needs to be available as high-quality liquidity. Aside from central bank money, this means short (< 5 yr) sovereign bonds. It can’t all be central bank money (or if it can, explain how monetary policy would work). If the debt ratio drops much below 50%, sovereign debt duration has to drop dangerously.

There are reasons for not having too many sovereign bonds about. There are also reasons for not having too few. No thought appears to have been given to this 0.5% rule, about the only concrete element in the ‘fiscal compact’.

76 Responses to “More Fiscal Arithmetic”

  1. Georg R. Baumann Says:

    Dear Colm,

    traditional economics failed. -Not?- Financial systems are supposed to allocate capital and manage risk, both failed cataclysmically.

    What we see since the better part of three years now is pure desperation, maintain status quo at all cost.

    You know, I would bet my bottom dollar, if you were to get together with a few colleagues to create an “EBG”, economic bullshit generator, you would find plenty of politicos signing up to the proposed ideas that come straight from this random BS generator.

    This is the level we face in politics today, hence this is not a banking, let alone a talked up sovereign crisis, it is purely a political crisis.

    http://www.dominicirving.com/temp/cccbsg.pl?

  2. David O'Donnell Says:

    Europe’s Top Bank Regulator

    ‘The Crisis Has Reached a Systemic Level’ [Useful Graphic ...]

    A stress test performed on European banks last week found a capital shortfall of some 115 billion euros. In a SPIEGEL interview, European Banking Authority head Andrea Enria defends the decision to perform the stress test and discusses the huge challenges facing the European banking sector.

    SPIEGEL: The head of CONSOB, the Italian securities and exchange commission, has accused you of acting like Iran’s autocratic Ayatollah Khomeini.

    Enria: Despite all these reports about quarrels, cooperation with national authorities is very good. But in September, there was a fundamental change: the crisis got worse. And during a crisis there is a natural reaction to erect national barriers. Governments concentrate more on protecting their national banks, there is too much uncoordinated action.

    http://www.spiegel.de/international/europe/0,1518,803127,00.html#ref=nlint

    @Colm McCarthy

    Ta for a little further clarity on those abstractions [0.5; 3.0; 60.0] – of little, if any, innate validity (or use) on the crest of a crisis.

  3. The Dork of Cork Says:

    Alan Greenspan mentioned that he could not operate monetory policey properly in 1999 2000 ish when Goverment was in surplus.
    This was when Rubinomics was in full force – forcing the private sector into massive private debt & malinvestment and of course we know what happened next.
    When Irish central goverment services as a % of GNP were around 2.5% to 3% for 6 or 7 years before the bust that was when most of the real bad stuff happened.
    The banks were lending into a false financial / economic ecosystem.
    We should aim for at least a pre 1987 value of 12% ish or 8 to 1 leverage.

    However the Euro system is not a goverment money type operation – it needs the M1 or most of it to be on the ECBs books before it can effectively operate without much risk.
    So what do we do if the Euroclub is living in fantasy land ?

  4. DOCM Says:

    This is about politics, not economics. The sheer silliness of what the three leaders got up to is by now evident to all. Every action, however, generates a reaction. cf.

    http://www.ft.com/intl/cms/s/0/605ab278-24e5-11e1-8bf9-00144feabdc0.html#axzz1gLf9h2ke

  5. David O'Donnell Says:

    contd. imho multiply the figures in the Graphic above by at least 4 – purely intuitive based on an analysis of the recent empirics of spun fudge.

  6. David O'Donnell Says:

    Tables on the 3.0 and the 60.0 for all EZ 2000-2010 incl.

    here .. scroll down

    http://www.macrobusiness.com.au/2011/12/europes-suicide-pact/

    Be interesting to see a Table on the 0.5 …

  7. DOCM Says:

    Wiser heads also seem to be beginning to make themselves heard in Paris. The tune from Sarkozy now is that “we need the UK” and he is also preparing the ground for the loss of France’s triple A status.

    http://www.lefigaro.fr/conjoncture/2011/12/12/04016-20111212ARTFIG00365-sarkozy-nous-avons-besoin-de-la-grande-bretagne.php

  8. DOCM Says:

    FYI

    http://www.ft.com/intl/cms/s/0/90cfb17c-24c9-11e1-bfb3-00144feabdc0.html#axzz1gLf9h2ke

    Sarkozy is running out of road.

  9. David O'Donnell Says:

    The End of Old Europe Der Spiegel International

    Why Merkel’s Triumph [of the 0.5!] Will Come at a High Price

    The euro crisis summit has caused a deep split in the European Union. Britain has been sidelined, and other member states feel steamrolled by Germany and France. The future of the common currency is as uncertain as ever. By SPIEGEL Staff.

    European Commission President José Manuel Barroso even spoke of “warlike conditions.” According to Barroso, Merkel and Sarkozy are trying to impose their views on everyone else, even though they themselves can hardly agree on any issue. The fact that the majority of countries bowed to the German-French duo in the end shows how dependent the EU is on its two biggest financiers. Cypriot President Dimitris Christofias described the dilemma in a nutshell: “We really ought to engineer a revolution against Merkel and Sarkozy, but each of us needs the two of them for something.”

    http://www.spiegel.de/international/europe/0,1518,803097,00.html#ref=nlint

    Worth a read …

  10. David O'Donnell Says:

    Despite German resistance, Van Rompuy, Barroso and Euro Group President Jean-Claude Juncker do not want to give up their plans for common euro bonds. At the summit, the heads of state and government agreed that the trio would submit concrete proposals on the introduction of such bonds by March 2012. One of the purposes of the euro-bond effort is to break the German-French entente, an EU diplomat explained.

  11. Ger Says:

    There are other high quality liquid assets apart from bonds. As the bond market shrinks, these would come to the fore. Given the timeframe you are talking about there would be ample scope for adjustment.

    I dislike the idea of public debt being issued merely to facilitae bank lending. Our current banking system is dependent on these assets, but there’s no objective reason why this should always be the case.

  12. John McHale Says:

    Amid all the doom and gloom, concerns about a too low steady-state debt/GDP ratio are wonderfully optimistic. I would think there would be lots of opportunities to relax the rules if it looked like sovereign bonds were about to practically disappear. As Colm notes, a lot of time has to pass before this becomes a serious concern for most of the euro zone.

  13. Desmond Brennan Says:

    These rules were not well thought out. It is absurd to think that ‘back of envelope’ fiscal rules could be sufficient to govern economies with hundreds of millions of people. No private sector company would have such laughably simple rules.

    Credible/realistic fiscal rules would be somewhat more complex, allowing for variant scenarios – and would at least require the aid of say Excel to calculate.

    This inadequate partial response shows that we can no longer trust the Franco-German compact. It is the work of a few emotional, failing politicians – not the foundations for a New Europe.

  14. seafoid@hotmail.com Says:

    @ DOCM

    “This is about politics, not economics. The sheer silliness of what the three leaders got up to is by now evident to all”

    And the people of Europe will be paying for the buffoonery of the financial sector for years. Where is Deutsche Bank’s 25% RoE these days ?

  15. seafoid@hotmail.com Says:

    Very interesting piece by John Authers about the difficult future ahead for the equity market as the boomers retire and Asians who don’t like equities become more influential

    http://www.ft.com/intl/cms/s/0/52100348-2248-11e1-923d-00144feabdc0.html#axzz1gMIT7Ie0

    So if the bond market contracts as well where is all the money going to be invested ?

  16. grumpy Says:

    @John Mc

    All of that just illustrates the fact that its a load of bullshit, and, as bullshit goes, fairly transparent bullshit. The political class are so used to the concept that having something to say that sounds vaguely plausible can be passed off as wisdom, that they haven’t yet worked out that their new audience is somewhat less gullible.

  17. colm mccarthy Says:

    Ger, you state:

    ‘There are other high quality liquid assets apart from bonds. As the bond market shrinks, these would come to the fore.’

    Not in the quantities we are talking about Ger, don’t forget bank debt would be ineligible. My point really is that this 0.5% rule was magicked out of thin air to beef up the communique. The 3 and 60 made little sense and the 0.5, 3 and 60 is actually worse.

    Anyone who has not done so should read the document. It is really sloppy stuff.

  18. Dearg Doom Says:

    @Desmond Brennan +1 on the ridiculous simplicity of the rules. The present crisis reflects that different countries were in different situations and any “system” needs to recognise this. Some countries have potentially higher growth rates, Estonia might grow more quickly than Austria. Should they not be allowed a little bit more road building etc in this situation?

    As for the broader point, extensive explicit fiscal transfers are politically difficult. What is needed is largely what happens in any union that contributions to the common fund are related to economic performance of the region. In the EU case this would mean more contribution in an above trend growth situation and a lot less in a below trend high unemployment situation.

  19. Tullmcadoo Says:

    Colm,
    In this magic world, there would also be a dearth of long bonds. So insurance companies and mature pension funds would have nothing to hedge annuities.

  20. Ceterisparibus Says:

    @DOD
    Yes, that Der Spiegal,article was worth reading. It is deeply troubling that the German officials cited would rely on their opinion that the ECB would unleash the firepower necessary to halt the crisis if only for their own self preservation.
    Draghi is on record, as is Weidmann,that such schemes are illegal. It would be impossible for him to resile from,that position now.
    What would the reaction of bond buyers if they did an about face. My view is that it would be extremely damaging for the ECB and for the currency. Even the proposed scheme to fund the IMF is now in doubt recognized, I would suggest properly so, as merely a means to circumvent Treaty Articles. The European sovereign debt market is critically ill and the creation of further
    confusion is likely to kill the patient.

  21. Kevin Donoghue Says:

    Anyone who has not done so should read the document. It is really sloppy stuff.

    They don’t have anything to say, really. The words are simply an effort to summon up the Confidence Fairy. They’d happily try “Abrakadabra!” if they thought it would do the trick.

  22. David O'Donnell Says:

    @ceterisparibus

    The IMF shuffle signals impotence, and severely damaging.
    The self-preservation argument is puerile, signals incredible indecision …

    Very difficult to fathom such ineptitude … very difficult … A potential Global Giant of prosperous and cosmopolitan Democracy is turning into a Feeble Mouse before our eyes …. and the citizenry is predominantly supine … not lookin good … we need an accelerant …

    @any ol ratin agency

    Downgrade France Now! Save the Euro! Save Democracy!

  23. Mickey Hickey Says:

    A video clip by German ex Deputy Minister Finance Dr Heiner Flassbeck.
    This is economics at its best, pure as the driven snow with clarity crystal clear.

    Titled: Class War- Low Wages -Beggar thy Neighbour

    http://www.nakedcapitalism.com/2011/12/class-war-low-wages-and-beggar-thy-neighbor.html

  24. Karl Whelan Says:

    @ John

    “Amid all the doom and gloom, concerns about a too low steady-state debt/GDP ratio are wonderfully optimistic. I would think there would be lots of opportunities to relax the rules if it looked like sovereign bonds were about to practically disappear.”

    The point that the long run debt levels aren’t in the frame now is fair enough and I made it in my post. But there’s no reason to think it would be easy to change these rules in the future. And why store up problems by agreeing to legally binding rules that we know would cause trouble in the future?

  25. Mickey Hickey Says:

    Dr Heiner Flassbeck

    Titled: Democracy is not a Given

    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=7694

  26. Mike Hall Says:

    @ Mickey Hickey

    1st class links, you beat me to it!

    Dr Heiner Flassbeck’s talk at the University of Texas is a must watch.

    Are you listening Irish economists (allegedly)?

  27. The Dork of Cork Says:

    @Mickey
    Go to the Yanis V. blog site and you will pick all the lectures from this gathering.
    Its some of the best left wing thinking I have heard in a long while although I do not agree with all of it.
    Theres a Italian economist working in Hanoi who was very good – his name escapes me now given the effects of Beamish.
    But pretty much everyone there were heavyweights in my opinion with a very eccentric / funny French economist with a speech impediment that was the joker in the pack.

  28. Michael Hennigan - Finfacts Says:

    It would be good if solutions just required arithmetic and the concerns were about the long-run.

    In 1933 a senator at a congressional hearing was rambling about the long-run and FDR’s aide Harry Hopkins snapped back: “People don’t eat in the long run, they eat every day.”

    And so in Dublin on Monday, the most important short-run economic news was that unemployment had accelerated and long-term unemployment had grown.

    Everyone seems to have a solution about the euro in contrast with the jobs crisis at home.

    The latest ‘scheme’ will hardly have much impact: BRIC countries + South Africa account for 2.3% of exports with China responsible for the lion’s share; MNCs account for 95% of the exports and they do not generally base sales/marketing personnel in Ireland.

    @ Desmond Brennan

    This inadequate partial response shows that we can no longer trust the Franco-German compact. It is the work of a few emotional, failing politicians – not the foundations for a New Europe.

    This is the narrative about politicians in every age. The Eurozone has 17 countries and all of the leaders are not fools.

    The ‘best and the brightest’ often turn into duds in the political arena.

    Just a bit of local history: it was a professor of economics turned politician who was the architect of the first domestic policy-driven monumental economic disaster in the history of the State and he promised ‘an everlasting boom.’

    According to the IMF, the budget deficit of 17.6% of GDP in 1978 was the largest among advanced countries in the period 1970-2008.

  29. Joseph Ryan Says:

    How any set of political ‘leaders’ could force a proposal that will drive a continent into recession or depression beggars belief.
    As I take it from both Karl Whelan and Colm McCarthy, the numbers have no rational economic basis, are plucked out the air, and if the situation was not so serious would be considered a joke.
    The imposition of austerity on a continent is nothing less than a declaration of economic war on those who will bear the burden of that austerity.
    This solution is doomed to failure, hopefully before it tears a continent apart.

  30. Paul Hunt Says:

    I just can’t understand why economists don’t get it about politicians – and I don’t mean just Irish economists. Politicians are the same the world over. If they don’t have power, they’ll say or do anything to acquire it; if they have it they’ll do say or do anything to retain it.

    All the detail that will flow from the latest summit has yet to be thrashed out – and there are armies of sherpas to do this. The main message of the summit was “the PIIGS shall behave; and behave in a manner that suits better-governed northern EU member-states – we’ll work out the detail later”. This means not doing anything that would highlight the north-south current account imbalances and the dodgy state of many core EZ banks as this could scupper the already shaky re-election chances of the main players.

    The simple but brutal message for the PIIGS (especially the smaller ones) is that, if you allow yourself to be so badly governed that you end up playing where the elephants dance, you have little grounds for complaint if you get trampled.

  31. PR Guy Says:

    @DOCM

    ‘The tune from Sarkozy now is that “we need the UK” ‘

    And you are right about the AAA too – The tune coming out of Paris very strongly this morning is, “that AAA is not so important…” …I would kind of disagree with that (EFSF isn’t exactly going to be firing on all cylinders if the ratings underpinning it are donwgraded and all that) but Sarkozy is of course entitled to his opinion.

    He may know what’s coming? I believe the ratings agencies have opted lately to give governments advance warning of downgrades. It helps them get their PR act together before the merde hits the ventilateur ;-)

    It’s going to be an interesting run-up to Christmas. Hopefully, I will stop working like a dog before then and get a bag of popcorn out to sit back and enjoy the show as it unfolds over the next week or so.

  32. tull mcadoo Says:

    Karl,

    Read P9 of the Times today. Sarko’s (aka Laval) position is that the pols have the final say on sanctions. IOW, there are some legallly binding rules to reassure investors. However, there rules will never be inforced. Like SGP I all over again. So we can rest assured that the stock of sovereign bonds will not disappear

  33. Incognito Says:

    @ Colm McCarthy

    You wrote: “Actually the decline from 100% (possible peak debt/GDP ratio for the Eurozone as a whole) at a deficit of 0.5% per annum is pretty slow – takes 20 years to fall below 80%”

    I believe you must have done some computing error. With 3% nominal GDP growth (a very low assumption in my opinion), I get a reduction of debt from 100% to 80% of GDP in about 10 years, to 70% in about 15 years, and to 60% in about 22 years.

  34. Colm Brazel Says:

    Agree the set of rules proposed are disastrous. They suppose the EMU starts from a level playing field where debt to GDP levels throughout the EMU can be controlled by some mathematical conjuring trick.

    Here’s the conjuring trick:

    Actually the decline from 100% (possible peak debt/GDP ratio for the Eurozone as a whole) at a deficit of 0.5% per annum is pretty slow – takes 20 years to fall below 80% – so plenty of time for more summits.

    Any asymtotic rules of mathematics that are based on 20 year falls to a n index of debt ratio less than 80% do not take into account current debt to GDP levels of certain EMU countries that blow those aspirations out of the water. The pot is boiling over!

    Fact is, folks, the center cannot hold, I give the euro, not 20 years, approx six months, maybe even a couple of months depending on how the bond spreads against Italy measure up after Xmas.

  35. Eamonn Moran Says:

    @Joseph Ryan

    “The imposition of austerity on a continent is nothing less than a declaration of economic war on those who will bear the burden of that austerity.”

    That’s a bit OTT if you say it like that but…

    The imposition of austerity in order to avoid imposing real banking losses on mainly wealthy older banking creditors by transferring these losses with interest to the backs of sovereign nations, and making the weaker nations and the young carry a disproportionate amount of the load is nothing less than a declaration of economic war on those who will bear the burden of that austerity.

  36. grumpy Says:

    UK inflation figures out today. Nothing there for the Teutonic guardians of the printing presses.

  37. Overseas commentator Says:

    This discussion is slightly surrealistic.Europe is drowning in debts and here you are, worrying that there will not be enough bonds to conduct a proper monetary policy 20 years or more from now.I wish you are right and that it will be a concern then,that would mean a huge success in the deleveraging of Europe in the years to come ,I am not betting on it.

  38. PR Guy Says:

    H’mmm… rumblings coming from Athens this morning that those involved in negotiating PSI (on the ‘being haircut’ side) are not playing ball and talks are getting nowhere as they keep stringing it out. Are they hoping that this decision will ultimately be reversed if they keep doing nothing for as long as possible…. and even Greek bondholders will be left whole?

    Or are they delaying because they know that some significant event is on the horizon and they will be able to leverage the situation?

    Something’s up that’s for sure. I sense a quiet before the storm…. Ho, ho, ho.

  39. Eureka Says:

    @ Overseas Commentator
    I think you don’t understand.
    The Irish are a little bit like a country on the rebound. After a long difficult relationship with England we welcomed the embrace of others. We first fell for that other European institution – the Catholic Church. But slowly and surely we came to realize that it wasn’t for us. It’s not the Catholicism that galls us as much as the Church. In a very similar way we were drawn to the recognition and security that the EU offered. And now we are beginning to see it in its true light. Again it’s not Europeanism we’re against – its the corruption and inadequacy of the institution.
    So we look upon their pronouncements in a bemused way. We contrast them to the straight forward logic of the Anglo-American sphere. All our kids emigrate to Canada, UK, US and Oz, for example
    To paraphrase the song Breaking up would not be that hard to do.

  40. Paul Hunt Says:

    @Overseas commentator,

    It is surreal as it is displacement activity to avoid confronting the structural reforms that, in addition to fiscal adjustments, will be required to provide the necessary assurance to sovereign bond market participants. But it is no more surreal than the attempt by Merkozy et al to suspend disbelief about the impact of persistent north-south current account imbalances and the insolvency of many of their banks.

    However, Merkozy et al may have the political power to sustain their ‘surreality’ and it is demonstrable objectively that reform of economic governance and deep-seated structural reforms are required in the PIIGS.

    So there will be only one winner in this competition of ‘surrealities’, but the penny has not yet dropped for most Irish politicians and policy-makers – or, apparently, for most Irish economists.

  41. David O'Donnell Says:

    @eamon moran

    neat deconstruction of …

    @joseph ryan …

    there; that said, Ryan put it more succinctly, and precisely.

  42. David O'Donnell Says:

    @Overseas commentator

    ‘This discussion is slightly surrealistic.

    This is The Aesthetic Turn in Irish Political Economics; you are confusing the ironic with the underlying real. In this case, the real is an a_ontological ass.

  43. grumpy Says:

    @Paul H, Overseas bloke

    Pretend you are a bond fund manager.

    You suspect there will be eventual defaults.

    To persuade you that is not likely, Merkozy and its Clingons announce they will absolutely, definitely, for real this time, impose a strict rule.

    You think about the rule and work out that if they did stick to it (quite apart from being a silly idea anyway) they would eventually be forced to stop sticking to it.

    You are unimpressed.

    This is not something you, as a fund manager, are supposed to ignore. Why you are having a go at Irish economists over it is, I can only assume, a misplaced frustration at the determination within Ireland to avoid applying the same enthusiasm to the nitty gritty of reforms.

  44. David O'Donnell Says:

    @all

    On the positive side we can begin to draft our own referenda agendas.

    Little one I would like to see would be a choice on regressive fiscal policy design and implementation; I’d make such actions unconstitutional.

  45. PR Guy Says:

    Here’s a Tuesday afternoon test for you. Who said this morning:

    “My position is that it’s important to know exactly what consequences this will have before we sign an agreement. ”

    1. Swedish PM Fredrik ‘Sensible’ Reinfeldt
    2. Enda ‘Tell me where to sign’ Kenny
    3. It’s a MCQ so tick any box and hope for the best

  46. David O'Donnell Says:

    @PR Guy

    I hear he is reopening the embassy in occupied Hibernia.

  47. Paul Hunt Says:

    @Grumpy,

    Fair comment.

    If those with knowledge and competence, who are paid from the public purse and who are willing to pronounce on matters economic prefer to highlight the apparent perfidy of foreigners rather than address the detriments to consumers and the economy under their noses, then there is nothing I can do about it.

  48. grumpy Says:

    @Prg

    Wrt the Swedes, history suggests that this sort of sentiment:

    “The company of the British is too little to hold in your hand when global competition is increasing and Asia’s major powers are growing stronger. Swedish influence in European cooperation is under threat. Therefore, Sweden should join the EU stability pact.”

    may have less effect on the British position than might be generally assumed. ;-)

  49. Paul Hunt Says:

    And a final point, since this ‘fiscal pact’ seems to be attracting so much attention…

    For Greece, Ireland and Portugal, since they are in official support programmes because they presented irrefutable evidence of being able to govern themselves responsibly, there is a strong case for not giving them any say in whatever agreement is finally presented for ratification. They should be given the option of consenting (or not consenting) to what is agreed prior to exiting their support programmes.

  50. Paul Hunt Says:

    Sorry, should be ‘unable.

  51. Bond. Eoin Bond... Says:

    @ Grumpy/PR Dude

    re Sweden

    *SWEDISH DEBT OFFICE REJECTS EU FINANCIAL TRANSACTION TAX

  52. colm mccarthy Says:

    Incognito: D/Y is 78.4 after 10, not 20, years. Not that it matters – Italy 10-yr over 6.6 this pm, can last somewhere between 10 and 20 weeks?

  53. Gavin Kostick Says:

    @ Paul Hunt

    “For Greece, Ireland and Portugal, since they are in official support programmes because they presented irrefutable evidence of being unable to govern themselves responsibly, there is a strong case for not giving them any say in whatever agreement is finally presented for ratification.”

    A touch testy?

    After all your own analysis (from memory) was that the EU/ECB wanted these three countries thrust behind a firewall where they could be dealt with – and so we were, in spite of our cleaving to the S&G pact until then – on the chivvying of our own governor. Now Italy and Spain have reached the same points, the main reason they are not in their own support programmes (in spite of Italy not being trusted with its own government), is that the EU/ECB can’t afford to put them on support: not that their governance is any better.

    As this is a financial crisis at heart, perhaps if exclusion is the way to go it would be better to start with the proposition that the banks and shadow-banking institutions should forfeit the right to independent action.

  54. grumpy Says:

    @Enda the Euro

    1.31 vs $ as Merkozy confirms that doing ‘whatever is necessary’ equates to doing feck all.

    I could sum up today’s currency trading as “pennies dropping” but technically that would be incorrect.

  55. Incognito Says:

    @ Colm McCarthy

    As long as the money keeps coming, I believe the sovereign can last quite a long time, say 2 years, before interest costs become unbearable. But I believe that the banks supported by that sovereign will not last that long.

    Anyway, a monetary union with wide divergences of financing conditions between countries (whether for the private or for public sector) is simply not sustainable in my opinion. The only institution that can equalize financing conditions between countries is the ECB. It largely does that for banks and thus for the private sector. It will have to do that for sovereigns. If not, the Euro will break up, point and out.

    My conviction is that after a short period of turbulences, all ex-Euro area sovereign will be suddenly become solvent again. Some currencies will depreciate, some will appreciate, but the return to solvency will not be achieved with massive monetization (except perhaps for Greece). And the whole crisis will appear for what it is: almost purely a monetary illusion.

  56. grumpy Says:

    @Eoin, you may recall the Swedes tried one before and watched half their trading volume go to London.

  57. Paul Hunt Says:

    @Gavin K,

    Indeed it would be loverly if the banks and shadow banking institutions could be brought to heel, but that’s a work in progress. We need to view this proposed ‘fiscal pact’ as the proxy for an attempt to impose sound economic governance on the PIIGS – and, indirectly, on France and Belgium. It’s also a bit of displacement activity to divert attention from dodgy banks.

    The moral for small economies (and a debate persists as to whether Ireland is a small open economy with limited autonomy or simply a regional economy within a much larger economic entity) is to stay well away from the edge of any cliff – fiscal, monetary or financial. Finland, for example, managed to do this since it joined the Euro; Greece, Ireland and Portugal didn’t.

    And then consider what is likely to happen if whatever is agreed on this ‘fiscal pact’ is put to the people in Ireland. Not only will we have the fiction that has been spun for more than two centuries about this mythic Republic, the excessive executive dominance that requires citizens to exercise restraint on government directly in any popular vote that arises between general elections and the general discontent with government policy bearing on the vote, but we will most informed opinion pointing out the fatuity of the exercise.

    It would be nice if opinions – informed or otherwise – shouted from the treatment room were able to influence the decisions of those running the hospital, but like ain’t like that. We should also note how easily the EU’s Grand Panjandrums were willing to dispense with the UK. What they are advancing is largely nonsense if taken on its own terms, but it has a purpose and is politically driven – and they have a sporting chance of pulling it off. Ireland would be far better off if it were not required to pass judgement on it. And more attention might be focused on how we can exit the treatment room in a reasonable condition.

    But that would require concentrated effort and the facing down of powerful narrow sectional interests. Couldn’t be doing that when there’s so much fun to be had shouting the odds.

  58. Kevin Walsh Says:

    @Paul Hunt

    You appear to be complaining about the fact that an economist who writes for a newspaper is paying attention to the news cycle, instead of writing yet another column about the same things he’s already written about.

  59. tull mcadoo Says:

    Paul Hunt,

    You are of course correct. Don’t give the untermench a voice.

  60. Paul Hunt Says:

    @KW,

    There are exceptions that prove the rule, but they cannot be expected to cover – and in some cases there are factors that prevent them from covering – all economic sectors below the macro level.

  61. Paul Hunt Says:

    @Tull,

    It’s possible you misunderstand my view. I’m all for giving people a voice; I would prefer it if they were asked a sensible question – and in a position to respond after due consideration of the pertinent issues.

    Neither criterion applies in this case.

  62. DOCM Says:

    @ All

    Good article by Seumas Coffey in the Indo which belongs on this thread.

    http://tinyurl.com/buumsda

    Returning to the real issue and the most pressing question (apart from what is happening in the real world); what happens next?

    A group of senior officials has been established to try and make some sense of the latest effort by a very dim class of leaders. Will the UK be involved? It is difficult to see how it can be excluded as many of the initiatives re-heated in the statement by the Euro Area leaders involve the participation of the Commission and all 27 member states under the provisions of the existing treaties.

    Incidentally, the following, courtesy Google, are the procedures for changing the Dutch constitution.

    To amend the constitution, the proposed changes must first be approved by both the House of Representatives and the Senate of the States-General with a simple majority (more than 50%). This law is called a voorstelwet or ‘law to propose changes to the constitution’ (lit. proposal law) and does not alter the constitution, but declares there are sufficient grounds for a certain proposal to change the constitution to be considered. The House of Representatives must then be dissolved and general elections held. The proposed changes to the constitution are then discussed a second time, this time needing a two-thirds majority in both houses of parliament to approve them. This is intended to give voters a say in the matter, by allowing them the opportunity to elect a parliament to vote down the changes if desired. In practice, however, the House of Representatives has never been dissolved and elections held specially for this purpose. Instead the law proposing changes to the constitution is adopted shortly before the next regularly scheduled elections. Consequently, unless early elections are held for some reason (e.g. following the collapse of the government) changes to the constitution can only occur once every four years.

  63. Eureka Says:

    @ Paul Hunt
    Did you know that life expectancy is actually falling in Getmany.
    Their economic miracle has had many casualties.
    Their model of growth is not one that should be imposed across the continent.
    The “treatment room” analogy is ok but if you look at it logically a medicine which doesn’t fix you is useless and a medicine that kills you is just poison. As a medicine austerity has no proven track record and dire side effects. All signs are that it’s not working.
    This is my point of view. There is no shame in agreeing to disagree on this though

  64. Mickey Hickey Says:

    @Paul Hunt
    Whatever Ireland was before 1973, a stagnant backwater comes to mind, we are now a regional economy within a relatively tight trading bloc. Since the advent of the Euro which jet propelled growth in Ireland we have become more dependent on our trading bloc. We are on the same stage as some of the trading heavyweights of the world and benefiting enormously from the clout they are exercising.

    Independence and sovereignty are still bubbling in the Irish pot. In today’s world a population of 50 million does not guarantee either independence or sovereignty. With a population of less than 10% of that we are extremely lucky to be in a free trade area of 400 million enjoying the same privileges and freedom as the largest country in the free trade area. In my part of the country our sovereignty and independence ended in 1580 with the destruction of Carrigafoyle castle by the British. We did not experience freedom again until 1973, freedom from want, freedom from poverty, freedom from hunger, the freedoms that really matter.

    Do we want to return to the Sinn Fein (ourselves alone, not the party) policies we suffered under from 1922 to 1973, the answer is a resounding no.

    We have as level a playing field as we are ever likely to see, we have external rules policies and regulations that will protect us from the navel gazing, parish pump excesses of the representatives we are sending to the Dail. Our penchant for electing cute hoors will continue for a few more generations. What is good for every country in the EU/EZ is better that what we will experience from gov’ts that will continue to cater to our more destructive whims as they enrich themselves their relations, cronies and lobbyists.

    The EU/EZ is not capable of protecting us from everything as they respect our sovereignty/independence. Only the Irish people themselves are capable through the ballot box of ensuring we get competent gov’ts. Surely we can exercise that part of our sovereignty and independence.

  65. Paul Hunt Says:

    @Eureka,

    If the austerity is accompanied by structural reforms that will benefit the many while, possibly, discomforting the few, the total package will allow the patient to recover. Without the latter the patient will languish, but there are far too many deeply embedded narrow sectional interests to prevent these structural reforms being devised and implemented.

  66. David O'Donnell Says:

    @Seamus Coffey

    Gallant attempt to test The Efficient Markers’ Hypothesis last Sunday!

  67. Eureka Says:

    @ Paul Hunt
    Do you have an example of this working?

  68. David O'Donnell Says:

    CARTOON OF THEY DAY

    United Kingdom
    On the wrong side of the road
    13 December 2011 Trouw Amsterdam

    http://www.presseurop.eu/en/content/cartoon/1283961-wrong-side-road

    Further ‘abuse of language’ … can anyone see the ‘can’?

  69. David O'Donnell Says:

    The World from Berlin
    ‘Cameron Has Shed UK’s Claim to a Leading EU Role’

    (Cameron is a delightful distraction for the Germans …. I’m sure Angela will reciprocate the favour at XMas! )

    British Prime Minister David Cameron may have done his best to defend his EU veto before parliament on Monday. But many have begun grumbling that the premier’s appearance in Brussels was little more than a comedy of errors. German commentators say it could have far-reaching consequences.

    “It would be better now to think about what common ground remains between the two sides, and what would help both, rather than just bashing the Brits. A functioning common market is right at the top of the list.”

    http://www.spiegel.de/international/europe/0,1518,803430,00.html#ref=nlint

  70. PR Guy Says:

    @David O’Donnell

    Cartoon

    How come the wheels aren’t coming off that European juggernaut?

    :-)

  71. Gavin Kostick Says:

    Martin Wolf in the FT:

    “A disastrous failure at the summit”

    With discussion of work of Kevin O’Rourke:

    “Still more important, as professor Kevin O’Rourke of Oxford university argues on Project Syndicate, [original linked here] is that it is also an economic monstrosity.”

    And concluding paragraph”

    “The eurozone has no credible plan to fix the flaws of the eurozone, apart from greater fiscal austerity: there is to be no fiscal, financial or political union; and there is to be no balanced mechanism for economic adjustment on both sides of the creditor-debtor divide. The decision is, instead, to try still harder with a stability and growth pact whose failures have been both predictable and persistent. Yes, Mr Cameron made a blunder last week. But that of the eurozone looks far bigger.”

    http://www.ft.com/intl/cms/s/0/b7b944a0-24fc-11e1-8bf9-00144feabdc0.html#axzz1gUaFOjyX

  72. Gavin Kostick Says:

    Guardian reporting:

    “IMF slashes growth forecast for Greece”

    ‘Poul Thomsen, deputy director of the IMF’s European department and its mission chief to Greece, said: “We have revised growth down significantly to -6% in 2011 and -3% in 2012. We expected 2011 to be an inflection point when the recession bottomed out, followed by a slow recovery. But the economy is continuing to trend downwards. The hoped for improvement in market sentiment and in the investment climate has not materialised.”

    ‘”The IMF, together with the European Union and the European Central Bank has imposed tough conditions on Greece as the price of financial support that has allowed the government in Athens to continue paying its bills. In the fifth report carried out since the start of the crisis 18 months ago, IMF officials suggested that the austerity programme might need to be eased in view of the damage being caused to the economy by the recession.

    ‘”Discussions [at the IMF] focused on recalibrating the programme’s macroeconomic framework and adapting the implementation of reform and adjustment policies to an appropriate and feasible pace.”

    ‘The IMF had previously assumed that the contraction in the economy would be limited to 4.5% this year, allowing the budget deficit to be trimmed to 7.5% of gross domestic product. Thomsen said the deficit was likely to be 9% of national output this year.’

    Whilst I appreciate the IMF saying out loud “damn your expansionary contraction, it’s nuts”, it remains that these downward forecasts are still couched in the language of disappointment and surprise. It really needs some heavy hitters inside the tent to say that this not a surprise but an inevitable consequence of the policies pursued.

    If the new agreement is serious then I would recommend that the Irish government commission the Keynesian head of the Irish Fiscal Council and his team to put together a serious report on what it would mean for the Irish and European economies and get that into the Non-Keynesian German economists.

    And hey, this is suddenly offering spell checking. Oh brave new world.

    http://www.guardian.co.uk/business/2011/dec/13/imf-slashes-greek-growth-forecast

  73. Eureka Says:

    Europe is a joke. It took the Americans to sort out the Balkans. They’ll probably have to fix this too.
    Why does German prosperity always come at such a heavy price for its neighbors? The policies it pursues have a sociopathic streak to them

  74. DOCM Says:

    @ Gavin Kostick

    The problem with the analysis of Martin Wolf (and that of Kevin O’Rourke) is not that it is wrong but that it is incomplete. It ignores all the other steps, admittedly stumbling, that are being taken, the most pertinent being the actions by the ECB with regard to bank funding and the bringing forward of the ESM.

    Reuters has a good report based on a briefing on the institutional issues.

    http://www.reuters.com/article/2011/12/13/us-eu-treaty-enforcement-newspro-idUSTRE7BC1C620111213

    Putting it mildly, this is now serious business. Schaeuble has to change his 2013 budget and find an immediate €4 to €5 billion for the ESM. Navel gazing by any country wishing to participate in the two treaties under discussion (there is no absolute requirement for all to do so, even members of the Euro Area with regard to the ESM) or attempts at imaginary negotiating ploys will not succeed.

    An interesting question is raised; why do we need two treaties (especially as the ESM can come into force when Member States representing 90% of the capital commitments have ratified it)?

    On negotiating ploys, readers may be interested in the shopping-list – widely leaked – presented by Cameron.

    http://dl.dropbox.com/u/46265023/Uk%20-%2009%20Dec%202011%2001-01.pdf

  75. Mickey Hickey Says:

    @Eureka

    Fifteen years ago Germany was in a downturn with high (for Germany) unemployment as a result of faltering export markets. There was abundant evidence of this on the streets with second hand clothing stores, boards up retail outlets, unemployed young people hanging out at railway stations, petty crime and so on. The German unions, gov’t and management collectively decided that high wages were at the root of the problem. Immediately they decided to adopt a policy of holding wage increases to less than the rate of inflation. Today Germany has a competitive advantage of 20 to 27% over the EU periphery and a 17% advantage over France. In other words France hewed close to the EU policy norm of 2%, the periphery went to 2.5% to 4.5% while Germany remained well below the EU policy norm of 2%.

    This is the EU composed of Sovereign/Independent states so nobody held a gun to Germany’s head or the periphery’s head and said get it to 2% or else. Ireland could have managed its economy responsibly and Germany could have exercised less responsibility, the outcome was what could normally be expected. A new improved treaty is essential, the mistakes of the past will be corrected. Ireland can prosper under the new rules or it can pick up its its marbles and depart in a huff to suffer another half century of penury.

    As for Britain, they will do what they have to do. The fact remains that they are a minor player on their own with an uncertain future. Ireland should have enough sense to tie its wagon to the main train.

  76. No simple solutions to our economic woes | Brian M. Lucey Says:

    [...] implied. As has been pointed out by a number of commentators (see Karl Whelan here and Com McCarthy here ) this is likely to take a very long time, and in any case would result in the perverse situation [...]

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