Happy 2012?

Charles Wyplosz writes on what can be done in 2012 to fix the eurozone crisis in this vox article.

32 replies on “Happy 2012?”

Read the vox article this morning and it was refreshing to see that there are ideas being bounced around which don’t involve a loss of sovereignty. I think Enda should be taking a serious look at Ireland’s fiscal position to ensure that they won’t be singled out as a debt offender – assuming that any such committee and rules be enforced (missed the boat does come to mind though)
Sadly it seems that Merkel and Sarkozy are happy to go the political route and not consider an independent Fiscal Discipline Board. At least Wyplosz gives us a glimmer of hope in this new year.

Happy 2012 indeed!
I dont think he was focusing on Ireland…

I asked a question in the previous thread that went on unresponded (probably deservedly so).
If the situation doesnt improve and Govt (Troika) tells govt(us) to relook at Croke Park Agreement, Taxes and Welfare and if serious enough changes have been made then what affect will this have on Irish Banks?

Has the recent review of Irish banks looked at situations like this where a breaking of CPA and presumable wage cut will affect the viability of the banks?

I ask this partly because if there is a cut my first phone call will be to bank manager: “Dear John, this would have never worked out between us…”

@Al: “If the situation doesnt improve and Govt (Troika) tells govt(us) to relook at Croke Park Agreement, Taxes and Welfare and if serious enough changes have been made then what affect will this have on Irish Banks?”

They’re in Sh***ville, Part Two! Though if you are already in that place, can you be there twice, simultaneously and at the same time??? Maybe, if you are a busted, busted bank is all!

Al, the banks no give a flying f*** about you or any individual. You just be a number, an account, not a human person with (maybe) family and dependents. Your their ATM.

If the excrement really gets into the air conditioning unit – talk to a lawyer – fast! No phone calls, no letters, zilch! Sit tight and dumb and let the bank do the ‘walking’.

The situation is set for a deep dis-improvement. Be prepared!

Brian.

The US is not going to pull the world out of recession

http://realestate.msn.com/blogs/listedblogpost.aspx?post=834cfc52-27b7-487a-94f6-e6f5005d22b8&from=en-us_msnhp

“Home prices back to 2001 levels
With values close to what they were in 1989, after calculating inflation, should a home ever again be seen as an investment?”

That was one hell of a wealth transfer. Home prices back to 2001 levels and a mountain of debt that didn’t exist in 2001 . And who holds the debt ?

@Seafoid

The wealth has gone up the pyramid.
That is why we have austerity-no defaults etc. So that those at the top of the pyramid keep the wealth.
A lot of course has gone to China to be distributed equally in true communist fashion!

@Philip Lane

Good article. He seems to have a lot of common sense. I see that ‘capture’ is now being recognised by academics as a key influence in the disastrous non-solutions that have been tried.
Thanks for posting.

@ BW Snr.
Tisnt myself I was pointing out.
If all the work done so far (shut hospitals, cancelled operations, less educated population) in order to maintain these zombie banks has been for naught, then what does that say about our political classes?

More and more, I am moving completely away from a focus on public debt / budget deficit to a focus on external debt / current & capital account deficits and on overall debt and overall financial balances.

History demonstrates that countries can have very high public debt (>200% of GDP) and budget deficits provided that domestic savings are able to finance them. This is the case in Belgium for example (positive external position > 50% of GDP => domestic savings largely exceed domestic financial needs). But also to a large extent in Italy, which has a high public debt, but low private debt and high domestic savings.

This shift of focus might have very practical consequences for overall policy, among others regarding the 3 countries getting financial assistance from the troika.

My policy goals would be to achieve the fastest possible deleveraging of the whole economy. Deleveraging can mean either reducing debt, or growing the income supporting that debt. Deleveraging the whole economy also means that I am not really interested where public leverage is doing as long as overall leverage is coming down.

My conviction is that the fastest deleveraging path for the overall economy looks broadly as follows:

1. Get the current & capital account in balance. This is in fact by far the hardest part, as this typically involves depressing domestic demand for a while. Already done in Ireland, well on its way in Portugal and Spain.

2. Once the current & capital account is in balance or has a small surplus, set the budget deficit to keep it that way. If the private sector is deleveraging (as is the case in Ireland and Spain, but also in the UK and the US for example), that might mean keeping a high budget deficit for a while, and allowing public leverage to substitute for private leverage. This is neutral for the overall leverage of the economy.

As a consequence, the economy should start to slowly deleverage. Overall debt (private and public) should stay constant or decline slowly in nominal terms, but the economy should grow again at a relatively normal pace, as there are no factors depressing domestic demand.

3. At some stage, the private sector will feel comfortable again with its leverage. It will be willing to keep its leverage constant or even increase it and thus stimulate domestic demand, either in the form of higher consumption (lower savings) and/or higher investments (higher borrowings). This will also show up in a degradation of the current & capiatl account balance. That is the point where the focus needs to shift towards reducing the budget deficit and public leverage.

This is in fact closely linked to Koo’s analysis of balance sheet recessions. The US have been doing something quite consistent with my views so far. The UK is trying to reduce the budget deficit in the face of private sector deleveraging, and it does not work well. I am very fearful of what the misplaced focus on public finances might do to the economies of Ireland, Spain and Portugal. It is only in Greece that it is the right focus.

France has the cheapest electricity in Western Europe for household use at 13.96 cent per KW hour. (June 2011)
Germany electricity prices have exploded in recent times – perhaps as a result of older nuclear closure at 26.71 cent per KW hour(june 2011)
Its prices are now only lower relative to Denmark which has made big wind energy “investments” at 29.47 cent per Kw hour.
For Industrial amounts France has the lowest prices in all of Europe including Eastern Europe which has far lower internal costs such as wages.
At .0721 cent per KW hour.
Go to – Europe Energy portal – if you don’t believe me , you can compare and contrast prices if you wish.
http://www.energy.eu

Most of us are creatures of the Industrial Pack wether we like it or not.

Without industry the earth could only sustain Biblical population levels as Biomass such as trees would be used much more intensively for fuel and such.
Irish early 19th century experience & landscape is a case in point – with even hedgerows stripped to provide more acreage for food and the last woods outside landlords demises felled for charcoal.
We will never learn I guess.
Privatised Utilities on natural monopolies do not work too well for the commons.
Europe’s recent deregulation of state utilities has been a disaster with France still benefiting from investment up until 2004 when EDF became a limited Liability corporation.
Now these corporations must subtract wealth to achieve profits – they achieve this quite simply – by not investing.

All of Europe is now moving closer & closer to Industrial collapse with Germany surprisingly ahead of the pack.
More people could die of starvation & malnutrition rather then Cancer before this is all over.

Happy New Year.

Strange article. He comes to the same conclusion shared by the same European policymakers he lambasts – ensure no bank fails and put in place stronger institutional conditions for fiscal discipline.

@Dork: “We will never learn I guess.”

You guessed correct. Well, not exactly. We actually dis-learn the ‘bad’ lessons. We later re-make them, and exclaim, “But, no one saw this coming!”

“More people could die of starvation & malnutrition” – and the effects thereof! Yes. Plenty of archeological evidence for previous episodes. Lack of fresh water is the main culprit.

@Al: Thanks, (just me being a tad moody and all!).

“…what does that say about our political classes?”

That they are a pretty shabby lot. Some individuals are acceptable (from a human perspective). In aggregate, they are completely untrustworthy: mendacious to their spineless spines.

To ensure their re-elections they have deliberately fostered and studiously maintained the fiction that we (as a state) can keep increasing our day-to-day expenditures, without a parallel increase in aggregate productive output (to sell abroad and repatriate the surplus to save and invest). That we can fund our overspending spending by creating an entity (debt) – which itself grows exponentially, and that this compounding, negative future income will be paid back by a real future income, which itself has to a compound increasing entity. Its insane!

Mind you, they are amply supported by many ‘normal’ economists in this fictional endeavour – some of whom inhabit this, and that other, site!

Not once, has a principal contributor on this site challenged my Permagrowth paradigm. Not once has a principal contributor on this site challenged me about the Export-land Model of fossil fuel production, depletion and available nett exports. Not once on this site has there been a sustained intellectual attack on the FIRE economy and a sociological rebuttal of the Political Economy of Austerity. These critters are a lot smarter than I am. So, why the ‘silence’?

Dork says it above. We (Ireland) have been here (Austerityville) before, at least three (maybe four) times since the 1950s. Three times!!! Three times!!! Three times!!!

Brian.

@ Incognito

Although I am no expert in these matters, your analysis seems to me to ring true. Indeed, it appears to be what the government is attempting to do.

It also raises the question of whether Ireland needing to go into the ESM (in effect, a second bailout) is the fate that absolutely needs to be avoided. While the international economic tide was coming in, I was inclined to think so. Now that it is clear that it is going out, some revision of that view seems to me to be required.

Martin Wolf is very interesting on the subject in this morning’s FT.

http://www.ft.com/intl/cms/s/0/a1a5eeb2-35fe-11e1-9f98-00144feabdc0.html#axzz1iUCJNm4q

As to the Wyplosz article, I agree with your view. It is also very weak from the point of view of political analysis. The new international agreement implementing the fiscal pact is only an element in the approach being adopted by Germany. In effect, it seeks to give political cover to the type of action that had to be taken with regard to Berlusconi and, in the process, to assure German taxpayers that good money is not simply being thrown after bad.

It would have been better had the approach suggested by Van Rompuy been followed, but it seems to me now to be unlikley that there will be a kiss and make-up meeting between Merkel, Sarkozy and Cameron, given that Sarkozy is fighting for his political life.

Indeed, a tone of desperation seems to be creeping into his actions, most notably the proposal to raise VAT in order to cut the cost of social contributions for employers, an action taken by Merkel several years ago. As exports remain zero-rated, even within the EU, such an action would give a boost to French exports. Far too late! The main evening French news devoted a special report to the collapse of France as an exporting nation at the New Year. One set of statistics struck me in particular (if I remember them correctly). Of 3.5 million small and medium-sized enterprises in France, only 95,000 have any exports i.e. a market outside France. The equivalent percentage for Italy was twice and for Germany four times!

In short, the main problem may not be Italy, but France! If the country loses its triple AAA rating, as the French say, Sarkozy’s “carrots are cooked”.

@ Aidan R

I read the article with interest and also found the conclusions strange. Still, this bit worth quoting:

“This observation raises another, most disquieting, interpretation. Are the politicians captured by special interests?

“A common thread of many decisions is that they aim at protecting banks. Clearly, no one wishes to see a banking collapse but if, as many believe, some deep bank restructuring is unavoidable, forbearance is highly counterproductive. The capture interpretation rests on a web of signals: the initial refusal of contemplating any sovereign debt restructuring, last summer’s row with the IMF Managing Director, pressure on the European Banking Authority to conduct gentle stress tests, and the negotiation of PSI with the world banking lobby leading to solutions that protect banks while providing little debt relief.”

But the suggestion of putting the ECB in charge is a worrier (though it seems unlikely) as experience shows that the ECB doesn’t do ‘arms length’ when dealing with national sovereignity.

But what’s even a moderate sort of Keynsian to do? IE one who would get a hearing from the current FG led government.

Seamus Coffey comes out guns blazing for a wealth tax here (last line, and tongue slightly in cheek):

“If we got €1 billion from a wealth tax it would be a start.”

http://economic-incentives.blogspot.com/2011/12/wealth-and-taxing-wealth-in-ireland.html

Also, I still have no idea why the offer of EU structural funds is not being enacted.

In my blacker moments I suspect this government of acting like a normal electoral cycle is underway, ie getting ‘bad news’ out of the way in the first 2 – 3 years, then getting a stimulus in towards the end, so as to set themselves up for the next election.

I don’t think this will work, as to the ‘surprise’ and ‘disappointment’ of one and all, growth figures will be poor, the deficit won’t close, more austerity will be the order of the day, but with more money going out in paying off debt interest rather than into the economy.

@ Brian, and the Dork

My ears are open, but my cowardly strategy is (in as far as making the odd comments on blogs can be called a strategy), is to see Ireland on its two feet again and then say, what was all that about resource depletion?

Diesel €1.70, petrol €1.80, average monthly take home pay around €1000 for many public servants, average monthly gross income for a member of parliament (excluding substantial extras) over €11k (yes, €11k). This is Italy. The latter salaries are being cut (soon…). I don’t know what the academic salaries are but a friend of mine did a post-doc in physics, left at the age of 40 to set up a technology company and told me he was earning less than a bus driver in academia, but I gather lecturers earn around €35k annually.

Diesel and petrol in Ireland around €1.50. Public servants taking home €2500 on average per month? TDs on gross monthly income of €8k – throw in the un-receipted €15k to get a nice earner on top – and university professors apparently on more than €12k per month.

Great stuff.

@ DOCM

Frankly, France would be the problem? No, really not. Yes, it has lost a bit of competitiveness over the last few years, and that shows up in in its growing trade deficit. Nothing dramatic though. The idea to increase VAT to lower social contribution is a good response in my opinion.

However, I looked in more detail at how Spain has reduced its current account deficit since 2007. It is very striking that it is mostly happening through a reduction of the trade deficits with Italy and France … the 2 countries which have seen their trade deficits widen significantly recently. Conclusion: everything is interconnected!

With regard to the issue of France losing its AAA: I don’t care! The rating agencies are mixing up monetary issues with solvency issues. This is absolutely laughable. Academic research has shown that they have little added value with regard to the ratings of developed sovereigns. Do you want to bet that if France gets downgraded, its bond yields will go down? (as in the US this summer, as in Japan in 2002)

@Gavin & Alchemist

Italys abandonment of Nuclear in the mid 80s when it had built 2 brand spanking new & unused BWRs has left it open to huge Natural gas price fluctuations which makes long term economic planning extremely hard.

en.wikipedia.org/wiki/Montalto_di_Castro_Nuclear_Power_Station

Honestly some of this stuff is not really hard.
NG should not be used on wasteful electricity generation which has very large transformation losses in even the most efficient plants.
It should be used for direct combustion in heating ,cooking and transport.
The rush for Gas in the electricity sector has created huge opportunity costs built long term into the system.
http://www.iea.org/stats/pdf_graphs/ITELEC.pdf

PS
When large countries such as Spain & Italy stopped or abandoned their capital intensive nuclear plans it created conditions for a further increase in consumption in such consumer durables as Holiday apartments & BMWs which extract wealth over time as they are not needed or are a technological overkill.

For every economic action there is a equal & opposite reaction.
We just lived through a tempory gas surplus when the Soviet Union was stripped and we deferred investment to consume more.

Why pay 30 grand for a car when you can have a functional advanced internal combustion engine on wheels for 15 ?
Target 2 this.
http://www.youtube.com/watch?v=Ns9HqlXs1NE

@ Incognito

I am afraid that I do not share your analysis with regard to the trading relationships. France and Germany are doomed to try and manage their economies cooperatively, something which they have been singularly failing to do. I do not disagree with regard to the justification for the change in VAT. I am simply making the point that it is being considered out of sync with the change introduced in Germany and far too late.

As to the impact of the loss of France’s triple A status, I do not see how it can possibly be argued that this would not have an impact, economic. financial and political cf.

http://www.lemonde.fr/crise-financiere/article/2011/12/29/oui-l-eventuelle-perte-du-triple-a-de-la-france-serait-une-catastrophe-par-thomas-chalumeau_1624018_1581613.html

@ All

On looking up Le Monde, I came across this intem to look forward to in 2012; a financial transactions tax, at least as far as Sarkozy is concerned.

http://www.lemonde.fr/election-presidentielle-2012/article/2012/01/04/la-taxe-sur-les-transactions-financieres-mise-en-place-avant-la-fin-2012_1625365_1471069.html#ens_id=1593448

It may be noted that Merkel made no mention of such a tax in her New Year address while Sarkozy laid consdierable emphasis on it. Even Schaeuble, if I am not mistaken, managed to get through a recent major interview without mentioning it specifically.

On the subject of crisis and the EZ, does anyone have any clues as to which banks borrowed that €15 billion from the ECB overnight? Something doesn’t ring true and it ain’t the Christmas bells.

Being a mere PR Guy, maybe I don’t understand ‘high finance’ well enough but I would have thought if you stuffed yourself to the gills with 3 year 1% loans from the ECB a couple of weeks back then there must be a problem if you are still looking to them for emergency assistance at the end of each day?

I do wish the details of who borrows what, when from the ECB weren’t shrouded in secrecy – you would have thought investors ought to have a right to that information so that they could make sensible investment decisions….. though no doubt some select ‘investors’ do get access to that info.

@: Gavin Kostic. Sorry about the volume! We can indeed get back on our feet – as long as they are clad in a stout pair of farming boots!

Here’s one for you!

“In ____ Ireland went for growth in an international context of expanding markets and eager investors, basing its economic strategy on the attraction of foreign capital. In ____ it is going for growth in a context of stagnant markets and cautious investors, and its most immediate problem is that of halting the flight of capital away from the Irish economy. Finally, Ireland in ____ is attempting to maintain a massive public sector and a costly and still ineffective welfare state, while at the same time it is attempting to reconcile the demands of increasingly concious and conflictual class interests.”

by _________________

Dates and author anyone? I’ll post answers if ye are stumped!

Brian.

@Dork

Have you got any links or book recommendations on the early 19th century and the trees being cut down to clear the way for spud cultivation?

@Seafoid
I don’t have any book in particular in mind but I know the historical landscape pretty well around my parts – & especially hill country in both Caledonia & south west Hibernia which had similar natural histories / human habitation patterns (with lazy beds sometimes at almost impossibly high elevations)

There was a very interesting book I spotted in Waterstones before Christmas about land agitation mainly in Limerick & North Cork but I was too Tight to buy it and it was too short a time & too big a book to buy for a present if you know what I mean.
The name escapes me now – I might go into Pana tommorow and get the title for you.

PS – it was land agiatation in the 1820s – when the memory of pre Act of union wealth was still about I suspect.
If Masstricht 1992 was our modern 1801 Act of Union then we are in a modern version of the 1820s breakdown phase now.
Only another 20 + years until……………

PS PS
It could have also been due to the post Napoleonic war depression which badly affected Cork and possibly trade flows from the local Agricultural Hinterland pretty badly.
Must read more……………

@Gavin
Yeah , thanks for that – I always liked Micheal Vineys stuff – his description of his 1960s camping trip to Inishvickillane always sticks in my memory.

A much better arrangement is possible without a new treaty. Currently, in its routine refinancing operation, the ECB accepts as collateral a wide range of assets. Most central banks accept only – or mainly – treasury bonds. The unusual arrangement of the Eurozone is an artefact of history – because practices differed considerably among future Eurozone countries, the ECB decided to accept every asset that was previously accepted. The ECB has the authority to decide what collateral it accepts and it could decide to only accept treasury bonds issued by governments that exercise fiscal discipline. It would work as follows.

Perhaps a global conference on “What Ireland Should DO to solve its economic crisis?” hosted at UCD next July? Invite Charles Wyplosz and others along 🙂 It would be interesting to look at many approaches to this topic.

Wyplosz idea I’m sure would be attractive to the Germans. It wouldn’t have to be a Waffen-SS type financial guard, but could have a benign role? Nah, it wouldn’t have a benign role! It would need some clout. It could look at Irish treasury bonds and decide they were useless and roast us, refuse to accept them!

But that’s not the real problem with his analysis. The real problem is in the little throwaway remarks on the need to recapitalise banks. Translated means an economy like Ireland’s gets shafted with IMF/Troika/promissory notes and a mountain of debt that destroys them.

Nah, forget it. Its a rather inane useless idea this Fiscal Discipline Board. Bit of a German trojan horse or a banking trojan horse to destroy democracy and democratically elected parliaments.

They can have their FDB, we need to default and leave the euro asap!

From the PR perspective, looking at all the various things that are happening around the EZ crisis since we all (?) returned to work the other day, the two most significant aspects/short term threats would appear to be Greek exit and a potential bank failure.

Papademos appears to have seen the writing on the wall. The current actions are certainly recognition of imminent (in the next 3 months) failure and the need to point the finger of fault to some place other than those who originally caused the problem. The government PR machine has gone into overdrive this week to start shifting the blame for failure onto the unions and the public themselves.

The levels of money being parked with the ECB and emergency lending by the ECB suggest one or two banks are having quite some difficulty. I only wish I knew which ones but PR activity in the banking sector is unusually quiet at the moment. Too quiet. The few rumours that are around suggest one with a strong link to Hungary is possibly being shunned when it comes to obtaining funding and has to go to the ECB again tonight.

Possibly a third issue…. how is Spain going to sort out it’s banks needing an additional €50 billion on top of however many billion they have to raise in additional capital anyway by June (Santander shortfall alone is something like €15 billion by June?)? They aren’t setting up a NAMA to park all their toxic property assets – “they are not Ireland” says a spokesman. I wonder what on earth he could mean by that? My guess is that the IMF could be offering some assistance with this problem.

And all this is just for Q1 2012. Happy New Year!

I wonder how long it will take for £1 to be > €1.30 and €1 to be < $1.20 ? Must be on the cards for Q1 or 2 as well.

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