My take on it went out as an op-ed on Bloomberg today. (I’m not responsible for the headline!). It’s quite similar to KOR’s and CMcC’s, which is hardly surprising since we have been ad idem on this for more than a decade, though my repeat of the phrase I used some months ago – coup d’etat – might strike some as excessive (though it came from paying attention to Garret FitzGerald). By the way, I see that Ciaran O’Hagan asked, in a comment on KOR’s piece, about the decision to sever the link with sterling. Patrick Honohan and Gavin Murphy have written on this. The final sentence of the abstract shows how prevalent was the mindset displayed by Stephen Collins in his article in last Saturday’s Irish Times. (I agree with Karl that this must be one of the least insightful articles to appear over the current debate). I emphasised to Kevin Myers on some radio show at the time of the single currency debate that there was no clash between my nationalism and my recognition of the continuing importance to Ireland of our economic links with the UK. In fact I argued that this was an indication of the maturity of political attitudes on our side of the debate.
38 replies on “More on the EU Summit”
This is something I’ve been meaning to ask for along time but couldnt get an opening – thanks for giving me it. And please, I’ve seen some extremely condescending dismissals of the average readers opinions before this, so if you’re not willing to listen to a question from someone without a PhD in economics, please dont respond to this.
As an average Irish person, but regular reader, who is trying to grasp the finer points of economics, let me ask two things.
1. You mention your take is inline with two of the regular posters, and has been for a decade. I find that opinions on this site generaly agree. You are all economics professionals, so this i hardly surprising. Is there a reputable (Irish) website that ever disagrees with you?
2. Who is advising the government? Listening to the posts and commentary on this site, this is car-crash TV. They must have economic advisors, but how are they so far out of the loop?
Excellent article. But, I am not sure about the role of the EU Commission being sidelined. It seems to me that the institution being ignored is the European parliament – the one with a democratic mandate.
I have an article on the relationship between fiscal, wage and monetary policy in the EMU, published in New Political Economy here:
Touches on some of the same issues albeit from a more critical perspective.
The Euro – a Gold standard like currency where they don’t even back their M0 with the shiny stuff !!
A proper Gold currency union = M1 fully backed.
Term loans to banks = a risk not covered up by the CB.
Simple rules , no favourites.
But we get complex rules ,teachers pets & dunces thrown into the corner of the classroom.
We need at the very least to go back to a sovergin goverment currency with pre 1987 leverage.
Excellent article and IMHO it was very good you began on paragragraph with :” The current plan…”
It now appears that as soon as the leaders of Czech Republic and Hungary managed to return home they decided that “The currrent plan” no longer look as enticing as it did on the early hours of saturday morning before they managed to get some sleep.
I also think I heard somewhere that Estonia does not seem over keen on contributing to many Euros towards “The Plan”.
I wonder what will actually remain of “The current plan” by the time it reaches serious consideration in March/April? 🙂
‘Such fiscal federalism is necessary for a monetary union to function effectively. The European Union deal announced last week studiously ignores this need. But at some point it must come onto the agenda, or further crises are guaranteed.
Useful realism in time and place.
“Such fiscal federalism is necessary for a monetary union to function effectively. The European Union deal announced last week studiously ignores this need. But at some point it must come onto the agenda, or further crises are guaranteed”.
This is the foundation on which the entire argument advanced is based. The US worked quite well without such an arrangement until the establishemnt of the Federal reserve in 2013 in response to the excesses of the robber barons of the period. The growth in federal expenditure is a recent phenomenon and much of it has been devoted to military spending.
Robber barons now operate on an international scale and it would be naive in the extreme to pretend that they do not exist cf. recent ccover story by Newsweek on Merkel.
Ireland developed its own variety of robber baron and is suffering the consequences. This had little to do with economic theory and everything to do with good old-fashioned avarice or “animal spirits” if you like.
Meanwhile – back in Berlin …..
Berlin, though, would appear to be unmoved, as is the German central bank. Bundesbank head Jens Weidmann, who is also a powerful member of the ECB board, vehemently rejected ongoing demands that the ECB embark on an aggressive bond-buying program.
Happy to Wait
“It’s like an alcoholic saying that I need to get a bottle tonight,” Weidmann said during a dinner with journalists on Wednesday, according to Reuters. “Starting tomorrow, I will be clean and abide by the rules, but I need the bottle tonight. I don’t think it is sensible to give the alcoholic the bottle. He won’t have an incentive to solve the problem.”
Weidmann also said that the ECB board is also losing its appetite for the limited bond buying strategy it has thus far been pursuing, called the Securities Markets Programme (SMP). “The SMP’s fans,” Weidmann said, “are becoming increasingly skeptical.”
Oops! 2013 should read 1913.
Someone on this blog should have the figures for the growth in federal spending in the US since that date.
@ Aiden R.
Aiden, I’m going to break a cardinal rule of mine and respond before I’ve had time to digest your article. (I’m afraid I’m procrastinating as I still have to finish preparing a lecture for 9.00 am tomorrow!)
I have two quick points to make after quickly eyeballing your article:
First, there is nothing neoclassical about the assumption that “labour markets will automatically adjust to downward wage flexibility”. I was trained as a neo-classical economist but was always Keynesian in my understanding of how large economies (unlike Ireland) functioned. My heroes as economic theorists were, in chronological order, Hicks, Tobin, Stiglitz, Krugman. But I always regarded all of these as neo-classical. Those outside economics sometimes use classification systems that we within the field don’t recognise! On the question of downward wage stickiness, see the reference to Blanchard (neo-classical Ivy League economist) in a paper of mine that I posted recently on the euro debate in Ireland.
The other issue concerns social partnership, which you suggest has been shown to have failed over the current crisis. My take, right from the start, has been diametrically opposite. I think Paddy Teahon ruined his reputation by becoming involved in the Temple Bar and Bertie Bowl debacles but I have often cited with respect his early analysis that partnership may have promoted a shared understanding among participants about the way that the economy operated. When I was young, unions and “the others” had completely different views (“models”) of how the economy functioned. I regard it as a possible legacy of the partnership era the fact that we have had spectacular industrial peace over the course of the current crisis. Are we or are we not more likely to exit the crisis sooner than much more conflicted societies like Greece? I think the answer has to be a clear yes!
You come across to me as a political scientist rather than as an economist. I am somewhat amazed that someone from your background would regard the European Parliament as a bastion of democracy. (BTW: how I wish I had the possibility of registering my disgust at a particular Euro MP’s spectacular gombeenmanship of recent weeks). But we know that ugly beast (the parliament, not de Rossa) doesn’t matter in the slightest, because electorates have no affinity with it. Further huge chasms between the EU and the US!
I would not oppose this treaty if I thought good sense would prevail and countercyclical policies would be adopted over time. Unfortunately recent history and interwar history show that one cannot make such assumptions. Accordingly the treaty must be resisted on the grounds that it will not work.
Let’s get real here.
ECB lends to banks at say 1% so they can lend to sovereigns at say 6%.
If sovereigns default then EFSF borrows from same banks at say 5% to pay off the money owed to same banks.
It’s a circular Ponzi with money ding fed into banks either way at 5-6%.
Press Release: IMF Completes Fourth Review Under the Extended Arrangement with Ireland and Approves €3.9 Billion Disbursement
The general context of the article is the policy constraints of the EMU and framed against a broader European collective bargaining context.
The term ‘neoclassical’ is only referred to in the abstract and maybe twice in the article.
The main argument is that in a stochastic world, monetary constraints are the main problems facing peripheral countries of the Eurozone not fiscal deficits or wage costs.
The case study on Ireland examines the background conditions to the specific negotiation in 2009 and asks why social partnership did not internalize the constraints of the crisis.
It concludes that the tax based income exchange of social partnership agreements were a core part of the problem. The process became part of the problem not the solution.
I happen to share your broader opinion on social partnership. The industrial relations institutions of the state have done Trojan work to settle conflict throughout the crisis.
Only a fool would think the European Parliament is a bastion of democracy?
The conclusion of my article is precisely the opposite. It totally calls into question the democratic legitimacy of the Troika and the future of Europe – and based on work produced in the Max Planck Institute for the Study of Societies:
Here’s something for readers to cry themselves to sleep over tonight:
Irish government is downgrading efforts to secure Anglo promissory note reduction:
The rates on those notes are odious..and Noonan throwing in the towel early is typical of his defeatist attitude towards any EU negotiation.
This is a classic banking story if there ever was one.
Aengus Fanning, the editor, had an article in The Sunday Independent last April: ‘We need leaders who will ignore the eurobabble and just say no’
Interesting argument expect for the strange fact: exports to the Eurozone in 2010 at 38% of total exports (goods + services) were double the level to the UK.
Exports to the UK as a ratio of GDP have fallen from 55% in 1973 to less than 20% today.
Given the poor language skills, almost two-thirds of indigenous exports are to English speaking countries.
It’s also interesting that total employment in the tradeable goods and services sectors is at the 1998 level — the year before the launch of the euro.
One other interesting development in recent years is that courtesy of Tesco, the traditional Irish food and drinks exports surplus with the UK has been almost wiped out.
It would be facile to attribute this solely to sterling as a multinational group like Tesco operates global supply chains and it sources its inputs in more than the UK. Benefiting from economies of scale, Ireland is part of its UK distribution system.
It was the huge influx of FDI in the early 1990s not a devaluation that resulted in the Celtic tiger, which in turn was assisted by the big jump in labour participation.
Presumably, that and the development of the IFSC were the issues that swung the decision on the euro.
Convergence is a very slow process as the popular Prof. Hans Werner Sinn suggested in 2009: “Germany’s political unification has succeeded; its economic unification has not. Twenty years after the fall of the Berlin wall, GDP per capita in the formerly communist area is 69% of that of the former Federal Republic of Germany including West Berlin.
This value sounds better than it is, as it is artificially inflated by civil servants’ wages and salaries, which have reached West German levels. East Germany’s privately produced GDP per capita is only about 66% of the West German level. Moreover, a substantial part of the convergence is explained by West Germany’s slow growth and the out-migration from East Germany.”
The reality of the EU is that reform such as the responses to stagnation and crises such as in the Netherlands, Sweden and Germany over recent decades have to come from within the countries.
The flaws of the EMU are very evident but even with closer union and truckloads of cash, in contrast with the US, integration of economies and ways of doing business/ vested interests in different countries, suggests that it could take a century or more to have a full single market.
Just observe the reactions to the perceived ‘interference’ of outsiders even when they may be of assistance.
Also consider the level of interest in reforming broken systems in Ireland/implementing change, compared with the current outrage against Europe.
The genesis of the crash in Ireland was far from recent. It’s a bitter truth that not many appear to grasp.
As for being an Atlantic economy, we have a poor record in exporting and the opinions of people in places like Santa Clara – – not to be confused with Clara – – do of course now count in this period of crisis.
I would also add that while the IDA wouldn’t agree with me, US FDI has peaked; that doesn’t mean that it’s not important to keep the current players.
The trends are that pressures on standards of living from globalisation are going to continue in Europe and the US.
Countries like China view the euro as an important alternative to the dollar.
People who pine for the punt should keep that in mind if we wish to attarct FDI from the big EM economies.
Says the Telegraph:
This seems to suggest that i) the danger of some serious tax-harmonisation on foot of the fiscal pact is real and present and ii) other governments are doing something relatively serious about it. And ours?
Which mindset though? He starts by rattling the bones of the Fenian dead, but by the bottom of the article he’s scorning certain theoretical, outdated notions of sovereignty.
the rates on the promissory note are not really the issue (at least in terms of them being “odious”). It all goes to Anglo, which we own, so we eventually get the money back further on down the line. Its a circular transaction. As Karl has explained, we can either restructure the prom note so that the ‘burden’ on the deficit is lessened (ie less austerity needed, but less of a payoff further on down the line), or we seek to have something done with the ELA (write off, reduction in that rate (though its already low). Its a complicated instrument, and the debate is continually confused.
@MH: “People who pine for the punt should keep that in mind if we wish to attarct FDI from the big EM economies.”
Michael, you are usually an oasis of sense around here, but FDI from big EM economies?
Chindia? Russia? India is slowly being flushed down the toilet, Russia is a dictatorship, and China? China is a dangerous, deeply corrupt Mercantilist state which regards the Rule of Law as an absolute permission to loot and pillage at will. This disgraceful behaviour is actively encouraged and condoned by governments (state and provincal) in China. This behaviour will continue until there is nowt else they can steal. “There be dragons” has real meaning these days.
Someone opined above about the ‘slightly democratic’ nature of the EP. That may well be, but there is this bunch of political toadies, who self-style themselves as our government, who are actually a legally elected dictatorship, (until our next gen election). Think about this, careful like.
@ anonym: “… scorning certain theoretical, outdated notions of sovereignty.”
Forget the theoretical and outdated, what is our reality? Sovereignty, Irish 2011 vintage: “pants down, bend over the table and spread ’em”. 8)
2012 : the Chinese year (but not in a good way – expect chickens and other fiscal fowl to come home to roost)
@ Brian Woods Snr
We have not had success with Japanese and Korean firms that opened facilities in Ireland and I share your scepticism regarding the EM economies.
Maybe that Chinese guy who was trying to buy a glacier in Iceland could be enticed to invest in an Irish bog?
The situation is going to remain desperate; we need to be prepared for many scenarios.
Don’t get me wrong: that wasn’t my choice of words.
Very nice short article. I am not sure that the status quo ante is the correct system for the future. We are where we are, stuck with the Euro, so any credible solution that emerges (if one emerges) will involve very tight fiscal discipline throughout the Eurozone. But without the destabilizing features of the currently proposed “solution”.
Re Frank Barry
ECB doesn’t have the power to backstop the losses of the peripherals, now the losses of the core.
Fair enough, it should operate along Keynesian lines. It should operate more like the Fed with greater central regulatory control over its CB’s. It should be more proactive along Keynesian lines. It should impose FTT to curb runaway financial services deregulated and toxic. It should operate with a Stability and Growth Pact that provides checks and balances for growth.
But that’s a project for another day. Right now, this Titanic is going down.
Time for making those changes is long past. In a time of currency meltdown, referenda to vote on cosmetic changes? A bit like telling members of the EMU to put on anchors inside of life belts. Time to get real.
So, the euro was a noble experiment whose design was flawed. Big deal. Its time to consider options. In a storm it may be a good idea for a small economy to shelter in the lea of a larger ship. The UK offers benefits and disadvantages whose benefits outweigh the disadvantages.
Trade with the UK needs to be grown. I wonder at how much the high euro in terms of sterling has had negative impact on trade with the UK; we could reverse that negative flow. I’m wondering which way George Osborne will jump in the coming first quarter of 2012, which looks like a real euro wrecker. It would be very interesting if he decided to peg sterling to the gold mark!
Re “Its a complicated instrument, and the debate is continually confused.”
Its not that complicated. Taxpayers here will fork out €3 bn + next year of their money, effectively working one day out of every week to pay for that ELA party.
Re “It all goes to Anglo, which we own, so we eventually get the money back further on down the line.”
🙂 Oh great. I own Anglo. This is plain ludicrous, absurd and ridiculous.
What you mean is, the government have sold us a pup, a gigantic debt anchor around our necks.
We need a Madame Guillotine to deal with severing that ‘odious’ debt.
“I find that opinions on this site generally agree… Is there a reputable (Irish) website that ever disagrees with you (plural)?”
I don’t see this level of agreement at all. There are many reputable economists who still hold that joining the euro was right for Ireland. It remains a judgement call, and depends on the counterfactual. See Iulia’s contribution of a few days ago, for example. Patrick Honohan has pointed out that some non-eurozone European economies have been equally adversely affected, while Philip Lane wrote in 2008 that “the shifts in consumption and housing prices are mainly a once-off adjustment to the new financial environment that has disproportionately benefited the peripheral and lower-income member countries.” Some contributors to this website also adhere to the proposition that the current problems in the eurozone are the result not of design flaws but of fiscal incontinence. No unanimity here!
I would have thought that most peoples idea for the € was that it might prevent the boom and burst cycle. Or at least mitigated it anyway.
In the 80’s we had the profound idiocy of the banks and the farmers co-ops over in the States on a buying spree with the transfers from Brussels being leveraged for the purchases. Thereby giving the Unions and the politicians the notion that there existed a huge tranche of cash on the island. How in the hell the exchequer didn’t cop this is utterly beyond me.
@ MH and anonym. Got that. Thanks. Correction noted. That Collins piece has a few folk in a tizzy. I’d say it was more like ‘keyboard fatigue’. We all have one of those days now and again. Cheers.
Desperate. Yep! “What you mean is, the government have sold us a pup, a gigantic debt anchor around our necks. ” CB gets it!
@ Conor: Saw you request for guidance. Know the feeling. This site is good, well mostly. Few nitpickers like myself who can be safety be ignored – ‘less I am wittering on about energy problemos. That’s where to start your quest. Energy and credit are THE two vital nutrients of our Permagrowth economy. Absent an RDA (recommended daily allowance) of these two, its toilet time. Credit is ‘sphericlexed’. But just wait until energy goes likewise: trench warfare would be a picnic.
Go to http://www.theoildrum.com and look for Nate Hagens’ ‘The Best of theOilDrum’. Best biblography on-line at the mo. Good searching!
Michael Hennigan makes a good point about language deficiencies in Ireland. We need to make foreign languages (particularly Spanish and German) compulsory in primary school.
It makes me furious when we talk about our “small open economy” being tossed about like a rubber dingy in a storm, while at the same time failing to kit ourselves out with the life jackets and oars which a small open economy needs such as proper language skills.
It is also critical to our integration into Europe that Irish people be able to go and take up jobs in Italy, Spain, France, Germany, Sweden et al when their economies are going better than ours.
It’s good to see, at least, some economists venturing onto that fallow ground between the economics silo and that of political science. Any understanding of the process of, and of the basis for, or strategic proposals with regard to, economic policy decision-making needs to start from this territory. But it tends to be a weed-infested largely barren patch.
It might also be worth while to recognise that, while we have all the trappings, we do not have a genuine parliamentary democracy. Once TDs elect a Taoiseach those that aren’t on the Government payroll might as well tend to their constituencies and constituents – as most voters seem to want them as constituency advocates and mini-ombudspersons – and turn op to the Dail once a month to affirm their vote on the election of the Taoiseach and to submit and collect their expenses.
Issues or policy and goverance are between the government and the people – either directly or represented by various occupationally-based civil society bodies (IFA, trades unions, IBEC, industry associations, professional bodies, pensioner lobby, etc.). (‘social partnership’ put a slight gloss of respectability on this strange three-handed tango.) The Oireachtas has no meaningful role to play; not is it allowed to play one. Government certainly doesn’t want it to do so; and it seems most voters don’t want it to do so either. They seem to prefer to exercise some restraint on government by using any popular vote that crops up between general elections – local, Euro, by- or presidential elections or referenda.
And governments have strengthened their positions in this battle of wit and will voters by doing two almost diametrically opposed things – one is the creation of a huge hers of quangos to distance itself from the political fall-out of the decisions they make (while keeping tight control of their decision-making discretion) and the second is the almost total emasculation of local government. All this is copper-fastened by ensuring there is no effective advocacy of the collective interests of consumers.
It might be useful to start by looking at the reality of the current economic policy formulation and decision-making process before opining on Ireland’s stance on the weird, but understandable, process being applied to resolve the Euro crisis or on Ireland’s strategic options as an economy entity.
@Frank +1 – there seems to be something of a concensus emerging on this.
“We need to make foreign languages (particularly Spanish and German) compulsory in primary school. ”
I’m pretty sure I read in the recent budget that an existing initiative on foreign languages, aimed at primary school children, was to be scrapped – to save a piddling few million. It’s enough to make you weep. I go to Germany and Holland and I’m constantly impressed by the number of people (including children) who can speak more than two languages – usually more than three.
/Gets on hobby horse
I’m teaching mine French but starting to doubt how useful that might be!
They keep mixing up the French with Irish from school – producing ‘Fraelic’ as I like to call it. I honestly don’t know wtf so much money and time is put into teaching them Irish when they are now supposed to be ‘European’ citizens and we could divert the resources to other (more useful) language teaching.
/Gets off hobby horse
Oh well, no doubt when the latest summit unravels, the big bank crash – that I’m sure is hovering – happens and the Euro burns etc. etc. there won’t be any money to pay the teachers anyway (and nurses and firemen and the ATM’s won’t work….)
@ zhou: Compulsory anything has two v-bad outcomes: flight or criminality.
I understand that you mean well, but look at comp gaelige: its in the s**thouse, and it is not coming out anytime soon. We need a Constitutional Referendum to remove it as our First Official Language, or remove English as our Second Official. Then we can all be “Tá me mahogany gaspipes”. One or t’other. That would bring a few slugs out from under their damp rocks.
The mother tongue of the majority of us is English, and we should just accept this. We’ll manage. Damn nuisance if you do not know the local lingo, but I am advised by persons of my acquantaince, who are in turn acquainted with this matter of language skill: get thee a female friend who speaks little or no English. You’ll be fluent in whatever in jig time! And you actually get to enjoy it as well!
Or just go and live in the place. You have to eat, etc. Buy a good dictionary. You’ll KopOn real quick.
As I embark on reading the Honohan paper I find I have a problem.
Forgive the long reply (a quick cut and paste):
Towards the end of the Bretton Woods era the European Community began to explore the possibility of monetary union. The Werner Committee set out a blueprint in its report of October 1970. It envisaged a 10-year horizon over which there would be a gradual move towards complete monetary integration. Among the policies recommended were limits to exchange-rate fluctuations in the initial stages and full policy co-ordination at a later date. The most important step taken in response to the report was the decision taken in April 1972 to limit the maximum exchange-rate spread to 2.25 percent, which was half the spread allowed
under the December 1971 Smithsonian agreement on reform of the Bretton Woods system.
Thus the regime was dubbed the “snake in the tunnel”, the tunnel referring to the larger spread allowable against outside currencies. Even before the agreement was due to come into effect however the UK and Ireland had left the system because sterling was felt to be overvalued and had come under attack. By Spring 1973, with the collapse of Bretton Woods there was effectively no longer a tunnel. Between 1973 and 1978 the membership of the snake changed several times, and there were widespread currency realignments, so that the regime could not in any way be regarded as a success.
Monetary and economic policies had become more rather than less divergent in the interim as a result of the differential effects that the first oil shock had on member and potential member economies, and on the differential policy responses chosen. The failure of the snake regime, then, can be ascribed either to differential country-specific shocks (the view of those antagonistic to EMU) or to differential policy responses (the view of
Thank you 🙂
Right, back to the paper…
@Brian Woods Snr
“get thee a female friend who speaks little or no English”
I recall it worked for me once when I first went to work in Luxembourg. The funniest bit is when you are arguing and have to revert back to your native tongue in order to be able to fully express yourself: lots of name calling and slagging off in different languages….. er, a bit like one of those EU crisis summits 🙂
So what! Hungary and the Czech Republic are under no obligation to join the other treaty signatories.