Whelan: We should sign up to fiscal treaty despite the serious flaws Post author By Stephen Kinsella Post date February 13, 2012 Karl holds forth on the fiscal treaty in the IT here. Categories In Uncategorized 67 Comments on Whelan: We should sign up to fiscal treaty despite the serious flaws By Stephen Kinsella Senior Lecturer in Economics at the University of Limerick. View Archive → ← Lovenomics → Action plan for jobs 67 replies on “Whelan: We should sign up to fiscal treaty despite the serious flaws” Quel surprise! as someone who is in the “this whole thing isnt going to work out” crowd….I dont really think the fiscal treaty is the thing to make a stand on. Any rules that it incorporates can easily be broken in future (on the far side of the euro) and it isnt going to make any meaningful difference this side of the collapse. If the collapse doesnt come (and I am happily proven wrong), and we come to a situation where the treaty is obviously unworkable (and it is more likely that Germany arrives there first) I am sure the rules will be rewritten. Far more important stuff coming down the tracks in the next 18m months so no point crying wolf over this. Bad treaty but no real impact for Ireland. @Karl I’m driven in cases such as these by a well worn biblical phrase which should not be easily forgotten or tossed aside namely: ‘When in doubt, don’t’ Your article raises many doubts – too many in my view to have any comfort on virtually any economic level and given such a situation the hope strategy, that is the ESM backstop, is in itself another political cul de sac. I’d simply say don’t do it, don’t sign it and get a better deal. If Ireland Inc was your company and this is the deal that was placed before you and your families economic survival I’d suggest you would be back at the negotiationg table. Well I’m a shareholder in said company and I say no deal, and I doubt I’m unique. KW support of ESM is more sad than bad economic analysis. We have a financial services property boom, classic bank bust caused by mismanagement by those in the legal, financial services, banking and political sector. In the main we kept to the terms of the S&G Pact. We now have an artificial debt hose economy to be future fueled by PN’s and ESM funding to keep NAMA, the banks, the financial sector, feeding from the same trough that fed the bubble, an even more lethal and toxic economy than the one we had before. A defunct bailout failing as we speak. This ‘new economics’ to hide debt and preserve debt will be fed by austerity and further economic wreakage based on more peonage and debt extraction. Go for it, says Karl 🙂 The New Economy we should sign up for in the hopes we might rejig through negotiations further relief for the top 1% in our new society. Be sure any debt relief going will go into their pockets before it goes into the plan to dismantle the public service to pay for the debts of the rich employed by NAMA. Sadly, we don’t have analysis from Hudson, Stiglitz, Krugman, Roubini but only the ‘common sense’ approach of Karl. If the game is crooked and you are making money from it, why stop playing the game. Get the likes of KW to egg on the game from a ‘common sense’ sideline. But this is only common sense if you believe a bad economic system can be made better by preserving itself at the expense of the poor. The alternative is to leave the EMU which has proved a dismal failure; whose failure is compounded by its agenda to save the power structures, banking, financial sector responsible for the meltdown. NAMA should be shut down immediately with firesales. All losses should be moved from mark to market, marked to value and books cleaned based on ability to pay including ‘sovereign’ debt books. Sadly, don’t expect penetrative economic thinking from KW; unless you regard support of his views as a good career boost both for him and for yourself. Business as usual on Tir Na NÓg. I share the views of Gene Kerrigan in the Sindo yesterday, I too am afraid when I look at developments across this island. Personally, I don’t think it is wise to have the UK on the outside of this treaty. But a a meeting of minds between the UK and the Rest seems unlikely in the near future. Secondly, the 3% figure seems to me entirely arbitrary. Why this figure rather than 4% or 4.768% or 5%. Has the figure some relation to historical bond yields? Finally, the Irish situation is so perilous over the short to medium term that rowing agains the tide may do more harm than good. The treaty may be a bad compromise but Ireland’s own freedom to negotiate is itself very compromised – an unfortunate fact. Why is Karl making political rather then economic statements ? Who elected him or is he about to run for office ? Indeed will he become part of a new “Caretaker” adminstration soon ? Its a strange world when the oireachtas asks for political advice from economists & its even worse when they get economic advice from guys who still think we are on a fixed exchange rate system. 100’s of thousands of jobs being announced on News AT One o/before 2016…hAs the country gone MAD (Mutually Assured Destruction) ? Keep laughing, beats the alternative ! SSShh, maybe the new jobs after the financial sector and banks offload a couple of thousand shortly; whats the story on those job losses anyhow? @ Colm “Sadly, don’t expect penetrative economic thinking from KW; unless you regard support of his views as a good career boost both for him and for yourself.” Eh… We no longer have a global fixed exchange system – its been gone for quite some time now………. Just saying like. monetaryrealism.com This reads very much as something written much more in sorrow than in anger. The sorrow and resignation are justified because it is extremely regrettable that democratic consent in the ‘creditor nations’ may be secured only to the extent of legitimising this ‘fiscal compact’ – which by any objective standard is flawed and excessively constraining. But it is very easy to understand why democratic consent is so restricted in these countries – and restricted far short of what is required to legitimise the policy actions the resolution of this crisis demands. Voters in these countries were lied to by their politicians – not once, but twice. First they were told that they could take it on trust that the arrangements establishing the Euro were sound and solid and secondly, that all members would honour their sovereign signatures and conduct their national policies in a manner that would not undermine the stability of the enterprise. They were deceived on both counts and, understandably, are very reluctant to grant their politicians the licence they previously, and carelessly, granted. However, there is no doubt that the stock of sovereign debt must be reduced considerably and its quality enhanced in the medium term and this compact, how ever ill-conceived, will drive this move. But it should also be made clear that persistent current account surpluses as are damaging as persistent deficits and voters in the ‘creditor countries’ must be persuaded to address this. But I would argue that the energy and resolve induced by anger should not be dissipated and we should look to more than “hope we can work to improve its design in the future”. The Irish people have shown a remarkable willingness to accpept the programme of fiscal adjustment that has been imposed – and it is to their great credit. This makes it all the more necessary to pursue the structural reforms required to counteract the damaging impact of this programme. Ireland will then be in a position to make its case forcefully for reform of EU and EZ governance to its partners – and in particular to the ‘creditor nations’. It does seem mathematically incoherent. It would make some sense if these were “real” percentages. Karl talks about 4% nominal growth. Now if 1.4% of this was real growth and we interpreted the 1% restriction as being real i.e. 2.4% nominal then the math would stack up. Karl does the Treaty make any reference to growth and inflation? Colm, “I share the views of Gene Kerrigan in the Sindo yesterday” In the face of such intellectual giants I expect Dr Whelan to issue an apologia within the next 24 hours. Sindo v Economics Phd…no contest. Having been chief cheer leader for the boom, the Sindo seems no to be taking up the cause of the battlers. The thread is already weaving off topic folks, can we bring it back to the substantive points Karl raises in his piece? The creditor nations have settled the banks debts on the Irish people using the ECB as the Big Bertha gun. Regretably the Irish ran as the gun was being rolled into place. And most of Irish runners left with their pockets well full. For those tempted to resist we are being shown the spectacle of Greece being thrown to the beasts. A slow spectacle just in case any gory detail goes unnoticed. Whatever about the lofty articles on solidarity in European treaties it is clear that the spirit of retribution and vidictiveness is alive and well and indeed dominant in the New Europe. It is hard to argue with Karl Whelan’s conclusion unless one is prepared to take the harsh decisions to recover sovereignty forthwith. i.e the Morgan Kelly solution. But Ireland has no stomach for that kind of scenario. I hope the Greeks can find the courage to resist this European onslaught, which is being done in our name as much as it is being done in the name of Germany or France or Netherlands. @Paul The Irish people have been proven again & again to be naive Dolts – its nothing to be proud of. In a currency union without fiscal transfers the real resourses of that unit get sucked into the centre as they always must. We have been played again as at least one of these legs have been cut from under us and the other is in real trouble of breaking. I just find it amazing people still accept this poor propoganda. The mechanisms(multinational tax arbitrage operations / european fiscal transfers) used to sustain this artificial peg to Europe since 1979 have completly hollowed out the real domestic economy to the point of absurdity. The owl and the pussycat went to sea In a beautiful pea-green boat … @Gavin Help me out here … @all The ‘Compact’ will implode post German elections in 2013 … or earlier @Karl Whelan The rotten politics, false narratives and contrafactual economics of the current EU are no reason to give up hope and advise against following both your own conscience and intellect. Your article spends 90% of its text explaining how the macroeconomics of the fiscal compact is theoretically unsupported (not to mention strongly empirically contradicted) but ends with a remark saying we have to implement the policy anyway as we are party to an even worse one (EMU, the rule of the Troika) seems to be crying out to be reframed. Why not simply say that the fiscal compact is bad economics layered on top of bad economics and worse politics and have done with it? If we engage delaying tactics Sarkozy will be gone and the political character of the EU substantially changed by the time Ireland has to reject the compact. Contrariwise if we implement the compact we strengthen the political hand of both Merkel and Sarkozy at a time when their economic and political objectives are opposed to Ireland’s. Let us not despair and submit to the conservative German narrative before it is replaced with something reality based and progressive. I didn’t post this because I was busy this morning but also it’s just my comments from the Oireachtas committee last week and I posted them then. More interesting is that the Committee debate is now online. Video here http://www.oireachtas.ie/viewdoc.asp?DocID=20288&&CatID=127 Transcript here http://debates.oireachtas.ie/EUJ/2012/02/02/00003.asp Perhaps instead of constanting moaning about how I disagree with Stiglitz et al, Colm B might want to read the transcript, e.g. Who said this? “On Keynesianism and the abandonment of it represented by the pact, I agree with everything Deputy Mac Lochlainn said. This is turning its back on what macroeconomists teach to undergraduates in textbooks. We do not know everything but we know more than we knew at the time of the Great Depression. We know that fiscal policy should be used as a valuable counter-cyclical tool. To a significant extent, this treaty cuts back on that. It is turning its back on macroeconomic best practice. I agree with the criticism of Krugman, Stiglitz et al.” @ BW2 “It does seem mathematically incoherent.” The maths is here http://www.karlwhelan.com/IrishEconomy/DebtRatios.pdf The Owl and the Pussycat [Edward Lear on the Merkozian Kompact] The Owl and the Pussycat went to sea In a beautiful pea-green boat, They took some honey, and plenty of money, Wrapped up in a five pound note. The Owl looked up to the stars above, And sang to a small guitar, “O lovely Pussy! O Pussy, my love, What a beautiful Pussy you are, you are, you are, What a beautiful Pussy you are.” Pussy said to the Owl “You elegant fowl, How charmingly sweet you sing. O let us be married, too long we have tarried; But what shall we do for a ring?” They sailed away, for a year and a day, To the land where the Bong-tree grows, And there in a wood a Piggy-wig stood With a ring at the end of his nose, his nose, his nose, With a ring at the end of his nose. “Dear Pig, are you willing to sell for one shilling your ring?” Said the Piggy, “I will” So they took it away, and were married next day By the Turkey who lives on the hill. They dined on mince, and slices of quince, Which they ate with a runcible spoon. And hand in hand, on the edge of the sand. They danced by the light of the moon, the moon, the moon, They danced by the light of the moon. http://www.rhymes.org.uk/the_owl_and_the_pussycat.htm @Karl “All that said, despite the economics of this treaty being pretty terrible, I think that, on balance, the arguments favour Ireland signing up to it. This is for two reasons: Ireland’s debt ratio is now so high that the country is set for a long era of tight fiscal policy with limited (or perhaps no) room for counter-cyclical fiscal policy.” Is the real concern not that other countries won’t be able to use their fiscal space? the more countries that sign up the more likely that the eurozone as a whole will be straight jacketed by this @Karl Whelan This is rock and hard place territory but there needs be a better political approach than another retreat – where are we retreating to. It is possible after all that the fiscal compact represents not just a victory of political cynicism and right wing economic dogma in the EU but is also a precedent for further wrong headed policy making. If we are bullied into accepting the fiscal compact who knows what precisely will come next? Merkelism is not a path we want to end up stuck on. Might it be time to do a Krugman, forget the EU’s current “facts are in the gift of the powerful” philosophy and start calling the liars and fools liars and fools? You have been very reasonable so far but might it be possible that reasonable no longer gets things done? I agree with Karl that the reality of the situation is that our signing up to the fiscal treaty is likely to have a limited effect on Ireland’s economy in any time period besides the ‘in the long run we are all dead’. Complaining about the impact of a Treaty that may one day lead us to an asymptotic debt/GDP ratio of 25% (if we have a prolonged period of deficit-busting 4% growth) is pretty moot given we’re starting from a position of 120% debt/GDP. I think we should be thanking our lucky stars if we ever get to a position where the constraints of this treaty have started to bite and by then we’ll probably have better things to worry about (like recovering from the Mars invasion of 2027 and the Prussian Mongolian wars of the 2030s). Clearly the broader treaty adoption is likely to have a disastrous effect on the World Economy in general, as Europe delevers as a whole, but there’s nothing we can do to stop its implementation (and nobody cares about our protests) so we may as well sit quietly and take our bailout. The modern European market State will have privatised industrial utilties that will further deindustrialize the place via the mechanism of deferred real investment & depreciation of former nation state assets. Meanwhile effective zero public debt will force a now very poor populace into massive private debt. This is a nightmare. The 3% deficit target is arbitrary as is the debt limit of 60% but it’s interesting that Rogoff/Reinhart put a 90% of GDP threshold for the danger level. France is now at that level from 22% in 1974 when it last achieved an annual budget surplus. There is going to be no dictatorship applying sanctions on well–run countries that may overshoot these targets. What would be important is that there would be no reluctance to address for example reckless election promises before an election takes place. The buffoonery about the septic tank issue and property tax/household charge in Ireland shows that little has really changed since the crash. There needs to be decisions in countries such as Greece and Ireland on what can be afforded and on overdue reform. The pre-2008 situation is not going to return and in several countries it will take years to root out protection rackets and put in place fairer systems for the citizenry. The FT says today that last year the Greek state and private healthcare sectors spent €4bn on medicines alone, amounting to 2.4% of GDP – the highest proportion in any industrialised country and more than twice that in the UK. Greece spends more per capita on drugs than any nation except the US and Canada. A large but chaotic medical infrastructure has emerged since the 1970s. “There is still a huge oversupply of poor quality healthcare,” says a doctor working in one of seven full-service hospitals on the Greek island of Crete, two of which are in towns of less than 10,000 people. On the other hand, there is money from the EU for projects but the bureaucracy is incompetent. Despite being in desperate need of European Union structural funds that could help boost growth and employment in Greece, the government is having trouble absorbing more than €1bn because of problems with bureaucracy, staff shortages and lack of planning, Kathimerini, the Greek newspaper, says today. The newspaper says the European Commission is closely monitoring 181 projects in Greece, for which some €11.5bn will be dispersed. While much of this money is going toward infrastructure schemes, €4.3bn is being allocated through the European Social Fund for projects to help with employment. Ireland is also slow to tackle vested interests, public project management was poor throughout the boom and the concept of conflict of interest is seldom recognised. The country spent €8bn on welfare in 2001 and €21bn in 2011; the Government has announced 270 actions on job creation but big launches are easy while targets are seldom met. Colm McCarthy on Sunday made a suggestion in term of fairness in a society that faces more retrenchment: Job security is a precious concession in today’s Ireland, and no significant price was extracted by the government’s negotiators at Croke Park. Rather than another across-the-board cut in pay rates, would it not be fairer to conduct a fresh benchmarking exercise, in full public view this time, comparing pay rates across the public services with rates in the private sector in Ireland and in public employment in other European countries? There is a widespread belief that, particularly when pension entitlements and job security are taken into account, public employees in Ireland are still better off than their private sector neighbours. Moreover it is regularly asserted that Ireland’s public officials are better paid than their counterparts in countries on which we now rely for emergency finance. If these beliefs are inaccurate, as the public service trade unions maintain, would it not be best to get the evidence out in the open? If there is substance to them, the government would have a practical case for re-opening Croke Park. http://www.independent.ie/opinion/analysis/colm-mccarthy-lets-benchmark-public-pay-this-time-in-public-3016992.html @ All I would suggest that this treaty cannot be viewed in anything other than mainly political terms. Its text reflects the German view that the era of deficit financing is over, given the pressures brought about by globalisation. If you accept this, ratifying the treaty is a good idea, if you do not it is a bad idea. In a sense, the treaty marks the watershed between the so-called Anglo-Saxon view of the world and the alternative Rhineland model or social-market economy. As 25 countries have indicated a willingness to sign up, one can see where the majority view now lies. That is the choice facing Ireland! Debating the fine print of the treaty in either economic or institutional terms is, of course, very useful but should not blind us to this reality. Equally, those pushing for the issue to be decided by referendum should have some regard to how the matter is being handled by other countries and ask themselves; what makes Ireland so different? The Commission will be publishing its first report on macro-economic imbalances tomorrow. Le Monde gives a foretaste of what is in it. http://tinyurl.com/7uaszhe Unfortunately, the equation still remains “surpluses = good; deficits = bad” but there are tentative signs that this particular myth is being tackled. An example of the changing mood in Germany is the interview in the best-selling Welt am Sonntag with the German labour minster supporting a 6.5% wage demand, a living wage for part-time and temporary workers and a minimum wage to be introduced “in the course of the present legislature”. http://www.bild.de/geld/wirtschaft/ursula-von-der-leyen/wann-kommen-die-rekordgewinne-der-wirtschaft-22589168.bild.html Shay, If you are going to shout “liar and fool” as you suggest at the person who is financing your budget deficit and fundignyour banking system you better not be in a postion of dependency. Closing the primary deficit today is within the realms of the possible (actuall it is not!) Finding 140bn under the matress to fund the banks is not. That probably requires leaving the EZ, EU, planet earth. @ Tull Re ““I share the views of Gene Kerrigan in the Sindo yesterday” In the face of such intellectual giants I expect Dr Whelan to issue an apologia within the next 24 hours. Sindo v Economics Phd…no contest.” Oh really, http://en.wikipedia.org/wiki/Gene_Kerrigan “Gene Kerrigan is an Irish journalist and novelist who grew up in Cabra in Dublin. His works include political commentary on Ireland since the 1970s in such publications as Magill magazine and the Sunday Independent newspaper. He has also written about Ireland for International Socialism magazine. He was chosen as World Journalist of the Year in 1985 and 1990, and has written books, including fiction and non-fiction. “ The ghettoes sink deeper into despair while southside gobshites chatter inanely about the Celtic Tiger. —Gene Kerrigan ” @ Bond, re “…eh” Yeah, some ennui there. I await the announcement of KW to a new government economic thinktank or other quango, perhaps new special advisor to Noonan..we’ve been there before with optimistic Polyanna thinkers such as Alan Ahearne. What gets me is the shallow triviality of PC thinking now getting to absurd extremes with announcements of 100’s thousands of jobs. So, where’s the triviality or shallow hypocrisy, look at NAMA. We used to have an economy fed by debt that was spent in the economy. Now we have an economy built upon a virtual economy whose sole function is to consume more borrowed money in order to pay the debts incurred by the first economy. The new virtual economy of debt is NAMA, the banks, Croke Park, the austerity imposed on the most vulnerable used to protect the most protected class. None of the above is brought into the sphere of thinking of KW in his piece above. He makes vague mention of other rules that should be in the compact, but are not; but he’s not going to upset any apple carts by bringing them to anyone’s attention. But he does focus on one rule, the ‘golden’ rule. Instead we get the following: “For example, a deficit of 2.4 per cent per year would stabilise the debt to GDP ratio at 60 per cent if nominal GDP grew at a 4 per cent pace. And an average deficit of 2.4 per cent could also allow for cyclical deviations of two or three percentage points without endangering fiscal stability. However, the 3 per cent maximum deficit rule severely limits the ability to run counter-cyclical policies of this type that would still be consistent with moderate levels of debt.” He implies it would be a great Treaty if we could just tweak the compact to allow for some cyclical deficit adjustment tweaking.. This is waffle. Ireland was not in breach of Stability & Growth Pact. The euro didn’t fall because of S&G malfeasance. The euro fell because of the broken financial sector breaking in 2008; it broke because of the economic reliance on the FIRE economy that membership of the EMU signed you up to. The ICB’s in 1999 were given carte blanche to run their own affairs without political interference or regulation from Greenspan or anyone else. Lots of the money created by European banks was spent on hedge funds and US TB’s as well as German cars; this bolstered the dollar and the bond markets. This gave rise to banking crises worldwide including a property meltdown in Ireland. The ECB was super ANGLO. Pretending all is well with the EMU apart from a few tweaky objections to the Compact; that we should sign up to its austerity and the direction it is taking us, is plain uninformed nonsense, much like this 100’s thousands of jobs nonsense in Tir na N’Óg. I’m guessing many in FG and LB are enthralled with the EMU; but there are those few and far between who can see beyond the illusion. They see the scary path opening up to make a badly designed EMU an even worse prospect for member states who cannot learn from a hard lesson. The EMU may have begun as white magick; but its magic is turning black. Want to know how, look at NAMA, look around you! @DOCM “In a sense, the treaty marks the watershed between the so-called Anglo-Saxon view of the world and the alternative Rhineland model or social-market economy. As 25 countries have indicated a willingness to sign up, one can see where the majority view now lies. That is the choice facing Ireland!” If I was charitable I would think you are guilty of looking at the past. The Anglo Saxon or Continental model is not one single block of opinion. This is not the “mixed economy” of the English conservative Harold Macmillan or the German socialist Willy Brandt. Nearly all savings & debts will be private credit deposits under such a system. I cannot see it happening unless Gold rises to 10,000 + and politics becomes a sort of strange minority hobby. @DOCM In a sense, the treaty marks the watershed between the so-called Anglo-Saxon view of the world and the alternative Rhineland model or social-market economy. As 25 countries have indicated a willingness to sign up, one can see where the majority view now lies. How PanglEUssian. The fiscal compact means nothing of that sort. The EU remains staunchly committed to the worst features of the Anglo-Saxon model (the primacy of financial capital, the virtues of deregulation and privatization) and the new treaty is far more about legally enforcing neoliberalism and Bundesbank style style montarism in the EU and hence inoculating it against the dangers of social democracy. The treaty has precisely nothing to do with exporting the historical pro manufacturing industry Rhineland model to the rest of Europe (which is not even possible). The CDU’s vision of the social market is just neoliberalism in the EU with German characteristics, and German priorities run for the benefit of the portion of Germany that votes to the right. Like the awarding of the Nobel Peace Prize to Obama the 25 countries signing up to the fiscal compact hope to encourage Germany to do what it should by bowing before it. It will have the same results I feel. @ All Herewith a link to a comment today by a senior French economist which echoes many of the points made by Karl Whelan. http://www.lemonde.fr/idees/article/2012/02/13/non-au-pacte-budgetaire_1641780_3232.html Interestingly, with regard to the choice that I have identified above, and which is hotly disputed, the French economist advocates that the proposed approaches of London and Washington to dealing with the problem of deficit financing is better than that set out in the treaty. As Michael Hennigan points out above, the record with regard to control of the budget in France has been nothing short of disastrous. However, Francois Hollande has said that he wishes to renegotiate the fiscal treaty. The choice I have identified seems to me, therefore, to exist. It is, however, probably best to drop the labels that I used as they lead away from the basic point. To put it in another way, which of the two approaches is most likely to see a more balanced development of the economic relationship between Germany and France? And to convince the markets? Its very disturbing to see 3 economists virtually in agreement with John Mchale reaching furthest into the realms of the absurdity stratosphere but he is at least more honest in his crazy views. Caging your economic arguments to fit into a tiny political hole as Karl seems to be about is far more depressing. I take it all of yee were exposed to the monetarist poison during your formative years. You do realise it was merely US treasury propoganda of the time ? This is the reality of the situation. “More important is the fact that investors and economists have simply ignored the fact that the USA underwent drastic changes in 1971 when Nixon closed the gold window. In essence, the system underwent this dramatic overhaul, but the thinking never changed all that much. Overnight, theories and thinking should have been rewritten, but never truly were. Whether one likes it or not, we are operating in a truly fiat world. Therefore, the thinking and theories that are derived from this era are largely defunct. Modern Monetary Realism fills this void by describing how a state issued fiat monetary system operates. The fixed exchange rate misconception (such as those based on the gold standard) exists even at the highest levels of government and has been propagated by many of the world’s most prominent economists. I believe most people in power do not understand exactly how our monetary system works due to this fundamental flaw in our educational system – in fact, I believe 99% of the lawyers in Congress know far less than anyone thinks in terms of economics. The same can be said for many of the officials in Fed and Treasury.” Cullen Roche. The Dail is not being served when it is exposed to such narrow destructive anti sovergin views. If the local CB can bail out external credit deposits by printing money why not local goverment debt ? “There is no other option (TINA) other then involving extreme risks” John Mchale You better tell them the options John. 1. The Irish government would announce that it will begin taxing exclusively in the new currency. 2. The Irish government would announce that it will make all payments in the new currency. That’s it, deed done! The government can now provision itself and continue to function on a sustainable basis. Alans previous boss….. another Alan. REP. HENRY WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made? ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact. REP. HENRY WAXMAN: You found a flaw in the reality… ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working? ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well. DORK – How does it influence your world view when you were exposed to professors who have a Greek like conceptual view of scientific reality with no real testing of Monetary gravity Model using the scientific method ? ALAN – @DOCM, I fear you are wasting your sweetness on the desert air. Many of the commenters seem to be locked in the pre-bust mindset of what can we extract from the EU – or, more accurately, what we should be entitled to extract from the EU. Those on the left, such as Shay, seem to be locked in an ideological time-warp. Very few see this as an old-fashioned power-play between two slightly different versions of the social market model – but with distinctly different economic outcomes – that is constrained by the requirement to resolve it within the Community method so as to satisfy the better governed smaller members. Mario Monti seems to have tilted the balance somewhat in favour of Germany and its broadly aligned allies – but not without conveying some home truths. Ireland simply has to heal itself – and is well able to heal itself – within this emerging paradigm. But this Action Plan for Jobs, with its more than 270 actions, seeks to project and sustain the usual optical illusions. The only hopeful sign is that the senior economists are beginning to cohere on an interpretation of macroeconomic theory and practice to provide sensible policy advice in the context of the emerging EU reality. I can only hope they will build on this to advance the case for structural refroms to counteract the impact of the unavoidable fiscal adjustment. FYI Global investor George Soros considers the German government’s policies in the euro crisis to be disastrous. In a SPIEGEL interview, he warns of a vicious circle triggered by Chancellor Angela Merkel’s strict austerity measures and pleads for more money to be pumped into the countries most plagued by the debt crisis. ‘Soros: People like Schäuble don’t seem to understand that the heavily indebted countries are now at a severe disadvantage, because they have basically become heavily indebted in a foreign currency, the euro. They do not control it, and so they are in the same position as third world countries in Latin America were in at the beginning of the 1980s, where the countries became indebted in dollars. It was a situation that led to a lost decade there. Europe now faces a lost decade. That is the reason we need euro bonds and a new EU fiscal compact. SPIEGEL: The EU has had a fiscal compact before, and the rules simply weren’t followed. Why would the new fiscal pact be any different? Soros: In the past, there was no enforcement mechanism. If you introduce euro bonds, the bulk of the financing would be on equal terms between Spain and Germany. But if the Spanish wanted to borrow additional amounts, they would have to be borrowed by Spain using the country’s own credit, which would be extremely expensive because there would be a sharp penalty. Effectively, creating euro bonds would create the mechanism for controlling the amount of borrowing by each individual country. SPIEGEL: But German politicians are hellbent on preventing euro bonds. Soros: That is no longer true. Certainly, former German Finance Minister Peer Steinbrück used to say: “Euro bonds? No way.” Today, Social Democratic Party heavyweight Frank-Walter Steinmeier says, like me, that what Chancellor Merkel is proposing in response to the euro crisis is necessary, but not sufficient. SPIEGEL: Steinmeier is not in power. Soros: The point I want to make is that opposition to euro bonds can no longer be described as the German position. It happens to be the position of this specific government at this moment in time. ……………. not forgetting President Hollande in April. http://www.presseurop.eu/en/content/cartoon/1477441-angela-s-commandments ‘ Oops Correct Spiegel Link for Soros interview here: http://www.spiegel.de/international/europe/0,1518,814920-2,00.html @ Karl I was of course agreeing with you, the math of the Treaty as you explain it is incoherent. On a different angle. What about the interest rate? If debt is 60% and interest rates are 5% and the annual deficit is 1% that implies that there is a primary surplus of 2%. Is a primary surplus of 2% long term sustainable? I @ Paul Hunt Probably! But there is another angle to this debate which is rather ironic. Could it be that not to sign up to the treaty would cause us collectively to confront reality a little earlier? In other words, the mentality that you describe would be defeated by its own contradictions. One way or the other, it makes the situation considerably less fraught. In short, we are being left to our own devices but with the assurance that if, despite sticking to the programme, things turn out badly, we will not be left in the lurch. Not very edifying but there you are! Maybe we can indulge in a little more hubris and, with an effort, find some other bearna baoil that we imagine ourselves to be defending or to have defended. The one pass that is being defended most vigorously, of course, is the Croke Park Agreement. “I await the announcement of KW to a new government economic thinktank or other quango, perhaps new special advisor to Noonan ..we’ve been there before with optimistic Polyanna thinkers such as Alan Ahearne” Colm B misrepresents everything I’ve said and continues to claim my comments are in bad faith. I think this guy might represent a new low point even for this troll-infested blog. Philosophical musings. Let’s ignore the external sector. The government is then merely an intermediary between its citizens. A 60% permanent debt means that some citizens are happy to make transfer payments to others, basically the income rich to the asset rich or, simpler still, the economically active to the retired. Is that socially sustainable? To be sure, as an aggregate we in the West are born into a planet which has built up an incredible pool of capital, infrastructure, technology and knowledge. So we should not begrudge paying a little for that legacy. The question is how much are we prepared to pay and when do the cross transfers become socially unsustainable? @Paul & Karl You must live withen a very narrow socio- economic framework – you seem to have grave difficulty understanding a mass crime wave. I blame the Jesuits rather then their product. Why must people (trolls ?) only have conventional views when those establishment views have been devastating to the victim nations ? On the national level Germany was the most vulnerable of European nations given that it requires very high density energy systems to sustain its extensive mercantile operations. It has simply played a beautiful game with limited resourses – although the opposition hicks being Dolts & parties with skin in the game of personel capital preservation helped. But this extreme energy / crime event goes far beyond the lowest national chessboard. http://www.economic-undertow.com/2012/02/13/debt-o-nomics-part-three/ Europe was part of a integrated system – a mechanism , what is happening is quite simple on one level. The periphery is being stripped of resourses (energy) to sustain the core. What advantage do we have supplying these elements with natural resourses ? ” the credit of ‘all other Europeans at once’ is represented by the banks on the left ‘plus Government guarantee”. The recipient banks on the right are the servants of the manufacturers, exporters (including China), contractors, developers and crime bosses, recipients of the euros borrowed in the name of Greece’s population and other ordinary citizens. What was promised to the Greeks were empty platitudes, the ‘unity’, ‘common purpose’ and ‘progress’ bought and paid for with euro-denominated debt. The credit-worthy elites acted as private equity firms, borrowing against the assets that were created to facilitate the loans. Whether the collateral was worth anything did not matter: those who would determine worth were either cronies or ‘experts’ of some faraway ‘European Union’. There was never the intention to create economic value, only to roll over the debts and sell ultimately to the (friendly) state leaving the citizens on the hook for repayment. Loading onto the citizens’ the burden that only finance could bear was a ‘finance innovation’ designed to crush them. Even as this gigantic crime was underway — not just within Greece but across Europe — the euro was fatally flawed. Robbery could only have been the intent of the euro from the beginning for no other improvement was accomplished upon it after its issuance: The means to obtain credit and the means to manage must be organic to the particular finance economy and never external, IT MUST BE SOLELY AT THE (national?) ECONOMY LEVEL AND NO OTHER. Steve from Virgina…. Jayz, there are some right dorks in these here parts!! Re “I think this guy might represent a new low point even for this troll-infested blog.” Indeed….interesting! I do support burning the PN’s and congratulated you on that but have taken issue with your missionary zeal in supporting ‘the Compact’ ticket to ESM. I guess you have issue with the latter. I’ve laid out real points where I see your judgement is deeply flawed. You’ve decided its beneath your contempt to defend yourself; you obviously prefer ad hominem. Perhaps you have other trolls in mind who disagree with you as well. Perhaps we should ban this commenting stuff altogether and not comment at all. Who is the real troll here; the fact is no trolls or lynch mobs can stamp out the truth. So, I invite you to state categorically where you think you have been misrepresented? @ Colm “but have taken issue with your missionary zeal in supporting ‘the Compact’ ticket to ESM” I repeat my “eh…” comment from above – you would have to have a truly warped version of reality to read a “missionary zeal” of support into the article. It seems to be more of a “least worst option” argument. Points to refer to are in 3:13 … Colm, I detect no missionary zeal in KW article. It reads to me as a reluctant acceptance of the treaty for the very limited reason that the alternative of no funding outside the ESM would be problematic. Perhaps you should read it again. Or better still take a First year undergraduate course and read it again. Looks like “World Journalist of the Year in 1985 and 1990, Gene Kerrigan” is also regarded as a troll above. We’re obviously gone from the FF melting pan into the FG/LB FIRE here. Plus ca change! @Tull McAdoo “Closing the primary deficit today is within the realms of the possible (actuall it is not!) Finding 140bn under the matress to fund the banks is not. That probably requires leaving the EZ, EU, planet earth.” Lets clarify a few issues. 1. Closing the primary deficit is within the realm of the possible. Not only possible but desirable. 2. In the interests of getting rid of the ECB/EC and indeed CBI propaganda on the amount of ‘support’ for Irish banks we should define more clearly who this so called €140 billion (€150 billion at Dec 2011) is supporting. Taking the data from Namawinelake I have restated the figures for Dec 2011. Total ECB “Irish Bank” support = 107.2 billion as stated Less Non ECB -20 Banks = 25.2 billion Net Support to ECB-20 banks = 72.0 billion Less Non covered banks = 4.9 billion Total Covered Banks support = 67.1 billion. The 67.1 billion is the true ‘propaganda stripped out’ version of ECB liquidity support for the Irish covered banks availing of Ir Govt support. It is hardly fair to count ECB liquidity for a subsidiary of Deutsche, BNP, Credit Agricole or indeed GS as ‘support’ for Irish banks. You could, at a stretch, add the ELA given by the CBI of 44.2 billion. You can refer to Karl Whelan as to whether this is ECB or no, but one thing I think Karl Whelan and everybody else would agree on. It is supporting nobody. @ Tull, Don’t worry about my education I do have plenty of post grad quals to make me literate 🙂 But you might need to do that course yourself 🙂 Re Gene Kerrigan, Sun 12th February, my 3:13 drew more from his critique of austerity teams, “Government, have not looked for any write-off” of debt, Creighton VB interview I drew attention to on another thread “, similar, on Noonan, “Then he was told by the ECB to shut the hell up, and did…the Taoiseach saying, his Government , “have not looked for any write-off” of debt. Gene Kerrigan, writing down crushing debt is a standard route to solvency. Taking into account the above, taking into account KW recommendation we should sign up to a flawed ‘Compact’ based on a flawed Maastricht, Lisbon; taking into account Kerrigans and others ongoing critique of NAMA, plus my own 3:13 above (read it again), signing up to ‘Compact’ is MAD (mutually assured destruction). Taking into account critique of present policies by George Soros who also compares EMU to Latin American model, mentioned above ; I’ve also made comparisons with EU descending into a Latin American, banana republic paradigm for peripheral states as well, we live in a delusional economic experiment where a false economy based on debt extraction and the reignition of the FIRE economy through NAMA at taxpayers expense is trying to gain traction, This is my view, I’m not trying to represent it as Kerrigan’s or anyone else’s view. Overall, the people who created the mess are making an even bigger mess in their efforts to get out of the previous mess. Our delusional economic state at Government level is spoonfed by suggestions we should sign up to the ‘Compact’, inevitable Greek and Irish default ahead. Why prolong the agony? I’ve got ennui and cynicism but the plain fact of the matter is, there are plenty doing just fine out of the mess. Those who disagree with them are the discontents, malcontents and trolls, you shouldn’t be reading what they have to say. Just ignore em:-) @ All An example of the possible method in Merkel’s madness viz. moves in relation to the Spanish labour market which would have been unimaginable even a few months ago. http://www.ft.com/intl/cms/s/0/070a41f8-5405-11e1-8d12-00144feabdc0.html#axzz1mHzl0jbQ Such developments must now be matched by Italy before there will be any change in the position of the German government on other aspects of the crisis. It is this element of structural reform that is missing from the analysis by Soros. Such changes are in the interest of the countries concerned in any circumstances. @ Bond, Tull Re “missionary zeal” and “least worst option” Perhaps “missionary zeal” wasn’t best choice of words, maybe enthusiastic support might have been better, but I used the word missionary zeal because “least worst option” has become a mantra in this whole debate. “least worst option is used when the user runs out of argument to support their argument; or when the user is just lazy and couldn’t be bothered. You hear it echoed from europhiles who believe the term will sanitise all debate, or even anaesthetise zzzzz those who want to know more. Critique of Soros and my own 3:13 is simply ignored; sometimes its accompanied by reference to mysterious technical discussions we couldn’t possibly be briefed about 🙂 Mostly it disguises the lack of probity and knowledge and discussion on what exactly all the options are ? In place of critical examination of options, we get a bellyfeelgoody “least worst option” phrase that stifles debate and consigns unspoken options to the stuff of nightmares. So, we are presented with pro “Compact’ argument referring to mysterious consequences that are presented as the stuff of nightmares. There is no informed debate. Like the Greeks the effort is made to get to the next release of funding without consideration of the flawed, austerity driven future of default where those in our virtual economy drawing down max funds, the banks, the financial sector, the financial classes who created the mess, get more mess to sup from. @ Joseph Ryan yup lets add in Total Covered Banks support = 67.1 billion. Lets add ElA 44.2 billion. There’s NAMA ….¢32 bn…..for ¢72 bn of property, which, when we factor in NAMA’s new purpose is merely to get ¢32 bn back, so that’s ¢40 bn burnt. Namawinelake figures are fascinating, but what you don’t find, which is quite amazing, is there are no papers being produced by economists, to calculate the debt profile’s impact on our balance of payments going forward say for the next 5 years. There is KW attention given to the ELA, PN ¢3 bn and controversy recently re ¢1 bn bond repayments; but no factoring of profiles based on growth factors not reaching targets. Add to this the even more interesting estimation of where further cuts and tax increases are going to come from, virtually nothing. No papers from the ESRI or DOF profiling our debt engineering as it is meant to meet S&G targets. Its as if the future doesn’t exist? Or perhaps its one they dont want you to know about! @DOCM Re FT link on Spanish labour market reforms: The reduction in redundancy payments from 45 days to 33 days is still well in excess of Ireland’s private sector payment of 14 days (2 weeks ) per year of service plus one week. The maxing of of the payment at two years is not overly onerous, certainly not at the upper earning levels. The real question though is how these reforms create jobs. That I simply do not understand. Employers can perhaps shed (awful word) non-productive staff and hire more productive staff but there will be no gargantuan increase in employment. Consumption will take a hit with lower wages and the only increase in employment can come from beggar thy neighbour policies as outlined in the Heiner Flassbeck speech that you linked to on a different thread. While the reforms are fairer to society in general, particularly the youth, I am unable to visualise any major improvement in overall unemployment levels. @ Colm B “I used the word missionary zeal because “least worst option” has become a mantra in this whole debate” No, you used the term “missionary zeal” because you’re fond of hyperbole, where facts would be better advised. @DOCM Re “It is this element of structural reform that is missing from the analysis by Soros.” You are missing the point Soros is making. He is making the point there is only a one way track transfer of wealth via debt repayment from the periphery to Germany/France. You mentioned structural reform there. The structural reform is non existent; those who made the mess are still making the mess and benefiting most from it. This was also a Latin American phenomenon. Austerity pressure on the bottom layers of Irish society is greatest judging from stats in this weekends papers. I can’t see any evidence of reforms. Statistics also show growing disparity between the rich and the poor in Ireland also a phenomenon of Latin American economies. Reform for the ECB is reformulation of debtor economies into debt collection agencies for German and French banks and the financial sector 🙂 Not a good design for a currency, with or without S&G and false claims of reform. @ Joseph Ryan The point being made by Flassbeck is essentially that Germany overdid it in the internal devaluation stakes (and there seems to be a recognition of this if recent statements by the German labour minister are any guide). The new Spanish norms may still be more generous than those in Ireland but they will be much closer to those prevailing in Germany. In short, with moves on both sides, an equalisation in competitivity becomes nearer. This should help high-tech companies in Spain compete and create jobs. Greater uniformity in employment conditions, and less onerous hiring and firing, should also, in theory at least, encourage employers to take on more employees. Neither country has addressed the problem that trade unions tend to protect the interests of full-time employees first, then those of temporary and part-time workers and of the unemployed not at all. But that phenomenon is true of practically all countries in the EU other than the Scandinavian. @all What about ‘capital’-market reforms? A few around here are beginning to sound like IBEC drones from the 1980s! @ Bond, For some assumptions on hyperbole are used to coverup facts. I’ve not exaggerated any facts, but complained of the minimalist use of facts that distort other facts I’ve drawn attention to. You may not like those other facts and regard attention to them as hyperbole. your prerogative entirely! KW has left out a huge body of facts while concentrating on a narrow subset of arguments. Read Soros above whose arguments I support along with those of Stiglitz and Krugman. My main point was KW lack of facts in sticking to a narrow subset of arguments in supporting signing up to the “Compact’ while ignoring arguments as to the Soros piece; or other ‘hyperbole’ regarding the transfer of Irelands wealth from the poor to pay for the mistakes of the rich. But such facts are hyperbole of the trolls, we should put on our blindfolds and hope for the best; no worries to the “Compact’ from Ireland’s economics profession. Give them a bone, technical discussions on PN perhaps, invite them to brief the FG party or even the Oireachtas, job done. In fact, these guys are so compliant, they deserve to be members of Government. Perhaps I’m conditioned by the realisation we are living in the most heavily indebted country in the world and you would think you were living in Tir Na N’Óg on the cusp of a great burst of growth and boom. Sorry, perhaps the facts I mention don’t warrant hyperbole. Nuf said from me. lol:) In a word, NO!. Its time to stop the “lets all be rational about this”. Sentiment always trumps reason. So let it do so this time. Sky won’t fall. But asset prices and salaries, and wages, and pensions and entitlements will. But we will no longer be in debt, and will not be able to go there again. @ Colm im not gonna lie to ya, that didn’t make a lick of sense. @ All Sarkozy’s last throw of the dice, the rushed increase in VAT in order to reduce employer costs, came spectacularly unstuck in the National Assembly today. An insufficient number of UMP deputies turned up and it was voted down in the relevant committee through an astute manoeuvre by the Socialists. The measure will still pass but the air of fin de règne is unmistakable. Le Pen is also having difficulty in getting the required 500 signatures to enable her to stand. It will be interesting to see the reaction when Merkel commences campaigning for Sarkozy, a step that is raising eyebrows in both Germany and France. As Soros puts, Merkel is a doughty leader but, unfortunately, she leads in the wrong direction. The saga of the fiscal pact is far from over. @DOCM Have you not deconstructed the Owl and the Pussycat yet? Hint: ’twas the Ring o the Piigs wot done for them … @Bond Your most righteous vacuous stance re Colm Brazils comments on this thread is nauseating, please desist or add something informative to the debate. @DOCM That particular incident means absolutely nothing . If Hollande is elected (which is more and more probable) ,he will be obliged to accept the fiscal pact,even if its majority does not ratify it. @ DO’D and all, I’m mainly in rehearsals now for Tiny Plays for Ireland and not around to comment during the day – otherwise I should certainly have mused on “The Owl and the Pussycat”. @ All Thanks for discussion above and to Karl Whelan for links to transcript. I wouldn’t sign it – or advise signing it, but as noted by others above, not just for Irish interest but for European in general. But saying ‘I’ wouldn’t: the government team has gone and signed up (unlike the Czechs), and it would be frankly bizzare if they didn’t pass it – unless international treaties have a ‘buyer’s remorse’ period such as when you buy a three piece suite from a door to door salesman. @ Bond Re “im not gonna lie to ya, that didn’t make a lick of sense.” Perhaps if you desisted from the infantile, bottle suckling remarks, this might help:-) I’m betting there’s a lot doesn’t make sense to ya, but I’ll try again, facts included to warm your vitriol: Plus, let me make this a note to some researcher who perhaps some years from now is examining the role of economists in Ireland pre meltdown; yes, you, in the future 🙂 Facts, 1) 14% + unemployment with a massive explosion in unemployment figures between 2008-11 plus an austerity programme that requires further job losses, deep cutting in the public service, mostly through early retirement measures, but massively aided through attrition rates made up of non replacement of permanent staff and a policy of ‘no fulltime’ jobs, only part time jobs growing even rarer. Higher taxes and higher work loads with workers in the public sector expected to do the work of two people, rather than one person to make up the shortfalls. Deep financial sector cuts that havn’t been implemented yet. 2) Irish debt profile eg Joseph Ryan above http://namawinelake.wordpress.com/ and various sources including this blog and other blogs eg http://trueeconomics.blogspot.com/ or even The Irish Swan Song entry here http://colmbrazel.wordpress.com/ When a government with junk bond status on world markets holding together with sticking tape a FIRE(Finance Insurance Real Estate) economy that has created the problems it faces; having spent ¢30 + bn on creating the biggest toxic property company the world has known, which feeds the perpetrators of the previous property boom mess with finance borrowed by the state to be paid for by taxpayers, making real estate, legal and financial and developer employees new members of the public sector, decides to sign a fiscal ‘Compact’ with its lenders, refuse to sign up to its terms unless there is provision for burden sharing. If an Irish economist writes: ” policy-making rarely amounts to picking the best possible policy suggested by economic theory. In a choice between an overly-restrictive and badly-designed fiscal compact and the potential alternative of being denied funding for our fiscal deficit next year (and the more extreme possibilities of sovereign default or exit from the euro) we should stick with the European project and hope we can work to improve its design in the future. “; please ignore the snake oil. This is Irish Snake Oil:” Whelan: We should sign up to fiscal treaty despite the serious flaws ” In Tir na N’Óg they use this snake oil all the time to dump on taxpayers. They used this ‘least worse option’ when they decided to guarantee our banks; they used it when they decided to set up the NAMA which depends on 3% growth rates they also promised though warned not to; now they are using the same argument to give away Ireland’s hard won sovereignty. Its likely signing the ‘Compact’ will lead to further erosion of our sovereignty and threats against Ireland’s financial sector such as an attack upon our ability to set Corporation Tax or indeed any measure involving fiscal movement away from the terms of the ‘Compact’. When Government in Ireland ask that a decision be taken based on lame duck economic arguments, its likely not to be the least worst option; its instead likely to be the worst option. I’ll leave a future reader to look at and do a comparison chart between Ireland’s decision to sign the ‘Compact’ and the recent experience of Iceland and the shaping of its economic policies. The reader can also do a comparison between Greek and Irish experience in getting a good deal for Ireland. The reader can also look at the unconscionable levels of debt brought about by the failure to achieve a debt write down by negotiators in Ireland’s bailout. Add these points to the poorly argued lame duck arguments and blindfold analysis in “Whelan: We should sign up to fiscal treaty despite the serious flaws” . Once again another lame duck, giveaway deal by Irish negotiators filled with fantasy, wishful thinking; much similar to the 100’s of thousands of jobs being announced this week by Fine Gael of Tir na N’Óg. Enjoy ! Lol. Closing the thread now folks, it seems to have wound down. Comments are closed.