More on the Fiscal Compact

I have written an op-ed for the Irish Times on this topic – available here.

[The compressed nature of an op-ed means that I did not cover all issues relating to the fiscal compact – my Croke Park presentation touched on some other dimensions.]

57 replies on “More on the Fiscal Compact”

Philip , you have been assimilated.

Our only hope is if they fully add our cultural & technological distinctiveness to their own – we may then destroy it from the inside…….by mistake.

We were leveraged 42 to 1 during the final years of the boom.
This crisis has nothing to do with goverment debt.
If FF did not give Nurses wages back then they would have been commuting to Crumlin from the Bog of Allen – maybe some of them were ?
What can one say in the face of this propoganda ?

I am scratching my head really – some of yee guys seem like nice guys yet the policies yee espouse will destroy what is remaining of this society.

I find it both curious & frightening at the same time.
Why do yee wish to give goverment sovereignty to banks ?

The Irish Times article sounds like a plea for yet another quango…yep that should solve everything.

All v lofty Philip but do you see NO issues? Your colleagues in the business school on TCD have raised many. Can you address those?

I agree with the argument that prudence is a virtue. But this article misses one crucial point that must be considered when examining fiscal policy; the politics of distribution. Fiscal policy decisions have significant distributional implications and therefore deeply political. They are not technical.

The massive transfer of wealth toward the top of the income distribution, across the OECD, has occurred because of fiscal policy decisions. In the US, one third of the increase in the explosion of wealth for the top 1 percent can be accounted for by tax breaks alone. Permanent austerity is prudence for the little people.

I don’t believe for a moment that this fiscal pact will be implemented or that Merkel and Sarkosy really believe Ireland can reduce its ‘structural’ deficit to 0.5 percent without killing the patient. But if it provides political cover for Merkel to accept Euro bonds then it might be worth it.

@Philip Lane

A good well reasoned article. It makes the fiscal compact sound reasonable and logical and perhaps even beneficial. And perhaps it is could be beneficial.

The difficulty is that it is politically driven by a Europe that has forced Ireland into the ‘Debtors Yard’ that it is currently in, just to protect their own banks.

Ireland at present is in no mood to distinguish the surgeon from the knife. The knife that the same surgeon has lately held to our throat.

This article doesn’t address any odd the very real issues raised on the measurement of the structural deficit, the effect on the bond market, the many views that it would neither have prevented the last nor the next crisis, the concerns re the punative nature if the esm, etc. If all its to do is advance good governance and speed the reforms, which I would applaud, is this bludgeon the least intrusive and distortionart way to do it?

@ Philip Lane

Fair enough as far as it goes, but a bit simplistic, if I may say so with due respect for your technical nous. Firstly, any analysis of Ireland’s prospects has to take into account the historical constraints on monetary policy. Sovereign countries have very considerable counter-cyclical latitude, but we were never really sovereign economically. The current set of golden fetters is the euro and no amount of local fiscal tinkering can resolve that problem.

Secondly, our economy is hugely distorted by FDI financial flows, which are increasinlgy detached from real economic activity, and even more so from employment. We have little or no control over the factors, including CT changes, which determine these FDI decisions. We may get to cheer now and again, but Ireland’s Call it ain’t.

Thirdlly, Dork has pointed to your apparent disregard for the the role played by the financial services ‘industry’ in the global balance sheet recession. This process was driven by private credit expansion and capital extraction. A pretty sordid, socially destructive, game IMHO. It has to stop.

Purveyors of an austerity prescription, no matter how well intentioned, can only assist in obstructing necessary financial sector reforms and killing sovereign patients. You would surely serve Ireland better by giving some thought to the historic problems of regional economic development in this uber periphery.

@Philip Lane,

A badly needed antidote to the passions that are surging in the body politic. Many thanks. And, not surprisingly, the brick-bats are aleady being directed at your head – and more will come I fear.

Perhaps inadvertently, you are drawing an implicit comparison between the current actvities of the EU’s Grand Panjandrums and those of Keynes and policy-makers on both sides of the Atlantic as they crafted the outlines of the post-war international economic order before the war was won.

There is no doubt that the stock of sovereign debt must shrink in the EU so that bond market participants will treat it, near-as-damnit, as a risk free asset and be demanding the issue of more – rather than having governments pleading, cajoling, incentivising them to buy their paper. And a new class of assets must be created with a slightly higher risk premium over sovereign bonds to finance investment in infrastructure and utility assets that many governments finance directly, or are forced to guarantee or subsidise or end up imposing some financing responsibility on final consumers. Facilitating this transition will require meaningful structural reforms in many countries – not least in Ireland – and the role and scope of government will have to change significantly.

But the war is not yet over and Ireland lies bleeding. It has the strength and ability to begin to heal itself, but a passion surges that is convincing many that it is better to stay prostrate, point to the wounds and demand emergency assistance from others. The longer it lies prostrate the more long drawn-out and painful the recovery will be.

And on a more specific point, I note that you consider the IFAC would not be able to act as the ‘local agent’ to enforce this ‘fiscal compact’. If it is not capable of doing this, then what is it for?

But you go further and you argue that a genuinely independent fiscal authority is required to impose restraint on government. Why? What is parliament for – the body that exercises the delegated absolute authority of the people? I fear this reveals the instinctive distaste of the elites for genuinely democratic governance.

@ Philip Lane

Very good article. Further to comments above:

“so as to enable fiscal deficits to safely emerge during recessions by running sufficiently large surpluses during boom periods.”

But there’s nothing in the compact to define a ‘sufficiently large surplus’ is there? You get fined for breaking deficit targets, not for running an insufficient surplus.

Hmm. The paper for the Oireachtas committee mentioned in the article is linked here:

And, financial flow fans, in it we read Philip Lane saying.

“In addition to a stabilising fiscal policy, it is also essential that government limits procyclicality in credit flows. I do not dwell on this issue, since the responsibility for Financial stability is clearly delegated to the central bank and Financial regulator. However, I will note that the clear trend at both domestic and international levels is to adopt a more forceful approach to bank regulation. In particular, the macro-prudential approach to bank regulation recognises the two-way feedback mechanisms that link macroeconomic stability and Financial stability.”

But on sufficient surplus will have to read more.

The thing about it being more democratic if its stuffed into legislation against the will of the people (or more tactfully, without consulting the will of the people), whilst the EU retains the right to dish out the fines, is odd.

“It is a necessary condition for other initiatives that can improve the stability of the euro zone such as larger-scale liquidity interventions by the European Central Bank in bond markets, shared responsibility for European financial stability, various types of joint bond issuance and a deeper level of fiscal union.”

I’m skittery about the whole sign this thing (whatever your opinion of it is), so that other good things can happen. That’s pretty much Sean Quinn’s version of why he signed the recourse loan deals with Anglo, wasn’t it?

I think Philip is making an important point towards the end of the piece that I talked about in another post–actually calculating some of the quantities involved in the fiscal compact measurement system is quite hard, and to do so in a reproducible and defensible manner for the Irish economy while staying consistent with other EY member states’ calculations is both conceptually and computationally quite tough. Joseph talked about another quango–it needn’t be a quango, but if you want to measure things like cyclically adjusted structural deficits you will need highly qualified people to do this, and you do need to give them a desk and access to a coffee machine somewhere, either in Finance, or the Central Bank, or somewhere. It might seem like a jobs scheme for macro wonks but there’s no doubt it is necessary if unglamorous. Maybe we can put the poor unfortunate who has to measure these things beside our new cohort of septic tank inspectors to save a few quid.

“Such a role goes beyond the current advisory mandate of the new Irish Fiscal Advisory Council ”

Hmmm, I had the impression that the Council does in fact see this data collection and analysis role as part of its mandate

“The mandate of the Council – which is taken as given for the purposes of this report22 – is to independently assess, and comment publicly on, whether the Government is meeting its own stated targets and objectives. The Council is to assess the appropriateness and soundness of the Government’s macroeconomic projections, budgetary projections and fiscal stance. The Council will also examine the extent of compliance with the Government’s fiscal rules. The Council will perform other functions, including an assessment of the implications of budgetary plans for economic growth, investment and employment, as may be assigned by the Minister for Finance.”

Everyone knows that the result depends on what is characterised as being structural etc. the outputs depend on the inputs

It took the EU to force some level of honesty from the government in categorizing some of the ‘investments’ in the banks, NAMA etc…

Let some EU take the raw data and publish the results… As part of the Fiscal Compact, force all Euro zone countries to ‘open source’ their raw data, at the very least publih to all member states and EU, so calculations can be independently verified and challenged.

This paper could be taken as perfect commonsense if it could be taken in isolation. Unfortunately, it cannot be for countries within the Euro Area.

Statistics show that the explosion in public debt is largely due to the need to compensate for the social impact of the of the collapse in economic activity in Europe outside Germany and its satellite economies. This is the phenomenon that has to be corrected for anything else to work.

Paradoxically, Ireland has probably the best chance of entering the satellite orbit of Germany but this fact is not attributable to the austerity policy medicine being administered but to the MNC sector in Ireland, the happy coincidence of an up-turn in agricultural income and emigration. Whether France can succeed in doing the same, however, is the really burning question.

I posted on another thread the Spiegel translation of a recent very significant extensive interview with Juncker which I re-post here for convenience.,1518,813524,00.html

This morning, the French economic minister is spinning his best to try and explain away why France has a trade imbalance of over €50 billion while Germany has a surplus of over €150 billion.

The Economist had some of the explanation in an article last year about the German “Mittelstand”. The German company in question has since been taken over by a Chinese competitor. China has overtaken France as Germany’s main trading partner.

The burgeoning imbalances in the Euro Area are the real problem. Whether the new legislation in the area will allow them to be addressed is a very big question.

One promising avenue is the emerging idea of “re-nationalising” regional policy i.e. to transform the spending into inter-state transfers from the richer to the poorer countries as in the Cohesion Fund rather than what the Dutch call the “pumping-around” of their own funds back to them through the European Commission.

But this will provide no remedy as long as Germany fails to clarify what exactly the country is trying to achieve with its insistence on maintaining an export-led economy through administrative measures compensating for inadequacies in its true competitive capacity.

“It is a necessary condition for other initiatives that can improve the stability of the euro zone such as larger-scale liquidity interventions by the European Central Bank in bond markets, shared responsibility for European financial stability, various types of joint bond issuance and a deeper level of fiscal union.”

This argument is frequently put forth by those in favour of the treaty. However, there are absolutely no guarantees that the above measures would follow implementation of the treaty – it is merely wishful thinking. In fact, it is reasonable to guess this treaty is a quid pro quo for the support that has already been given by Germany and not a precondition for further measures.

If this treaty heralds a whole new set of measures and fresh policy thinking, then why aren’t these in the treaty itself. Where is the commitment to regulate the Eurozone banking system at a supernational level? Or where is the revised ECB mandate that would add unemployment and trade imbalances to its targets.

The answer, of course, is that they are not in the treaty because Germany does not want them. Ratifying the treaty is not going to change that – in fact it is only going to make real change less likely.

Today is the 20th anniversary of the signing of the Maastricht Treaty. Delors’ famous offer of a prize for a succinct definition of subsidiarity remains open as far as I know.

Professor Lane’s interesting suggestion that there is a sense in which the fiscal compact represents subsidiarity in action will not make the challenge any easier.

Goverment money must grow,not shrink if it to become a risk free asset.
However it must grow inside the Domestic Central banks which recycle interest income with their treasuries.
This will function to renationalise economies.
Its the Money to Credit ratio that counts.
Not the Money to GDP ratio………
What would it matter if goverment money was 1000% to GDP if no net interest was payed ?
Most of the investment misallocations we see around us are a result of commercial bank credit “investments”
They have not created wealth – they have destroyed it through depletion.
The entire urban and suburban landscape is all Houses & cars for a reason.
The Hospitals , Garda stations & power stations are ancillary – they only exist to service the credit ecosystem which functions by taking money from the future rather then today.

Being prudent with goverment money makes no sense – we have not had a standard from which to measure this since 1971.

TBH I think this fiscal compact thread could be combined with the one on the septic tank issue. The country finds itself in an EZ septic tank and all the big chunks have risen to the top and none of them are Irish and it’s a question of going through the motions and getting out of the tank ASAP and then NOT GETTING BACK IN.

Quel bordel des obligations de merde alors.

@Jag, I think not–the purpose of IFAC is to primarily comment on estimates made by government, rather than generating those estimates themselves. Of course if the Minister tells them to head off and figure out how to do these calculations, then fair enough, but I’d argue the IFAC role should be more of a check on figures rather than a generator of them. That’s the position Calmfors and Wren Lewis adopt as well here:


“But this will provide no remedy as long as Germany fails to clarify what exactly the country is trying to achieve with its insistence on maintaining an export-led economy through administrative measures compensating for inadequacies in its true competitive capacity.”

We’ve been around the block on this previously, but it appears that the penny hasn’t dropped for Irish politicians, policy-makers or the commentariat – or indeed for many of their ilk throughout the EU. Germany is seeking to pursue two conflicting strategic objectives simultaneously.

The first, as the ‘indispensible power’ – as Polish Foreign Minister, Sikorski, put it – is to secure the economic stabilisation of the Euro Area – and the broader EU beyond it. The second is to build a German Europe than can punch its weight with the BRICs and CIVETs by focusing on the export of high value, high knowledge content goods and services.

These objectives are not mutually exclusive, but they do conflict and the more they conflict the less Germany will be able to achieve even one of them. My view is that the second objective is the only feasible medium term option for the EU, so the obligation is on all member-states to do what they can thenmselves to help stabilise their own – and all EU economies – so that a concerted effort may be made.

Were Ireland to reform its sclerotic and inefficient sheltered sectors it would reduce the burdens on its remarkably resilient non-sheltered sectors and would be able to contribute to this effort. And the fiscal discipline imposed by this ‘compact’ would dove-tail with the effort.

But, I suppose, for many this would mean subservience to the Fourth Reich and it’s much easier to adopt the victim position.

A well written article but it, like the fiscal compact itself, avoids the real issues (in no particular order: the containment of the financial sector, the role of the Euro/ECB and German mercantilism) and makes these critical issues less likely to be addressed. Any approach that paints the crisis as a series of simultaneous moral, fiscal and economic policy failures in countries not bordering Germany rather than serious systemic issues with Eurozone capitalism is to be avoided.

Instead of wring anything more can I suggest that everyone reads @bazza and @DOCM postings above again?

@ Philip Lane


“Rather, the first line of defence in ensuring fiscal discipline should be domestic in nature, with the domestic fiscal law tying the hands of governments by requiring that public debt converge to a prudently low level and providing that average fiscal balances are sufficiently low so as to enable fiscal deficits to safely emerge during recessions by running sufficiently large surpluses during boom periods.

In this sense, then, the fiscal compact represents subsidiarity in action – it is more legitimate for the monitoring of fiscal policy to be primarily a domestic responsibility than remotely conducted from Brussels, albeit within a broader EU framework that recognises the negative contagion effects associated with high public debts and procyclical fiscal patterns in an integrated European economy.

In this spirit, the compact has the potential to strengthen the domestic political system since the Oireachtas can play an important role in ensuring the accountability of the Government in complying with the domestic fiscal law. Moreover, it is critically important to highlight that the compact is silent on the key political question in respect of fiscal policy, which is the debate over the appropriate size and role of government”.

I do not think this line of argument – which is valid enough as far as it goes – relates in any way to the issue of subsidiarity which deals with the issue of whether or not it is better for the EU to act or the Member States. In this instance, the parties to the treaties will be agreeing an inter-governmental (i.e. transfer of sovereignty is, by definition, precluded) treaty to act in a particular manner through agreeing legislation at a national level on the basis of agreed principles but to include “a correction mechanism” that “shall be triggered automatically”. The mechanism agreed, however, “shall fully respect the prerogatives of national parliaments”. The legal recourse method is that agreed between the Member States and which allows the European Court of Justice to act as arbiter under Article 273 of the TFEU of their compliance with the obligations that they have freely accepted, including the imposition of penalties.

But only the Member States may take one another to the ECJ, a situation perceived by many CDU members of the Bundestag as undermining the entire exercise on the not unreasonable assumption that countries could agree an informal “non-aggression pact”. Some further negotiations on the procedural steps are demanded.

In short, the Commission is acting as facilitator for this rather idiosyncratic (Merkelian?) exercise outside the treaties but has not abandoned in any way its role in relation to the obligations which the treaties impose on it as promoter of the “general interest of the EU” using its sole right of proposal.

Indeed, as you know, two further important regulations are in the pipe-line.

It may also be noted that the treaty is to be reviewed in five years time “with the aim of incorporating the substance of the Treaty into the legal framework of the European Union”. It is a pity this is not happening from the outset.

@ Paul Hunt.

The jury is still out! It depends on what happens to the German economy in the period up to the 2013 election.

While I agree that we have to pull ourselves up by our own bootstraps, and that there is no way we can abandon the radical reforms that are still required, there is the paradox of our situation which translates as being viewed as “best boy in the class”, or some other similar phrase, by peer governments, especially by those that wish to disparage it.

What other governments think does not matter two hoots; what the markets think does! Their judgement at this stage is fairly unequivocal. It is a pity that government cannot stop flailing around and convey it; (i) radical steps are necessary (ii) up to this point they are working and (iii) the situation remains fragile and finely balanced.

@Stephen, maybe I have the wrong end of the stick, but I understood there would be two stages with future fiscal adjustments

(1) The Department of Finance, predominantly and the Government would propose adjustments, typically in annual budgets

(2) The Council would examine the proposed adjustments and judge the effect of the proposals on future economic targets.

Step 1 is predominantly political and Step 2 is the new step which should lead to better political decisions by independently judging Step 1.

Step 2 involves a lot of data collection and analysis, so that a judgment can be made by the Council. I understood Philip’s article to suggest that this data collection and analysis be done by the Central Bank or ESRI or a new body. All I meant was that the mandate for the Council as I understood it, and as set out by the Council recently, would include this data collection and analysis.

I guess we’re talking at cross purposes then–for me anyway the data collection and analysis shouldn’t be done by IFAC first. They should check the calculations against reality, etc, and run their own model(s) on the calculated quantities. But the separation and feedback loop has to be pretty good to be effective in my opinion.

@Stephen, I see. You may be right and there may be a risk of the Council being held hostage to its own performance in collecting and analysing data, and we’d probably prefer for the Council members to be as unencumbered as possible in making their judgments.

This is a good article focusing on the big picture of what is the start of a process towards a better designed euro system — better not perfect and for sometime ahead, in for example China’s interest to have a second global reserve currency, currently at 26% of total world reserves.

It’s good that pressure from Europe helps to improve Irish water standards, forces some action on septic tanks just as a European Court of Justice deadline is about to kick in and eventually maybe will be a catalyst for a credible waste management system.

Twice in a generation, the Irish economy was wrecked and the underlying culture remains the same despite the crash. More intrusive European intervention is a welcome prospect.

There are 101 or more other issues that can be raised and some regard their particular interest as the main issue. The agreement provides a framework to move forward and with 25 countries involved there will be operational changes as time goes on.

German mercantilism is seen as a problem but where we gain, at least in cash terms from the Common Agricultural Policy as does France — should radical reform be welcome? Why should American multinational companies be able to pay Ireland corporation tax on the sales that are made in for example the UK (e.g. Google)?

Much of the ‘whataboutery’ can divert attention from the main priority of policy.

Individual countries have to take the initiative to radically modernise their economies over the next decade or else they will remain in the doldrums for much longer.

No amount of German consumption will make a difference if there is nothing to sell.

Some talk about transfers as if money should be provided for corrupt systems without question. The US federal union is sometimes cited.
However, for example West Virginia produces a lot of black stuff but it has not a black economy like Italy’s which the national statistics agency Istat says is worth €255bn and €275bn a year, or 16.3% to 17.5% of GDP.

In 1980, Germany had trade surpluses with Italy, Spain and Greece.

In Jan 2010, George Provopoulos, governor of the Bank of Greece, wrote in the FT: During the 1980s, Greece had another twin-deficit problem (large and unsustainable fiscal and external imbalances) and its own national currency, the drachma. It waved the magic wand twice, with large devaluations of the drachma in 1983 and in 1985, but in the absence of long-lasting structural adjustment and sustained fiscal contraction. The devaluations were followed by higher wage growth and inflation, with no sustained improvement in competitiveness. Speculative attacks against the drachma were avoided only because of strict controls on capital flows, an option that is no longer feasible or desirable. The twin-deficit problem remained. So much for the magic wand of currency devaluation.”

Problems predated the euro while credit and property booms masked them in recent times.

Spain and Ireland headed the 1993 unemployment rankings of the member countries of the OECD. Spain’s rate was at 22.4% and Ireland’s was at 15.8%. In December 2011, Spanish unemployment was at a rate of 22.8%; Ireland’s was at 14.3% and in October 2011 Greece’s rate was 19.2%. Of the 34 member countries (mainly rich countries) of the OECD in 2011, Spain, Greece and Ireland headed the rankings.

Greece can do much better. Its neighbour Turkey was also regarded a basket case a decade ago.

No economy is Utopia but Turkey’s budget deficit is now about 1.5% of GNP, but it runs a primary surplus. A decade ago, Turkey’s budget deficit was 12% of GDP. In 2002, government debt was 74% of GNP, now it’s 39%. A decade ago, Turkey’s per capita income was US $3,300. Now it is about $10,500.

As for Italy, the estimate of tax evasion in 2009 was €119.6bn – – almost four times the value of the Prime Minister Mario Monti’s recent austerity budget – – according to calculations reported last month by the Rome daily ‘La Repubblica.’

@ bazza

If this treaty heralds a whole new set of measures and fresh policy thinking, then why aren’t these in the treaty itself.

You highlight a positive aspect of the treaty; like a constitution, it’s not wise to include current day policy issues in a document that should have durability.

@Michael Hennigan

I’m sorry, but you’re wrong.

Do you honestly believe that the ECB’s mandate can be changed by anything other than new treaty? What would the process be for adding trade imbalances or unemployment to the ECB’s targets, if not through a treaty. Do you think the board can simply vote on it?

How about banking regulation? If we can move towards Euro Area regulation without a new treaty then I would be interested to hear how that would work.

I don’t buy this notion that the EZ mandarins are doing is the best for the EZ. Super Mario isn’t interested in jobs. It’s a conservative stranglehold that works against the long term interest of the EZ economy.

“the possibility of “quantitative easing” (purchasing bonds in an attempt to reduce long-term interest rates) by the Fed had been widely viewed as the conservative alternative to fiscal stimulus. The Fed would take action to reduce interest rates and thereby promote private spending. As many have pointed out, the Fed’s current approach is very much in line with the policy prescriptions of Milton Friedman, the patron saint of conservative economics. Indeed, in 1998, when Japan was suffering economic difficulties very similar to those we face now, Friedman urged the Bank of Japan to adopt what amounted to a policy of quantitative easing.

Moreover, key Republicans in both the Senate and the House demanded that the Fed abandon any effort to promote employment and limit its mandate to price stability.

Ireland need to get the deficit down but nothing will be done for jobs.

Maybe there is no other game in town but that doesn’t mean it’s the right thing to do. The unemployed can go hang under the ECB. And some literally will.

@Much Ado about Nothing of any real relevance to getting out of the unconscionable screwing of European serfs by the Financial System which has galloped out of control …..

POLITICS …. TangoMerkozy collapses in May …. ECB remains a pawn of the Financial MatrixsQuid_esque elite …. and Ireland’s Vichy Banking System Debt renders its sovereign positon UNSUSTAINABLE. The Oath of Allegiance didn’t butter any bread in the 1920s … Fiscal Compact is simply providing Caviar to the Financial Elite ….. it’s a Dummy for Dummies ……… a serious distraction ……… time for European Social Democrats to take over ………..

On the Delusional Duo ….

‘… Merkel and Sarkozy are being driven by desperation. The president would seem to be hopelessly behind his challenger Francois Hollande in surveys. A repeat of the German job miracle in France — Sarkozy is hoping that such a promise will attract voters.

Merkel, for her part, is horrified at the prospect of a President Hollande. The Socialist is in favor of euro bonds and opposed to the anchoring of a balanced budget amendment — the so-called “debt brake” — in the French constitution. Hollande also doesn’t think much of Merkel’s fiscal pact, which she recently managed to push through in Brussels. Should Sarkozy’s re-election bid fail, then Merkel’s European strategy could fail as well, the Chancellery fears.,1518,813583,00.html#ref=nlint

@ bazza

Realpolitik suggests that seeking to explicitly add unemployment to the ECB’s mandate is not a real world option.

What practical difference would such an inclusion have?

The central bank does take account of unemployment and critics of the euro often cite high German unemployment as the reason for the 2% benchmark rate from 2003.

If you believe thet the ECB’s sole focus is the inflation target, where have you been since the first week of Aug 2007?

Whether the argument is that emergency actions are in support of the ‘price mechanism’ or the economy, is a moot point.

@Michael Hennigan

Ta! Simply picked up a near toxic dose of merkozy_itis, complicated by a touch of matrixsQuidesque scurvy, and had to sojourn to lisdoonvarna to take the waters, the red pill, and recover. No truth in the rumour that Blind Biddy, Seven_of_9, and I were on a recce mission with Anonymous on hacking into the ECB mainframe and twiddling a few bits and bytes to silently restore Ireland’s debt levels to a sustainable position – that said, it is as plausible a strategy as any apparent from the locals at the mo ……

The Vrai French are on the way back …..

@ David O’Donnell

The Vrai French are on the way back …..


Talking about Vichy — Mitterand II? Hell hath no fury….Royal, François Hollande’s partner of 30 years told Le Figaro: “Can French people actually name anything he’s achieved in 30 years of political life?”

@ seafóid

The unemployed can go hang under the ECB. And some literally will.

Once again, it’s easier to blame the foreigners while ignoring what could be done at home if there was collective will to concede bubble gains and take actions that would increase the likelihood of employment compared with Europewide quantitative easing.

@ Michael Hennigan

It goes without saying that homegrown reform is required. But the gall are not interested in jobs. Even if the PS was world class there would still be a jobs crisis.

FT at the weekend

One solution would be to encourage the relocation of labour across Europe’s single market. The shortage of skilled workers reported by a growing number of German companies provides an opportunity for many Portuguese and Spanish unemployed. A proposal before the European Union to foster cross-border apprenticeship schemes is therefore welcome.
More should also be done at the national level.

ie no chance of any jobs in Spain or Portugal or Ireland

How many Iberian welders would Germany welcome anyway?

Does anyone agree with the minister Ruairí Quinn’s recent suggestion that the internet is “a playground for anonymous backstabbers” as reported today in the IT ?

@David O’Donell

That Press Review link has a beautiful little paragraph from Le Monde on the Merkezy alliance:

Mr Sarkozy and Mrs Merkel both have an interest in demonstrating that the couple is working as it has done in the past: the French President wants to give the impression that he is running Europe, while the Chancellor aims to show that she is not.

@Michael Hennigan

@ seafóid

‘The unemployed can go hang under the ECB. And some literally will.’

Once again, it’s easier to blame the foreigners while ignoring what could be done at home if there was collective will to concede bubble gains and take actions that would increase the likelihood of employment compared with Europewide quantitative easing.

This culprit bashing makes me sick too.

In a similar spirit it is easy to blame Hitler for invading Poland while ignoring what Poland could have done at home to give up peacetime gains and build up its own army to defend itself.

I say this being fully aware of all Internet traditions.

@ Michael Hennigan

It would, of course, be a very welcome development if the German government recognised that there should be increased consumption at home and took steps to promote it. This would absorb both imports and German products. But it will not, of course, resolve the problem confronting the smaller peripheral countries which are back where they were twenty years ago.

But then, this is not the problem that must be resolved. The Gordian knot that must be cut is the question of the growing imbalances between Germany, on the one hand, and France, Italy and Spain on the other. Europe has been here before and the weapon of devaluation (or sometimes that of revaluation of the Deutschmark) was used to resolve it. This weapon is not available within the Euro Area.

The imbalances arise, not because Germany is exporting too much but because it is destroying the capacity of the other countries to export by taking administrative measure to promote niche technologies and dominate in particular sectors. This is the strategy of the Mittelstand and, up to this point, it has been very successful because Germany also has a number of mammoth industries, notably car manufacturing and chemicals.

The classic example of the strategy is that of solar energy, in which other countries, notably France and Denmark were also active in the same way. All involved got a bloody nose because the Chinese defeated them all.

The lesson is that the countries of Europe have to cooperate in the creation of a genuine single market, including joint enterprises such as Airbus which brings the work to the workers and not the workers to the work.

When I can read on a product “EU Patent pending”, I will believe that this can happen. Unfortunately, there has been no agreement on a language regime and the countries that have agreed to go ahead on the basis of one based on English, German and French are incapable of agreeing where the European Patent Office should be located.

Either the calculation of the politicians who launched the euro that it would be a stimulus for further integration is correct or, unfortunately, it is the opposite – a stimulus to disintegration – that it will provide.

All one can say about Merkel is that she is playing both sides and eating the FDP’s lunch in the process. A renewal of the Grand Coalition with the SPD seems the most likely outcome. Whether she will be prevented by the new Six-Pack arrangements from pulling a stunt such as that during the last one as adverted to by Juncker (increasing VAT from 16% to 19% without any consultation) remains to be seen. Juncker did not seem that convinced.

As Mervyn King pointed out in a speech some years ago, the burden of adjustment lies entirely with deficit countries. This is the one lesson that has been retained with regard to mercantilist parctices over the centuries.

The main problem with Philip Lane’s article is that it is not really about the fiscal compact treaty – it is about fiscal discipline in general; the argument is basically that since fiscal discipline in general is a Good Thing, then the fiscal compact treaty is also a Good Thing, as a specific instantiation of the general principles.

The DoF in their discussion paper outlined some principles for fiscal rules – let’s see how the fiscal compact treaty stacks up against these:

1) Simple, clearly defined and transparent.

Fail – the lynchpin is an unmeasurable quantity. This is pretty much accepted across the board – the spectrum ranges from “extremely difficult to measure” (Noonan) to virtually impossible (McCarthy, Whelan)”.

2) Adequate

(leaving aside all issues surrounding credit bubbles, EU-wide imbalances etc. which a full discussion of “adequate” requires)

Fail – it would not have changed government policy during the boom. You might have expected to see huge cyclical surpluses and structural deficits during the boom, but this wasn’t the case. The Stability Program Updates produced every year showed that everything was just fine, generally with small structural surpluses.

3) Flexible

This is a tricky one, since one man’s flexibility is another’s non-compliance. However the main point of the fiscal compact treaty is not the formulation of the rule itself (this is just a tweaked version of an existing SGP rule), but to elevate one rule to prime position and to reduce the flexibility that surrounds that rule, e.g. with automatic sanctions. One thing you can be sure of is that rules will be implemented with rigour for small countries without much influence, but watch what happens when large countries are involved. For example, early drafts of the fiscal compact treaty specified that the EU Commission could specify policy measures to be taken for countries in breach of the debt and deficit criteria. Italy didn’t like this so they had it changed so that the measures only applied to deficits and not debt. You will see that the rules are surprisingly flexible for large countries, while being quite rigid for small ones.

A better model to use as a basis for a fiscal responsibility law would be that used in Sweden, which makes heavy use of multi-year expenditure ceilings, for example. Sweden only signed up to the fiscal compact treaty when the wording was such that none of the fiscal rules actually apply to Sweden – meaning in effect it is purely symbolic.

The question is not about fiscal responsibility rules in general, but is about the fiscal compact treaty in particular. Signing up to a treaty where mini-budgets and other corrective measures are automatically triggered on the basis of the value of an unmeasurable quantity is not in the country’s interest. The estimates of this unmeasurable quantity will likely be taken from a one-size-fits-all model defined in Brussels and Berlin, without due regard to the characteristics of Ireland’s economy. This is hardly subsidiarity in action.


Mario Monti says in an interview in The Wall Street Journal: “Europe won’t be a nice place in five years if we have not solved the issue of how to have Europe grow economically. What will growth policy have to look like in a fiscally compacted Europe? Clearly any illusion of budget stimulated growth policy will have to go away.”

On Germany the former professor of economics says: “economics is still a part of moral philosophy. In the sense that they make a much stronger correlation between the moral virtue of economic behavior and the good or poor results of a country as a whole. The way to penetrate, productively, the German frame of policy-making—rather than urging them as was done over the decades through the locomotive theory to expand their deficit of the public sector in order to generate a higher dynamism of the German economy, thereby helping other EU member states through exports to Germany to increase their growth—I think we should urge the Germans to go the full extent into their virtuous notions of the social market economy.”

Monti calls for more powers for the European Commission to enforce the single market rules – – countries often break the rules as it can take years for the infringement process to be concluded.

You say Germany “is destroying the capacity of the other countries to export by taking administrative measure to promote niche technologies and dominate in particular sectors.”

Germany’s biggest surplus is ex-EU and like the Swedes, they are good at exporting and providing customer support, even though prices are always seen as high.

Germany became a net exporter of food and drink for the first time in 2008. Maybe people overseas get more a kick from weissbier than Carlsberg or Heineken.

Apart from SAP, Germany is weak in consumer high-tech but so is the rest of Europe.

Germany has Europe’s top global car brands, Mercedes, Audi and BMW.

As it opened plants abroad, German car sector exports rose (parts and components). In Italy, it took a Canadian accountant, a son of Italian immigrants, to revive FIAT and it is now an important player in the US.

Yesterday the European Commission said Switzerland was Europe’s top innovator but South Korea beat all European countries.

Lots reasons for this that cannot be distilled into a soundbite.

Sony flounders as Kodak did for decades but Germany’s Siemens is America’s GE’s global rival — both companies date from the 19th century.

Why is Ireland poor at exporting?

@ Michael Hennigan

“Why is Ireland poor at exporting?”

At the risk of going right off topic, this is where you need to entice the likes Richard Fedigan back.

For me, it goes around in circles to exporting what (insert bitter joke about emigration here)?

I note that U2 have completed their world tour and the Irish Times reports “When U2 comes to town: 360° tour grosses over $703 million”, now I don’t want to deviate into opinion or discussion of their tax-affairds – I’m merely noting that this is a highly successful Irish export, isn’t it?

I also note in the Sunday Post, my plucky friends at Element Films looking to expand their operations.

I sometimes worry, as per your list, that when people think of supporting or developing exports, their are thinking of physical objects only – as if Ireland is going to have a crack at a car industry.

So it comes back to building on excellence – what Ireland is good at and known for, and thoughts related to those.


(1) Agriculture
(2) Tourism
(3) Sport
(4) Arts/Film/Culture
(5) Software/apps/games, etc
(6) Construction

I was talking to one businessman and I asked about Ireland and he said, fundamentally the Irish were good on one thing – communication – that’s what our strength was.

I threw construction, because actually I do think in some areas (ie not flats or ghost eststaes), the Irish did get on with showing leadership in large-scale construction projects.

‘Intellectual property’ is a funny area I’d like to see further discussed.

Feel free to add.

I’ve recently been asked to sit on an Artists’ advisory board for UNESCO International Theatre Institutes. My main interest is living Irish arts and artists, and I’ll be pushing that way: with the aim of setting up virtuous circles. Feel free (or any other readers) to send suggestions to support cultural activity my way and I’ll see what I can do.

@ Michael H

‘Two-thirds of the surplus was ex-EU27’

The euro is a wondeful asset in the struggle for global market share.

@Michael Hennigan channels Mario Monti

“Clearly any illusion of budget stimulated growth policy will have to go away.”

It is the use of the word “illusion” where Monti really gives away the game. Another former economist turned European technocrat operating in the alternative reality where there is no fiscal multiplier.

Sad really – the man studied under Tobin but now, thanks presumably to the dominant atmosphere in EU economic circles, you could not tell him from a member of the CDU’s youth wing waving a copy of The Road to Serfdom like it was a religious text.

@ Michael

”Why is Ireland poor at exporting?’

Which Ireland are you talking about ?

The FDI Ireland is very good at exporting, but is merely located here, and mostly for tax reasons, and is increasingly centred on services and footloose intangibles.

The old Ireland is scarecly industrialised, heavily skewed towards property, traditional professions and tourism, with a rigid, Victorian public sector. The domestic economy is crumbling anyway, and fiscal rectitude will merely acccelerate the decline.

@ Gavin

One reason, and maybe the bigest reason, we have excellent arts is that there have been so many decades of high unemployment and emigration. Back to the future.

@Shay Begorrah

“Clearly any illusion of budget stimulated growth policy will have to go away.”

Any illusion that QE which is stimulus for the banking sector will lead to growth will have to go away.

It’s just a strategy to kick the unemployed down the road.

@Michael Hennigan

“Destatis reported this morning that the German foreign trade balance showed a surplus of €158.1bn in 2011. In 2010, the surplus amounted to €154.9bn.”

I see that Sony and Panasonic have been crippled by the strength of the yen. Germany really does need a sick periphery.

But where is this surplus being invested now that the periphery has the financial equivalent of an STD? They did get their money out thanks to JCT but what will they do from now on?

‘The question hanging over Mr. Hasenstab’s Irish bet is whether he will hold the bonds after 2013. Right now, the Irish government can pay off bonds that come due with the help of rescue loans from the European Union and the International Monetary Fund. But after 2013, Ireland may need to go back to borrowing from private investors to repay debts that come due — and the appetite may not be there, which could send Irish bond prices plunging. All of the Templeton Global Bond Fund’s Irish government bonds mature after 2013, according to the November holdings filing’

Is this bond investing or or bond speculation ?

@ seafóid

Sony has been crippled by more than the yen.

The EUR/USD rate in mid 2008 was $1.60

Monti was making the point that there are other ways to promote growth.

The surplus is belong to Daimler, Siemens etc.

@ Gavin Kostick

Most of the U2 loot doesn’t make its way to Ireland.

The likes of Riverdance are export earners – – if an Irish company books the revenues.

In 2010 inward tourism revenue was worth €3bn and outward was valued at €5.8bn.

@ Paul Quigley

Apart from the concentration of indigenous exporters on the UK market, research on comparable countries shows that teh number of Irish SMes that export is on the low side.

An EU survey of more than 16,000 small and medium size companies <SMEs, < 250 employees) found that in Estonia, 23% of companies generated turnover from exports, Slovenia: 21%, Finland: 19%, Denmark: 17% and Ireland 11%. The proportion of SME revenue generated from exports in 2005 was Belgium: 15%, Estonia: 12%, Slovenia: 11%, Iceland: 10% and Ireland: 4.2%.

Bank of Ireland reported on a survey by MORI Ireland in 2005, which
found that only 3% of Irish SMEs are medium size with more than 50
employees. This contrasts sharply with the UK where medium size
enterprises, which employ 30% of the workforce, are the powerhouse of
the economy.

The confirmation of a selling incentive for BRIC countries + South Africa in the Finance Bill is odd. Why exclude Nigeria or Japan — big markets in their regions?

@ Michael Hennigan

There is no real mystery to this. Small peripheral economies cannot hope to match the SME’s in larger countries with a long manufacturing history and world-size firms.

However, as to why Irish indigenous firms are so poor at exporting, my simple answer would be that they are seemingly incapable of cooperating, as the sad history of the Irish cooperative movement confirms. There is no vertical integration, by way of example, in the beef trade. Each level of production is independent and sees itself as a competitor with the next, most of the value added disappearing out of the country.

I can go to any local major store in Ireland and see potted plants and flowers displayed on the same trolley as went through the flower auction in Holland, the auction house being owned and controlled by the growers and practically every cent of the value added returning to them.

Indigenous Irish firms that do grow tend to leave the country and ignore their origins.

As long as export promotion is seen as a matter for the government and not the industries themslevs, the situation will not improve. The mind-set of “can I get a grant for that?” is so ingrained, it is difficult to see any change taking place.

Against such a background, the policy of attracting FDI and hoping for spin-off is about as good a policy as can be invented.

@ Michael Hennigan

On your figures with regard to the German surpluses, this is also not new as German industry is benefiting from the boom in developing countries and from the decision by Chinese leaders to go for domestic investment to try and raise living standards, an example that Germany could usefully follow. (There are signs that internal pressures are rising. IG Metall, the largest industrail union, is looking for twice the 3% on offer from employers. But that is not where the problem lies but in the decline in living standards of those outside the strongly organised and unionised sectors).

cf. SDZ coverage of the latest German “economic miracle”.

Two thirds of the trillion of German exports still go to the other countries of Europe.

But the crux problem remains; either Germany sees the wording about economic and social cohesion and balanced regional development in the treaties as so much verbiage or it believes that it must be translated into facts. Monti is making the case for the latter. If he is not heeded, the future looks bleak. There is nothing in the deal for the other countries of the EU other than those in a satellite situation vis-a-vis Germany, a status to which Ireland can and must aspire as there is little other option.

In short, when looking at the various scenarios, one has to have two perspectives (i) the national self-interest one and (ii) the broader European interest.

It’s a tough old world!

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