The Economics of the Fiscal Compact

The article below was published in today’s Sunday Business Post.

The Irish electorate will soon be asked to express its opinion on the new EU Fiscal Compact Treaty.  Although the treaty document is quite short, its content is quite abstract and addresses issues that have been mainly debated so far within a fairly small technocratic circle of economists. So, what are the economics of the fiscal compact?

The economic logic behind the treaty is that a deep commitment to fiscal sustainability provides a key anchor for macroeconomic policy.  If the domestic population and international investors are confident that a government will maintain public debt at a level that does not pose default risk, sovereign debt will be considered a “safe asset’’. In turn, this avoids the incorporation of risk premia into the sovereign bond yield, which is an important saving to the government in terms of its debt-servicing bill. Furthermore, a low sovereign yield lowers the funding costs faced by the banking system, in view of the close financial connections between banks and the government.

In addition to these benefits, a stability culture also allows a government to more effectively manage the macroeconomic business cycle.  One of the tragedies of the current Irish crisis is that the high level of sovereign default risk has forced the government to implement austerity budgets during a major recession.  In the absence of sovereign default risk, a government can “lean against the wind” by running larger deficits during recessions and surpluses during boom periods.

Why does it require a treaty to persuade governments to implement such desirable fiscal policies?  The accumulated evidence of the last thirty years is that many governments have suffered from a debt bias.  The electoral cycle means that a government may prefer to boost short-term popularity by raising spending or cutting taxes rather than maintaining a low debt level.  Such a myopic approach can go on for a long time, since the full costs of a high debt level are only revealed during crisis periods that occur only rarely.

An important contributory factor to fiscal instability is the failure to run sufficiently-large surpluses during boom periods.  Although Keynesian principles dictate that governments should pro-actively raise taxes and moderate public spending to avoid overheating during a high-growth phase, the temptation during booms is to spend the extra revenues, in view of the political pressure to meet the many demands for the various types of public spending and the electoral popularity of tax cuts.

Burned by previous crises, some emerging market economies have proven that it is possible to overcome these obstacles.  For instance, Chile and Ireland showed similar movements in the fiscal balance during the crisis.  In the Chilean case, the swing was from a surplus of 10 percentage points of GDP to a deficit of 4 percentage points of GDP, which did not trouble the bond market in the same way as Ireland’s move from a zero fiscal balance to double-digit deficits. Chile’s ability to run such a large surplus during the pre-crisis period was facilitated by a fiscal responsibility law that mandated the government to “look through the cycle” and thereby save boom-time revenue windfalls in anticipation of future rainy days.  Closer to home, Sweden’s good macroeconomic performance during the crisis is also partly credited to its fiscal law, which was introduced in the wake of its banking crisis in the 1990s and facilitated the running of significant surpluses during the pre-crisis period.

Accordingly, the intention behind the fiscal compact is that a legal/constitutional framework can provide a government with a commitment mechanism to help it avoid the twin problems of debt bias and fiscal pro-cyclicality. During booms, the legal commitment insulates the government from political pressures to increase spending and cut taxes. During recessions, investors can be relaxed about the emergence of fiscal deficits, in the knowledge that the legal commitment means that the government will ensure a reversal in the fiscal balance once economic recovery takes hold.

The importance of fiscal stability is even greater for members of a currency union, since the absence of national currencies means that fiscal policy is the main policy instrument available to manage domestic macroeconomic cycles. In addition, the current crisis has vividly highlighted the strength of contagion effects, by which fiscal weakness in one member country raises funding costs for other member countries.  It is now appreciated that domestic legal commitments are more likely to induce fiscal discipline than external rules such as the Stability and Growth Pact, since only the domestic system can effectively hold a government to account.  With a domestic legal commitment acting as the primary line of defence,  the external rules should only come to the fore in the event of extreme fiscal misbehaviour and a breakdown in the domestic system.

These factors provide a strong economic rationale to support the treaty. Still, it is important to fully acknowledge that the implementation of this new fiscal system raises many concerns.  In particular, it is economically-sensible that the treaty expresses the medium-term budgetary target in terms of the structural (that is, non-cyclical) fiscal balance, since this allows the fiscal balance to automatically decline during recessions without forcing a government to amplify the downturn by introducing austerity measures.  However, the calculation of the structural balance is inevitable imprecise, given the difficulties in accurately measuring the cycle (especially for highly-open economies such as Ireland).

At one level, the centrality of the structural balance concept calls for greater efforts to do a better job in measuring it. In this regard, the trend in the European discussion is to emphasise the importance of allocating this task to well-resourced independent research institutions, in order to avoid the perception that a government might tweak its estimates for political purposes. In the Irish case, this would necessitate a major initiative to build the required analytical capacity.

Still, at another level, it is important to appreciate that the range of plausible estimates for the structural balance will always be considerable, such that the government will need to factor in a prudential margin in its budget calculations in order to avoid over-committing resources on the basis of medium-term growth forecasts that subsequently turn out to be too optimistic. In related fashion, a “correction” plan will be needed by which deviations of budget outturns from budget forecasts are gradually reversed over time.

It is also important to recognise that the Fiscal Compact facilitates other European-level reforms.  First, strong national fiscal discipline is a pre-requisite for jointly-issued Eurobonds, which require a high level of mutual trust among the member countries.  Second, the corollary to tight national constraints on public debt is that the fiscal responsibility for banking systems must be shared at a European level. Third, as has already been decided, only countries that ratify the fiscal compact will be eligible for financial assistance from the European Stability Mechanism. Fourth, by reducing the risk of sovereign defaults and thereby improving the quality of government-backed collateral, the Fiscal Compact enables the ECB to maintain its extraordinary level of medium-term liquidity support to troubled banking systems.

91 replies on “The Economics of the Fiscal Compact”


Very good, I nearly understand all that. Had to google the SBP to see who was the author, I see it was your good self! That wasn’t clear from the posting.

I need a definition of austerity though. As pointed out, our fiscal deficits have plummeted from zero in boom time to -10% or so during this crisis. To me a 10% budget deficit is far from austerity and is very much anti cyclical. Austerity is being interpreted as a sort of relative concept – it is any move in the annual budget to reduce a deficit from what it otherwise would be.

Thus it seems to refer to a change in “unit” tax/expenditure levels. But clearly at the aggregate level this government is collecting much less tax now than it was during the boom and it is paying out much more in social protection, together these being the antithesis of austerity.

Maybe “the Fiscal Compact facilitates other European-level reforms” but I wouldn’t bet that they will happen. For my part, I won’t be voting on the basis of what it could lead to, but rather what I think it’s likely to lead to.

Would the existing Irish Fiscal Responsibility Bill and oversight by the Fiscal Advisory Council provide the same result as the Fiscal Compact but with protection of Ireland’s national interest at all times?

Didn’t the 64-page ESM Treaty signed in July 2011 provide for prudent economic management for the term of any new funding programme?

Mutual trust with Europe? Is this the same Europe that insists on an insolvent nation paying the debts of bust banks, which to a significant extent are debts to other European countries’ banks. Is this the same Europe that sits on its hands whilst this nation saddles itself with 40% debt:GDP for bailing out banks plus 20% debt:GDP for NAMA until it recoups its outlay. “Mutual trust”, how are you.

@ Philip

This is as good an effort to make a complex treaty intelligible to the proverbial man in the street as one could imagine. Unfortunately, it is still pretty heavy going. Nevertheless, it should help orient the debate and provide an accurate source for those tasked with producing more populist material in the context of the referendum campaign.

One fact which has not much featured in the discussion is that the system is being tested already in real time in countries as diverse as the Netherlands and Spain, with the minority government in the first facing a real challenge in meeting its required targets and the new PM of the second, Rajoy, apparently even unaware of, or indifferent to, what is required.

As to the level of “austerity” actually being applied, Michael Hennigan has summarised once again on the other thread the elephant in the room. The ECB has drawn the ire of some for even daring to mention it viz. the bloating in the cost of the public sector which occurred under the last two governments and which must be addressed, together with the excessive costs in the area of social welfare, broadly defined.

Rather a long piece by Philip and tightly argued and sound from a classical macroeconomic perspective. But there are crucial omissions; the first is, the FIRE economy; the second is, the glaring fiscal imbalances in the EMU between the core and the periphery that are merely exacerbated by the ‘Compact’ rendering success impossible and also implausible.

First up, debt was hosed out unchecked/unregulated fed by Greenspan ‘market will regulate itself’ across the CB’s under the hood of the ECB. Anglo from the ECB down was given the ‘green light’. Indeed, written in stone, the ECB was decoupled from local CB’s left to their own devices.
Massive dollar based investment extended out unchecked from Wall St to European banks through interbank lending in the FIRE economy and also through trade in derivatives that multiplied opportunities for the extension and diversification of debt based investment engineering. None of this aspect related to the regulation of financial markets is addressed in the ‘Compact’.

Second up, the ‘Compact’ surprisingly has no methods to deal with the glaring fiscal imbalances arising between the core of the EMU and its troubled periphery. Forced to accept Greek default it has for the rest of the troubled periphery decided to build defensive walls against the periphery through the ESM. Austerity for the peripherals, further debt, but no transfer of liability for debt through eurobonds or methods based on structured default.

Lastly, the overall solution, so far enacted seems to be of the pump and dump variety. The financial institutions responsible for the largest responsible cause of the EMU malaise are the primary targets through LTRO and similar sovereign debt targeted funding mechanisms for correction of the problems associated with the euro. This approach is similar to the casino owner giving more loot to the players to play with. That loot wasn’t used responsibly in the past; it sure looks like the loot will be used same as before, to speculate on sovereign debt markets and investment markets and make money through the FIRE economy, rather than the real economy.

But didn’t that give us 2008, Anglo, the crisis in the euro? The ‘Compact’ instead of being a solution to the problems of the euro is, instead, a manifesto for the banks to occupy Europe.

@ Jagdip Singh

In terms of relations between states, mutual trust is not based on emotion but on making agreements and sticking to them. Ireland and “Europe” are not separate entities. Ireland is inside looking out, not outside looking in.

The idea that the crisis has hit Ireland uniquely hard – which is true – and that the country has been hard done by – which is not – is now apparently deeply embedded in the national psyche. Ireland had the biggest banking and housing bubble and the consequent biggest bust as the result of governance and regulatory failures by successive Irish governments under the terms of the agreements to which Ireland is a party. Those agreements may well have been faulty but this does not change the fact of where responsibility lies. Other countries have also had to accept the consequences cf.

I am sitting here scratching me head Phillip – how can a goverment save during a credit boom ? – you cannot have negative goverment debt which would have been a strange 5th dimensional consequence of fiscal austerity during the Irish Boom years.
If it saves during a boom as in Pension funds and the like it creates a bubble in lets say equities.
Creating a positive and eventually a negative feedback loop as the malinvestment bears fruit.
The only metric that matters is the RATIO of goverment debt to bank credit – surely the Spanish & Irish cases are thee most dramatic examples of this phenomena.
But do economists really need such dramatic examples ?
It appears our economists need even greater displays of Bank created disaster zones which is truely scary I guess.
Goverment only taxes the available money /credit supply – the inner goverment creates the bubbles.
Attempting to reduce the amount of fiscal debt is very sick – its already been wasted on credit “investments” that are almost always extractive by nature.
Why are not Irish economists trying to stop this sick game ?
Banks waste the surplus wealth on froth.
We enter austerity to create a new surplus.
When a surplus is created the banks waste the surplus once again
We enter austerity again and so forth……. into infinity and beyond in what is called “the business cycle” as if it was a natural occurrence.
When do yee guys say enough ?
You would think after the Lawson bubble of the 80s and the criminal waste withen the machine back then it would have been a end to such criminality but I guess we will all travel over the cliff together and unbelievably wonder what the hell happened Wille E Coyete style.
Monetary turmoil is not created by representative goverment – they are merely bit actors on this macabre stage.
Fiscal debt does not somehow reach into the future and grab resourses via leverage – its merely a record of our malinvestment – so if lets say Japan racks up 200%+ goverment debt to GDP – it means something went very wrong in the 80s – it does not reflect what is happening now.
And if they somehow destroy that monetory record of the past their economy will invert and nose dive creating greater economic externalties.

We must stop banks from reaching into the future via their credit games if we are to have a sustainable economy based on real capital creation rather then sad depreciation games with the UKs North Sea waste perhaps one of the most dramatic examples.

@Brian Woods II: the budget deficit outturn is a poor measure of austerity, for reasons explained by Keynes. An economy which cuts spending in order to save will reduce its income; the likely outcome of increased desired saving is lower actual saving. That’s the paradox of thrift. If you really do want a better measure of austerity, Karl Whelan has addressed that question, both on this blog and (earlier today) on his own.

@Philip Lane

A good article. On one point:
“Second, the corollary to tight national constraints on public debt is that the fiscal responsibility for banking systems must be shared at a European level.”

I assume that is an opinion and that there is no commitment to do that anywhere?

Brian clearly does not understand that the primary role of Dole money and the like is to pay down malinvested credit and do so while preventing social disorder.
True fiscal conservatives would have called for a default on malinvested credit deposits to reduce the leverage withen the system in 2008 rather then attempting to export our money and subsequently our physical exports to former credit holders who find themselves with real Euros rather then loans to dodgy banks.

If yee lads seem to recall back in 2008 &09 the bank bond holders & Europe were not calling for fiscal conservatism for some funny reason.

Now that they have escaped they can watch the destruction of this society high up in their Roman Colosseums.
Let the disorder begin………………

Before the Euro came into existence this fiscal stuff was money – you can plan welfare for decades in advance , but countries are ill prepared for bank credit events via massive criminal conspiracies.

@ Kevin Donoghue

I looked up Karl Whelan’s blog and found this helpful piece conveyed by him from a correspondent on the PN issue.

“My correspondent put forward a number of arguments.

1.That Article 18.1 of the statute governing the ECB and Eurosystem says that lending from national central banks must be based on “adequate collateral” and that this applies to all lending, including ELA. They argued that the Eurosystem’s principles of collateral and haircuts should be considered “sacred”.

2.That this means that the yield to maturity on promissory notes must be the same as the yield on marketable Irish government bonds, so any restructuring of the notes to reduce payments now must result in even higher payments later and this cannot help reduce Ireland’s debt burden.

3.That publicly appealing to change the structure of the promissory notes amounted to the Irish government lobbying the ECB Governing Council to change its collateral policy, which undermined the Council’s independence, an issue which its members feel very strongly about.

In summary, my correspondent argued that a restructuring of the note that reduced Ireland’s debt burden was impossible and the Irish government arguing for such a restructuring would simply generate bad will among our European partners. The correspondent concluded by noting that they had nothing against the idea of some kind of deal aimed at reducing Ireland’s debt burden and made a brief reference to senior bank debt”.

Karl’s arguments in reply can be found on his blog.

On the paradox of thrift, I have no deep education in economics but my everyday powers of observation tell me that borrowing money abroad to sustain a level of public expenditure largely dispensed in the form of salaries, pensions and social welfare, a large proportion of which is likely to be spent on imports and foreign holidays and be of no real benefit to restoring growth in the domestic economy, is ultimately – and probably fairly quickly – unsustainable.

Brendan Keenan has a brilliant piece in today’s Sindo to explain the curious character of the Irish economy which would makes even Keynes scratch his head.

@ Philip Lane

‘The accumulated evidence of the last thirty years is that many governments have suffered from a debt bias.  The electoral cycle means that a government may prefer to boost short-term popularity by raising spending or cutting taxes rather than maintaining a low debt level’

As Reinhardt/Rogoff and many others have shown, sovereign debt crises have been around for hundreds, if not thousands of years. The French sovereigns regularly executed their creditors. Joe Lee ‘s Ireland 1912-85 provides some nice accounts of the struggles over finance in the early days of the Free State. Directly above your SBP article, Richard Curran shows that countries take a wide range of approaches to debt problems. The north European ‘compact lesson’ is not necessarily universally applicable.

As Colm B and Dork note above, what has been new in the last 30-40 years is the consumerist credit bubble, aka the Greenspan put. This scam allowed the deindustrialisation of large chinks of in the western world, led to massive concentration of wealth in the hands of a global elite, and to the blinkered burdening of the middle class with crushing debt. Property price inflation was the main vehicle for that process.

‘It is now appreciated that domestic legal commitments are more likely to induce fiscal discipline than external rules such as the Stability and Growth Pact, since only the domestic system can effectively hold a government to account’

If the promoters of the compact really believed that, they would be fostering reform of the democratic process in Europe, and employing the likes of Paul Hunt for that purpose. Their technocratic analysis is that democracy is an obstacle to efficient government. It follows that they are pawns.

@Philip Lane

‘It is also important to recognise that the Fiscal Compact facilitates other European-level reforms. First, strong national fiscal discipline is a pre-requisite for jointly-issued Eurobonds, which require a high level of mutual trust among the member countries. Second, the corollary to tight national constraints on public debt is that the fiscal responsibility for banking systems must be shared at a European level. Third, as has already been decided, only countries that ratify the fiscal compact will be eligible for financial assistance from the European Stability Mechanism. Fourth, by reducing the risk of sovereign defaults and thereby improving the quality of government-backed collateral, the Fiscal Compact enables the ECB to maintain its extraordinary level of medium-term liquidity support to troubled banking systems.’

(i) It is possible to demonstrate strong fiscal discipline without recouse to adopting generally considered ‘nonsense’ economics. Further, there is no evidence of ‘strong commitment’ to EuroBonds from certain political quarters in Germany, Finland, The Netherlands, others. Personally, I’m very strongly infavour of Eurobonds. I’d like this commitment in ‘writing’.

(ii) We have yet to see a strong commitment to ‘centralised’ regulation of EZ banking systems [which I support]; nor have we seen any hint of any alteration in the ‘remit’ of the ECB [which I also support]. Fundamentalists in the Bundesbank, and the German puritan tradition suggest that this is a long way off – as odds on mention of, let alone responsibility for, ‘capital flows’ in the ECB is akin to the possibility of an editorial in the Sindo in support of Sinn Fein.

(iii) A little ‘sleight of the merkozian hand’ on this little ESM ‘klaus’ – which has yet to be voted on in the Dail. Humbly suggest that this vote be postponed til after the ‘Fiscal Corset’ (following Der Spiegel) referendum.

(iv) Post-crisis – one must agree. Post Merkozian Deauville Disasters …

(v) open.

That said, an admirable effort in making some ‘sense’ from ‘nonsense’. You must, perchance, have read Hegel in your mis-spent youth!

only took 4 posts before someone blamed the Public Service. Is that a record?
(For the record : I this last week occasion to get a, non binding and non legal but required, certificate of assets such as they were , signed by an accountant. This consisted of him looking at the meager bank statement, the possible value of the house minus the outstanding morgage, and what would a 7 y old car be worth …. Total cost was 650€ plus VAT. So, yeah, the cop on the beat and the single mother, they really did screw the state. Good job the irish private sector is so world class and competitive….

A mere sentence from the FT piece …. [h/t docm danno]

‘As it stands, the fiscal compact would land Spain in a debt trap from which it might never recover inside the eurozone.’

In solidarity with the Duc de Tetuan!

@ observerstatus

If your remark is addressed to me, I would dispute any suggestion that I have blamed the Public Service. What I have drawn attention to is its unsustainable cost cf. contribution of Michael Hennigan on other thread.

Also, if you have followed my other contributions you will be aware that I am equally critical of the private sector in respect of price-gouging such as you describe. What I have argued for is an abolition of the often arbitrary distinctions between employment in the public and the private sectors. This is the best means of avoiding any setting of one sector of the population against another (that may often be represented within the confines of a single family).

Under the pressure of the financial pressures which are unavoidable, this may be beginning to happen.

@ Philip The overall thrust of the article reflects the Fiscal Compact’s desire for good fiscal housekeeping. The problem I have is that the Fiscal Compact does not work on its own. It overlays an Austerity Programme the primary purpose of which is debt collection, cashflow extraction for the benefit of the Lender. The latter is clearly extremely deflationery (and will be increasingly so as further cuts and increased taxation bite). In Ireland’s context as opposed to anywhere else, rather therefore than being a positive fiscal housekeeping tool, the Fiscal Compact just adds to (and likely accelerates) the contraction, thereby undermining its intended results.

It will be “interesting” (if that’s the correct term) to see how it operates in fact in Ireland, in the absence of growth.

Looking at the Fiscal Compact separately /in isolation is too simplistic. Its intention is one thing; its real impact is another. Your article misses the latter.

I should add that the fact that no economist seems to be able to measure or at least accurately assess with confidence the likely fiscal impact, downside or upside, of the Fiscal Compact is not encouraging. So far, we have had its intention dealt with; not its likely (measured) fiscal impact (it is afterall called a Fiscal Compact).


‘Brendan Keenan has a brilliant piece in today’s Sindo to explain the curious character of the Irish economy which would makes even Keynes scratch his head’

Joe Lee cracked it long ago. The possessor principle trumps the performer principle. As my late mother used to say. ‘There are none so deaf as those who will not hear’.

They will just never get it – you need wages for demand in a envoirment that is not in a credit bubble.
But the problem was the investments dummy – the banking system is now essentially a criminal enterprise with no interest in wealth creation , it just wants the interest.
2005 : Irish Buildings & construction : 33.405 Billion
2006 : 38.037 Billion
2007 : 36.582 Billion
Total : 108.024 Billiion

Irish Imported capital goods (half of this is motor vehicles)
2005 :8.31 Billion
2006 :7.99 Billion
2007 :9.16 Billion
Total : 25.46 billion

On a day when the French Dwarf has hinted at hitting the Gaullist button and perhaps throwing French capital expenditure into ramping up its light rail investments the Irish will continue to fall for this neo liberal clap trap of pitting us all against each other.
Do people have any idea what 108 billion really is ?
We could have built the Tusker Tunnel , 3 PWR reactors ,a dozen Luas lines and still have money left over a housing boom and bust – all in just 3 years !!!
And they blame the teachers ?(with the exception of the political variety)

And to think the credit bubble began in 1987 !
We could have had a friggin Irish Martian colony for the amount of money we blew on Grot.
We will never learn me thinks – its a basic numerical literacy problem me thinks.
How much are Dem ?

@ Observer Thanks. Yes, that’s clearer (and a start).

“The fiscal pact also stipulates that debt in excess of 60 per cent of GDP must be reduced by 1/20th of the gap in every year after the ceiling is breached. This automatic debt brake is independent of underlying economic conditions. Imagine a situation where a government meets the required deficit targets, but faces a jump in its debt to due to an economic shock that cuts growth by, say, 2 per cent. The true cost to the economy of this measure would go well beyond the direct impact of the 1/20 rule. Add in automatic fines imposed for non-compliance, and the EU could make a bad situation worse. Real output could fall by up to 0.4 per cent of GDP for a small, open economy and by a multiple of that for a larger economy.”

That says much, succinctly.

Makes Philip’s article look lightweight. The world is full of good intentions…Fiscal analysis is needed also. As a result, the article, while reflecting intentions, is misleading by omission.

Also underlines the question re Colm McC’s assumption that the Fiscal Compact will be suspended in the presence of a Programme.

Still, it’s a debate I suppose.


I realise the point of the piece is to try to clarify the treaty rather than make a particular argument one way or another. Still, your final paragraph on ‘facilitating other European-level reforms’ got me wondering.

1. Re: “strong national fiscal discipline is a pre-requisite for jointly-issued Eurobonds”. If strong national fiscal discipline works, then doesn’t that essentially remove the need for Eurobonds? If it does not, then we haven’t met the pre-requisite. Either way, I wonder if this treaty does not actually increase the probability of Eurobonds.

2. On “the corollary to tight national constraints on public debt [being …] that the fiscal responsibility for banking systems must be shared at a European level”. Unless I misunderstand, that’s absent from the treaty. In that sense, the treaty seems half-baked.

3. Is ESM exclusion credible in the time-consistency sense? I thought the big thing about the existing bailouts was that they were strongly in the interests of the donors for fear of the financial/economic mayhem that would ensue if they did not provide assistance.

4. I don’t follow the improved sovereign collateral to medium-term banking liquidity support connection. As I understand it, the treaty will not bite on those in IMF programs, so no change for the ECB to respond to for Greece, Ireland, or Portugal. Spain seems to have declared some kind of immediate reneging on the deal. Italy seems difficult to predict. The rest weren’t so much of a worry, so I’m not sure what this changes for a medium-term liquidity program for the ECB.

@ Paul W

The text you quote is wrong. The excess does not need to “be reduced by 1/20th of the gap in every year”. The debt brake rule is assessed over a three-year period so it is an average reduction rather than per year. In fact it allows for two three-year periods to meet the requirements of the rule.

One is the average over the previous three years, and the second includes the estimated reduction in the current year and the forecast reduction in the following year. If either is satisfied the rule is satisfied. It is not on a year-by-year basis.

The debt brake is not “independent of underlying economic conditions” as it applies when “the breach of the benchmark cannot be attributed to the influence of the cycle”. The benchmark is set by the rule so in a downturn is it is not necessary to meet the target set by the rule every year.

There are no automatic fines. The fines only apply when a government does not introduce measures to try and close the deficit.

If a country introduces measures with the aim of satisfying the debt brake and it is forecast at the time of the budget that these will work then there is no penalty if factors (external to the government) cause growth to be lower and the government to miss its target.

From your latest piece……..
“Counter-cyclical government spending has not been outlawed. The intention is to try and ensure “sufficiently large” surpluses in the good times. There is no guarantee of that but this is not the attempt to kill Keynes, or more specifically Keynesian ism, that some have been claiming.

For those who are making this claim it would be useful if they could provide references to their calls for fiscal restraint and a reigning in of government expenditure during the good times”.

You are not asking yourself what causes the good times……… its credit / deposit production Seamus.
Double entry money……….based on assets inflated by credit.
you seem to think credit booms is some sort of natural event when it is not.
We have witnessed a dramatic failure of double entry money withen the eurozone.
The fiscal production of new money has been effectivally outlawed in Europe – this means of course more junk such as mortgages must populate commercial bank assets.
Although I might disagree with MMTers about how international settlement can be accomplished – the fact is we don’t have international settlement structures other then the possibility of outright collapse of societies relative to others.

A defecit is not really a defecit in a national sovergin economy – it is merely money production.
Therefore Lets call it money production rather then a defecit.
Don’t you get it ? the euro has been a dramatic failure since the EMU engine really got going in 1987.
Its time to leave don’t you think ?

Perhaps if local banks renationalise the money via LTRO it will provide the get out mechanism.
Would like to know if banks are only buying domestic debt.
It would be a signal I guess.

This from Randy Wray
“With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “A FUND TO MEET FUTURE DEFECITS.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.

3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction”.

Dork – Depressions have typically been caused by 19th century free banks producing money in their vaults or 20th century banks producing enormous amounts of credit as happened in this country post 1987 or America post 1921.

When Goverments don’t produce debt / money their citizen subjects must go into enormous private debt and almost always engage in malinvestment & speculation.

@Philip Lane

I view this article as an expanded and more detailed version of a previous op-ed that you wrote that was discussed on this blog previously. However the same basic issue remains – the article is all about the merits of fiscal responsibility in general, and not the specific changes implied by the actual Fiscal Compact treaty. I find it very strange that in such a long article, the SGP/6-pack, and the obligations it entails for Ireland, is not mentioned once. My conclusion is that it is not mentioned because it is inconvenient. Ireland has already signed up for this, and the consequences and benefits of adhering to these fiscal responsibility laws, as you describe, will ensue. However the Fiscal Compact treaty makes some changes to these, and not in a good way.

Specifically the Fiscal Compact reduces the flexibility that was allowed with the SGP. The enhanced SGP was developed over two years, in full conformance with EU procedures. In contrast, the main elements of the Fiscal Compact were distributed to all countries except Germany and France, which had written them, 24 hours before a summit meeting, and all the key decisions were made under extreme pressure at 3.00am in the morning. (In fact the way the Fiscal Compact treaty changes were proposed and introduced was technically illegal, as the required procedures for introducing any treaty change, were not followed, but that is a minor point at this stage). Which do you think leads to better and more balanced policy?

Before getting into the disadvantages of the changes introduced by the Fiscal Compact treaty, I’ll note that all the target objectives are *exactly* the same for Ireland as they were before the fiscal compact treaty (0.5% MTO structural deficit, as per last SPU, 3% GG deficit, 60% GG debt).

The key change that has been made is regards to what can be considered when determining the adjustment path to the MTO. Under the SGP the following exceptions/considerations were allowed:

(a) the adjustment path depends on the economic cycle
(b) the impact of major structural reforms (notably pension, but also labour & health)
(c) an unusual event outside the control of the member state
(d) a severe economic downturn (e.g. in a year of negative growth)

Under the Fiscal Compact treaty (a) and (b) have been removed and only (c) and (d) remain. In particular the ability to modulate the adjustment to the economic cycle has been removed, yet this is one of the elements that you mention in your article as follows:

During recessions, investors can be relaxed about the emergence of fiscal deficits, in the knowledge that the legal commitment means that the government will ensure a reversal in the fiscal balance once economic recovery takes hold.

Investors may be relaxed, but the EU Commission won’t be relaxed, as the rules have been specifically designed to remove this flexibility – early drafts of the fiscal compact treaty had the following statement:

The Contracting Parties may temporarily incur deficits to take into account the budgetary impact of the economic cycle

This was removed, as for Germany that was the key point – to keep flexibility to a minimum. While the “severe economic downturn” consideration remains, its definition is much more strict than what was removed. In addition there is a new automatic correction mechanism, with essential parameters to be defined by the EU Commission, that will be triggered, removing further discretion.

Seamus Coffey is absolutely right above in his description of the debt brake rule and the ability for the “influence of the cycle” to be considered. This is because, for this rule, the fiscal compact treaty makes *zero* changes to the SGP – i.e. it simply restates the existing rule. What is the rationale for keeping the flexibility for one rule, and going to great lengths to remove it for another? None, I would say, except that when policy is being decided at 3.00 am, consistency is not likely to be a key consideration.

In short, all the benefits that you ascribe to adopting the Fiscal Compact treaty will accrue from the SGP/6-pack anyway. I don’t see how the fact that the rules will be in national legislation makes a significant difference, given the new surveillance and sanctioning powers accorded to the EU Commission under the 6-pack, and in progress under the 2-pack. The changes to this fiscal responsibility baseline (i.e. the SGP/6-pack) made by the Fiscal Compact treaty make it worse, since it encourages legalistic pro-cyclical behaviour and has as its aim the total removal of allowing national governments some discretion for dealing with excessive deficit situations.

Why is the Fiscal Compact better than the SGP/6-pack? If it isn’t better, why vote for it?

Looking forward to a response….

For the record I think it useful to list the full scope of the Fiscal Compact treaty changes over and above the existing baseline of SGP/EU law. This was nicely summarized by the ECB in their opinion on the 2-pack that was the subject of a post a few days ago, and based on that and my own reading the list of changes is:

(a) requiring rapid convergence to MTO
(b) limiting the scope for temporary deviations due to exceptional circumstances
(c) requirement for an automatic correction mechanism
(d) requirement for Member States that have been made subject to the excessive deficit procedure to put in place budgetary and economic partnership programmes
(e) the ex ante reporting of public debt issuance plans.
(f ) defining the scope and procedures for Euro Summit meetings

Requirements (a), (b) and (c) were discussed above in my previous post. For (d) there is already an existing requirement to put in place a stability programme with the EU Commission, that also has new powers of surveillance, so how this new “partnership” programme will change things is unclear. (e) seems a fairly benign requirement, as it is to “report”, rather than “seek permission for”. (f) seems a recognition of existing practice.

Having listed all the changes, I would raise the following questions:

– How many of the articles/opinion pieces that you have read on the Fiscal Compact treaty actually refer to or discuss any of the changes made by the Fiscal Compact treaty, as listed above?

– What does this say?

This is a laudable effort by Prof. Lane and the Government must be exceeedingly pleased and grateful. Not only his standing as a leading, and internationally recognised, Irish economist, but his standing as a ‘public economist’ via his proprietorship of this blog and other media offerings will be exploited by the ‘spin doctors’ and this will provide ‘talking points’ for the merchants of cant, hypocrisy and bluster.

Unfortunately, this op-ed glosses over a number of points (some of which have been raised by previous commenters) all of which should give Irish citizens and residents pause for thought and reason for concern.

It ignores the impossible trick the EU’s Grand Panjandrums are trying to pull off of aligning the running speeds of the hare – the Merkozy twins desperately seeking to ensure re-election and pandering to their voters at the expense of everybody else – and of the tortoise – the European Commission struggling to develop effective economic governance via the Community Method (with the Merkozy twins charging ahead and David Cameron having cut some fo the ground from under them – which they are painstakingly trying to reclaim).

It ignores the serious economic and current account imbalances in the Euro Area and beyond it that will require deep-seated structural reforms to generate the economic growth – without which austerity will grind the weaker economies in to dust.

And, finally and most importantly, it ignores the fact that Ireland is an official support programme whose terms and conditions over-ride those of this ‘fiscal compact’ and that the latter will not come in to play until Ireland successfully exits this programme – or the likely follow-on programme since the Government is doing its damnest to avoid pursuing or whittling down to nothingness the structural reforms required to boost economic growth.

There is absolutely no reason for the Irish people to be required to accept or reject this ‘fiscal compact’ at this stage in the official support programme. Yes, people will say that Minister Noonan consented to the change in the terms of the ESM which means that ratification of the ‘fiscal’ compact’ is required to ensure access to the ESM, but the requirement for access won’t be clear until Ireland is nearing the end of this support programme. And Irish people might very well decide then that official support that involves the Commission and the ECB might be the last thing they want.

In addition, given the stance and fiscal circumstances of countries such as Spain and the Netherlands, it is clear a lot more work will need to be done on the ‘fiscal compact’ before it is demonstrated that it is ‘fit-for-purpose’ and secures informed democratic consent.

Nobody has advanced a compelling argument against why Ireland should not simply ‘wait and see’. Mainly because those in the ‘yes’ camp are adamantly opposed to a ‘wait and see’ approach; and those in the ‘no’ camp are far too intent on forcing the issue with a hope of giving the Government a bloody nose.

By the time this referendum is called, It will be almost 4 years since the collapse of the Irish banking system. 4 years since the frauds, corruption, insider dealing, share price manipulation and racketeering became public knowledge. Involving people at the highest level of Irish business, financial, regulatory and government circles.

The identity of these people and their actions are public knowledge. Although their are other reasons for Ireland being bankrupt, their actions have contribuited enormously to the situation we find ourselves in.

Yet none have been fined, jailed, had their assets seized or even been charged with an offence. Apart from some of the household names being called in for questioning as bonds become due, nothing has happened.

The cynic in me expects another household name to be arrested again at the end of March to provide another distraction as more money is handed over or more debts committed to.

I will vote yes in the referendum if just one of the household names is successfully proscuted by polling day.

Otherwise, I will vote no.

I am astonished by this piece of Gold-Standard economics that could have been written in 1920s. Prof Lane refers to the fiscal rectitude of Chile and Sweden while conveniently ignoring the current borrowing costs of the UK, the US and Japan.

Can you please explain to us, Professor, why UK, US and Japanese bonds trade without a risk premium even though their fiscal position is about the same or worse than Spain or Italy?

Of course, I know that Philip Lane knows the answer to this question, which is why it is this article is disingenuous at best.

“First, strong national fiscal discipline is a pre-requisite for jointly-issued Eurobonds, which require a high level of mutual trust among the member countries. Second, the corollary to tight national constraints on public debt is that the fiscal responsibility for banking systems must be shared at a European level.”

There is not a scintilla of evidence to suggest that either of these reforms will follow from the treaty.

Look, it is not hard to imagine an policy solution to the Euro’s woes. The current fiscal compact could form part of that solution, but it is not sufficient. We also need reform of the ECB and reform of Eurozone banking regulation. Why are these not included in the treaty? Why does the treaty not deal with current account imbalances?

The answer of course is that there is no appetite for these reforms in Germany and that will not change until the collapse of the Euro is imminent. In fact, ratification of this treaty could well make further and more important reforms more difficult to achieve.

@ Paul Hunt

Boiling down the issues to a few slogans, one could use, for the domestic aspects, ‘Never Again’, and for the EU, ‘If you are not in, you can’t win’.
A policy of ‘wait and see’ would serve very little useful purpose.

As to the testing of the new mechanisms in real time, in the context of a programme in Ireland’s case, Belgium has just announced further cuts in order to stay within its targets. The Dutch, unless I am very mistaken, will do likewise. Spain remains an outlier, but for how long?

This is serious business and the debate on how many angels can sit on the head of an economic pin will not draw many followers.

It is, of course, very uncertain what will happen between France and Germany until the outcome of the French elections is known. But the impetus to stick with the overall agreed deal is overwhelming coming, as it does, from the markets.

A commentator in Le Monde confirms the point made by Joe Lee, as linked to by Paul Quigley above, on the “possessor principle”. The embedded and persistent nature of this phenomeon is not confined to Ireland. Both Sarkozy and Hollande have returned to familiar French themes, including protectionism.

@ All

It seems to me that arguments that fault the fiscal pact for what is not in it are rather pointless. It does not claim to do anything other than what it says on the tin.

There are also interesting parallel developments in relation to the financial taxation issue which is linked, inevitably, with the issue of “fiscal responsibility for banking systems”. (Nine is the magic number needed to launch an ‘enhanced cooperation’ to allow a group of countries to push ahead on their own).


A desire for retribution is understandable, but those whom you would wish to see in the dock were only pushing to the limits of what dysfunctional and corrupted law, policy and regulation allowed. The law exists because we can’t rely on the morality of individuals. We consent to have our selfish desires constrained. But if those who make and enforce the law allow it to be breached with impunity – or actually encourage the breaching – the fault is not with those who breach it. The fault is with those who are democratically elected and sanctioned to make and enforce the law – and, ultimately, with those who elected them and who failed to exercise restraint over them and those they appointed.


You make valid points and, indeed, taken together, many of the comments on this thread present a compelling critique of the ‘official position’. And I note a plaintive expectation by quite a few commenters of some engagement and debate. But is is an expectation that, almost certainly, will not be met. ‘Official Ireland’ doesn’t do engagement or adversarial dusputation based on facts, evidence and analysis; it pronounces.

@ Philip
Would be grateful for clarification on this if possible.
What was the role of private credit in Chiles boom?
Did Chile have a banking crisis?

“It is also important to recognise that the Fiscal Compact facilitates other European-level reforms. First, strong national fiscal discipline is a pre-requisite for jointly-issued Eurobonds”

This is the the crucial point. The treaty on it own is bad economics. But if it is part of a process to really enhance European wide coordination and economic governance in response to the crisis (eurobonds, transfers, common consolidated tax vbase etc) then there is a sound logic to it. It also means we can have a frank discussion about the real problem; the cost to the sovereign democratic state of bailing out the reckless behaviour of private market actors in private finance markets.

Hence, even though the treaty is narrowly focused on fiscal stability (few could doubt the virtue of this) I think it is important that academics and commentators make explicit that the main reason Ireland has a fiscal crisis is because of the banks. If the treaty was in place before the crisis it would make no difference to our current situation.


I fear, with your summary dismissal of any consideration of a ‘wait and see’ policy, that you are manifesting your pseudonymous self as a ‘mouthpiece’ for ‘Official Ireland’. This is the standard approach. It declaims and pronounces. The validity of its position should be self-evident to all sentient beings. Those who contest it are somehow mentally deficient, or are not in possession of all the facts, or are indulging in jesuitical debate for the sake of it, or are pursuing some hidden agenda.

Ireland is in the ‘treatment room’. It is still a full member of the playing squad, but, much and all as the senior politicians would love to pull on the ‘green jersey’, puff out their chests and strut their stuff on the pitch, a sustained and intense period of recovery and recuperation is required. And Ireland must go through this period of economic recovery and recuperation before the medics will allow it on to the pitch again and be subjected to the rigours that the players who are not in the ‘treatment room’ are grudgingly accepting should be imposed on them.

Ireland can sign up to accept these rigours when it is in a fit condition to do so. The concerted focus should be on achieving the level of recovery and fitness that will allow it to be subjected to these rigours. This premature and unnecessary requirement to decide whether or not to accept these rigours while Ireland is such a long way from being in a position to be subjected to them is proving to be a distraction (welcomed by many) from focusing on the primary task of ensuring recovery. It is divisive, polarising and counter-productive as it is destroying the political and social cohesion and resolve and the common sense of purpose that are required to ensure a timely and sustainable economic recovery.

But it seems to be far more comfortable and convenient to shout the odds about something that might be applicable in the future than to address the exigencies of the here and now.

As for banning future stimulus programs, what country had the biggest subsidised work program during the recession?

Vote yes, move on and maybe at last serious give serious attention will be given to the issues within our control?

Minister Bruton is in Waterford this afternoon for an Action Plan for Jobs Forum.

“In order to facilitate a full exchange of views, the Business Forum will be closed to the media. The Minister will be available to speak to the media before the event at 1.50pm at the hotel.”

It’s curious that there is little interest in serious domestic questions such as those raised about jobs by Brendan Keenan yesterday in The Sunday Independent, as highlighted by DOCM.

Despite a jump of over 400,000 in the workforce during the boom, the total jobs added by the indigenous tradeable goods/services sectors and the FDI sectors was only 5,000 in 2011-2007.

A Cork reader of The Irish Times wrote last week:

We are an intelligent people, but we have never been able to organise ourselves as a civilised country. We have never lived within our means. We don’t want to pay any taxes. We want every service for free. We apply our considerable intelligence to avoiding laws rather that recognising their civic value. We elect only politicians who pander to our desires. We pay ourselves too much. Our promotion systems have been corrupted for decades by religious, political and sporting contaminants such that we are now governed by a mediocre ruling class, unable to lead.

I am fearful that we might regain our sovereignty because I have no faith that any Irish leader is able to take unpopular decisions and do the right thing in the long- term interest of the country. We were governed for years by the colonial British, then by the Roman Catholic church and now by the troika. Our leaders are familiar with performing a subservient role.

Rather than take responsibility themselves for property tax, septic tank charges, water metering, environmental protection, etc; it it easier to blame EU legislative imperatives.

I am voting Yes so that some rational European influence continues to prevail in our lives and save us from ourselves.

Japan’s low bond yields are no symbol of virility. It can fund most of its public debt internally. The US can fund up to 70%.

@ Aidan R

If the treaty was in place before the crisis it would make no difference to our current situation.

So 30% annual credit growth; banks foreign borrowing rising by 30% of GDP in 4 years; a stagnant internationally tradebale sector; almost all job creation property related, would not have mattered?

Basically a casino economy could still be operated?

It was only fools and the self-interested who were blind to the signals and yes, there were people such as myself highlighting them.

The new governance process will be more than meeting 2 targets.

The opening part of the above post is here:

It’s time to move forward at European and Irish level and while the FCT is a small step, it’s a start.

There is no perfect path and the prospect of better external control should be welcomed in Ireland where the economy was brought to the brink of
ruin twice in a generation.

It of course can be argued that the paymaster Germany needs to show its electors that more viable structures are being put in place and so on.

So what? On the other hand, handwringers bemoan the democratic deficit.

Picking Chile as a good example of fiscal probity is dubious at best – especially during a decade or more cooper boom of immense scale and force………….

The private credit (chiefly as a result of EMU & the Euro) that fueled Chinas boom is coming to a end anyhow.
People are not asking where did the European money go if it could not be spent in Europe ?
The Answer : the sweat shops of the world.


Re “EU, ‘If you are not in, you can’t win’.”

If there is one thing we can all learn from the bubble is how false that statement truly is.

Many a developer, property owner, investor, eg those who put up personal guarantees, now rue the day they fell under its false spell.

Sometimes its better to put on the thinking caipín and simply say, No!

Do I think we have a thinking Government? No. Do we have anyone even of the calibre of Francois Holland? No.


“Hollande has been criticised in the City for saying “the financial world is my enemy”. Yet it is Cameron who has denied bankers their bonuses, clawed back tax from Barclays, and stripped Fred Goodwin of his knighthood in the manner of the poor Captain Dreyfus having his epaulettes ripped off when the French establishment wanted to make an example of someone they felt had let the show down. Hollande is proposing a 45% tax rate on those earning €150,000. This is lower than the 50% rate George Osborne applies on similar incomes.”

What we have is the Cheltenham: “‘If you are not in, you can’t win’” from our current crop of winners 🙂

Swedens “performance” would be much worse if the Baltics decided not to take the pain from private credit malinvestment and export back the pain to the source credit country.
I am in favour of a renationalisation of countries banking systems but it is dangerous & foolhardy to believe we do not live in such a world of cross border claims now.
So why give isolated national examples in a incestuous banking world ?
If the Baltics decided to do the right thing a few years ago Sweden would have been toast.

@Paul But if those who make and enforce the law allow it to be breached with impunity – or actually encourage the breaching – the fault is not with those who breach it.

Thats exactly why I demand action by polling day in order to vote yes. it is very easy to measure. It is much harder to measure government performance in other areas

Forcing the government to move against well connected insiders is far more important than the individuals involved…. it could help reset the agenda in other areas

According to some advocating a yes vote, the state wont be able to borrow to pay wages in 2013 with a no vote.. so its a good pressure point to force the state to do the right thing.

Sometimes one can think too much about these things.

@Michael Hennigan,

While I might consistently bang on about the need for specific structural reforms in some sectors and the general requirement for them in others, you, more than anyone here, have consistently set out the requirement for some ‘heavy-lifting’ across most sectors of the domestic economy.

I’m not suggesting an opt-out. I’m simply trying to highlight the suspension of disbelief the Government is trying to effect that, by sticking with the ‘programme’ (even it obstructs the intent of the required strctural refroms in every way it can) and signing up for the ‘fiscal compact’, Ireland will exit from the support programme next year.

Without deep-seated, meaningful structural reforms fiscal adjustment and the approach to resolving the banks will continue to grind down the domestic economy. The ‘export enclave’ may help to keep the economy, in aggregate, from sinking further, but it will provide no salvation.

The problem is that these structural reforms should have been initiated 3-4 years ago and most would be bearing fruit by now. Since they haven’t, there is no way Ireland can avoid a further ‘official support programme’. I’m pretty sure that the Government is already negotiating the outlines of an extension of the current programme – and any denials that it is should provide more than sufficient confirmation that it actually is.

Rather than going through this charade, it would be far better for the Government to level with the people, concede that more official support will be required and present the options on how this official support might be structured.

Why are we so addicted to this endless cycle of a sustained suspension of disbelief, disappointment, anger and resentment when the optical illusion, inevitably, is shattered, a new optical illusion is projected and sustained, and so on.

Most Irish citizens are all ‘grown up’ now. They are well able to deal with a bit of honesty. Indeed, most would welcome it as they have had their bellyful of cant, hypocrisy and bluster and most, again, can see through it. The Government might be pleasantly surprised at the public reaction if it were to try it. But the ‘industry’ that survives and thrives from manufacturing the bullshit that sustains the optical illusions would be horrified and would do everything they could to maintain the production levels.

@ Michael Hennigan,

I share many of the views of your Cork reader, but sending Ireland to an EMU bank orphanage would be a dreadful mistake…..leaving the euro and, negotiating default based on ability to pay, joining sterling even with the consequent difficulty, would be a lot better than staying with EMU. Good times with EMU are over, becoming an IrishHaitiFrankfurter principality, peripheral ghetto, with its sovereign democracy defused by the Compact as part payment to German/French controlled banks, lies ahead. Voting Yes for a ticket on the Costa Concordia or Titanic is fools rush in where angels fear to thread. I’ll be voting No.

Ireland can also fund itself internally – it involves the CB defecit spending until there is enough medium that can be taxed – this would probally involve a significant devaluation.
Our oil consumption would probally drop to 1987 like levels.
The US and Japan can fund themselves internally because they can print the money.
The production of money or credit always comes first – you then save the new medium.
You cannot save money that is not available to save.

@ Brian G. Excellent posting. Best yet. You say “Under the SGP the following exceptions/considerations were allowed:
(a) the adjustment path depends on the economic cycle
(b) the impact of major structural reforms (notably pension, but also labour & health)
(c) an unusual event outside the control of the member state
(d) a severe economic downturn (e.g. in a year of negative growth)
Under the Fiscal Compact treaty (a) and (b) have been removed and only (c) and (d) remain. ”

However, do (c) and even (d) remain as fully in place as you suggest?

There seems to be a general notion out there (e.g. Paul Hunt above) that the Fiscal Compact is sidelined while a country is in a Programme. To quote IIEA’s Peadar O’ Broin’s initial analysis linked to one of my first postings:

“In any case, the Golden Rule and other numerical benchmarks are long-term objectives given that the vast majority of Member States are currently not compliant with the Golden Rule and convergence criteria (see table below). Furthermore, the fiscal treaty allows states that have ratified its content to deviate from these targets in case of ‘exceptional circumstances’, defined as ‘an unusual event outside the control’ of a state ‘which has a major impact on the financial position of the general government’ or in ‘periods of severe economic downturn’. The exceptional circumstances clause could be claimed by almost all Member States from the moment the fiscal treaty enters into force, which nullifies the impact of the numerical benchmarks in the treaty.”

As I have argued, there does not appear to be any hard legal basis for this. If this is true, it legally denies a country’s prior acceptance of and agreement to the Programme, [which overrides?]. I wonder whether this is this also the basis of Spain’s present approach? Are we already seeing differences of approach based on different legal interpretations of the Fiscal Compact? It would seem so. However, not all of course appear to agree with this approach and it will be interesting to see how the EU, Germany, France approach the subject with Spain in the near future.

@ DOCM “It seems to me that arguments that fault the fiscal pact for what is not in it are rather pointless. It does not claim to do anything other than what it says on the tin.” So far, I don’t agree. It seems full of holes and potential pitfalls /costs. It does however stringently put in place a fiscal management process that will dictate matters for years and years to come. It would be great if the referendum could wait, but that is not possible. Given that, people should have the max understanding of what is involved /not.

@ MH “Vote yes, move on and maybe at last serious give serious attention will be given to the issues within our control?”. So Ireland should step blindly into more potential abyss? Accepted though that many just want EU rule in the future as a better option than “home rule”.

@PH “…taken together, many of the comments on this thread present a compelling critique of the ‘official position’. And I note a plaintive expectation by quite a few commenters of some engagement and debate. But is is an expectation that, almost certainly, will not be met. ‘Official Ireland’ doesn’t do engagement or adversarial dusputation based on facts, evidence and analysis; it pronounces.”
It will be interesting to see if the likes of Colm McC or Philip Lane willbe influenced by what they are seeing here,and whether their current public positions will adjust in any way. They appear publicly as strong pro yes vote supporters. Fine, but on what basis and are they correct (and who will be accountable if they are not…they clearly are having a very strong influence on public debate /decision-making)? In particular, the apparent inability of economists at present to give a comprehensive and correct analysis of the likely fiscal consequences of the Fiscal Compact is not encouraging, as I have said.

@Paul W,

Dream on. Not a blind bit of attention will be paid by ‘Official Ireland’ to any case advanced here that contests its position. It will either be dismissed summarily as not having any merit or ignored. I can assure you there will be no effective engagement or debate. That is seen as a sign of weakness. We should be simply grateful that we have the opportunity to give voice to our concerns and discontents – and hope that some few people who might have an interest pay some attention and will form their own views.

@ PH I can understand their reticence, given the importance of academic standing in their world. Also, they cannot debate every point, and cannot be right all the time either.

However, thus far, they are open to valid criticism for promulgating only how Official Ireland wants to understand the Fiscal Compact (thereby potentially misleading the public), as opposed to the objective real impact of the Fiscal Compact (holes and all, incl. known unknowns and unknowns). Let’s hope they do better. Academic integrity is also important to their academic standing!

There is inevitably a significant number of the population that have revarinshed the auld victim’s cross and are in denial about culpability for this terrible crisis. Bertie Ahern after all had promised permanent prosperity as had a Trinity professor of economics and minister in the FF government in Dec 1977. Martin O’Donoghue had termed his dream “an everlasting boom.”

In 1978 according to the IMF, Ireland at 17.5% of GDP had the largest annual deficit of any developed country in the period 1970-2008.

John Banville, the Irish writer, wrote in The New York Times November 2010 – the month of the bailout – that we Celtic Tiger cubs set up a great roaring and ranting in response to the economic crash. Who is to blame for our sudden travails? we demanded – – somebody must be to blame. The bankers? Them, certainly. The politicians? Well, the politicians are always to blame, so nothing new there. The markets, those shadowy entities that seem to operate by whim? Ourselves, perhaps?  —  now, there was a sobering possibility.

Banville said: “There used to be a nice acronym that neatly expressed how the Irish people conceive of themselves: MOPE, that is, Most Oppressed People Ever.”

So I would argue that given the mess, we recklessly landed ourselves in, a little humility is in order when proposing Ireland should present a démarche to the European powers.

@ Paul W — Europe is a political abyss but it’s OK to be the temporary base of mobile US capital. Boston or Berlin — why not join the dollar zone?

@ Paul Hunt — Given the Irish culture, tolerance of machine politics and clientism in multi-seat constituencies, it would be a shock to find any TD advocating parsimony in the use of public funds.

The Indo has a headline this morning that it may cost householders €5,000 to replace sceptic tanks to comply with EU water standards – ie payment should be made from public funds.

A colleague of Philip’s at professor level at TCD who is in the mega tax-.funded innovation area, had an article in the Sindo yesterday on the audacity of introducing a property tax because of the “historical sensibilities.”

@ Colm Brazel — How stupid we would be to be aligned with anyone given our record of good governance!

@ The Dork — There are seldom simple answers to any complex situation.

As regards your earlier ref to the 1830s in the US, President Jackson’s opinion of banks was apparently influenced by reading a history of the South Sea Bubble. His scuttling of the Bank of the United States, effectively the central bank, was the main cause of the 1837 bust.

@ MH I don’t think the Europeans either will be too bothered with Irish taxation for awhile (bar the usual political posturing and soundbites)…The Irish tax system (incl. CT) is nowadays just part of the cashflow extraction machine in place for debt service purposes. The Europeans therefore also have a strong interest in its retention (for now). They are perfectly happy to take the Irish CT base (even if part US FDI funded) and increased Irish income tax to make themselves whole.

Yes Jackson was right to take on the bank – indeed Randy Wray who was / is a Hamiltonian questioned his own beliefs about this period in a recent article given the recent actions of the FED.
I hold a full money belief system myself but doubt it can ever be implemented given that banks will always try to produce credit.
Jackson had possibly a incomplete picture of monetory matters – when he wiped out the debt of the US he should also have banned bank credit / note production – this is what caused the subsequent speculative crash.
The Treasury could have just produced debt free greenbacks (as Lincoln did) to provide suffiecent medium of exchange rather then relying on free banking notes.

But once a banking system is part of a state in the post Cromwellian sovergin state / hybrid system it must get into debt with the banks and that debt becomes a asset of the banks.
The lower the ratio of goverment debt relative to other assets the higher the pointless speculative fervour.
Post 1987 Ireland is a classic example.

@ Finfacts

Re President Jackson, the following are the points he offered in support of his veto:

“The problem with the Second Bank of the United States stemmed from the fact that the US Treasurer was required to deposit US funds in this bank. Consequently the bank was not subject to the restraints of private banks. It could engage in unsafe banking practices without any fear that depositors would question the soundness of the bank and withdraw their money. It could make unsafe loans and even loan out more money than it had on deposit.

The bank was a part of the Eastern establishment to which the first six presidents belonged. It focused on helping the established businesses and did little for farmers and laborers in the Western part of the US. Moreover, after Jackson almost won the presidency in 1824, the bank became an arm of the anti-Jackson party , lobbying Congressmen with low interest loans.

Jackson’s veto message for the bill to re-charter the bank (written by George Bancroft), listed the following objections against the bank:

it was unconstitutional – Congress did not have the authority to create such a bank

it concentrated an excessive amount of the nation’s financial strength into a single institution

it exposed the government to control by “foreign interests”

it exercised too much control over members of the Congress

it favored Northeastern states over Southern and Western states

Interesting comparisons to be made between then and now if you put ECB into the above equation ?

@ MH First pref: I would hope that a substantial debt reduction for Ireland will be forthcoming at some stage although I know well that the N Europeans will not give that gratis. Things will have to become much, much worse (replace “Greece” with “Ireland”) before they will be prepared to accept that. It is not otherwise in their culture. Banish all thoughts that they can see this road ahead and will take pre-emptive action now before things get much worse….

“much, much worse” could first appear at the level of Spain, Italy, etc. Hopefully before Ireland is completely crushed in the interim!

An obvious negative in this whole context is the Irish Govt’s “negotiating strategy”.

Departing the Euro and negotiating on ability to pay is an option. Unlikely though given the State and Euro reliance of so many in Ireland at present. Still, if that unfolds in any realistic manner, retention of FDI and low CT would be more important than ever, although tax is only one part of Ireland’s attractiveness for FDI as has been discussed. Ireland would still need to remain in the EU for EU trading access purposes. I don’t have a firm opinion right now on which currency linkage Ireland should adopt at that point. Clearly $ trade could still be financed with $; Euro with Euro, etc. Impact on competitiveness of currency linkage would obviously be crucial. Can’t see in principle why that could not be managed (albeit imperfect).

@ The Dork of Cork

The cash from the BofUs was distributed among wildcatter banks.

Most of Jackson’s family died during the war against the English but he was lucky in his early teens to get a legacy of £300 from an Irish cousin.

Earlier today, I was walking back from a Stabucks when a monkey vaulted from a construction hoarding over my head to a tree by the pavement.

I was thinlking that in all my years in West Cork, I had never seen a fox but for the first time did in Ballsbridge, Dublin!

Am I offtopic?


“There are seldom simple answers to any complex situation.”

That is what the Gordian knot said. But then he would have, wouldn’t he ?

Flying monkeys………… did he have wings by any chance ?
Who had deposits in those wild cat banks I wonder ?

Whats little discused now is that the FRNs are becoming a form of synthetic US note as most of the interest on Federal Reserve holdings is flowing back to the US Treasuary.

This is perhaps having profound implications for international capital flows.

Jeez, lads. Ye’re really losing the plot. Old Hickory, flying monkeys and foxes in Dublin 4… I suppose it’s the inevitable outcome of wittering here while the ‘powers-that-be’ and those who influence them fail to take a blind bit of notice…

@Paul Hunt
Those D4 foxes are a breed apart…sadly, I saw one recently splattered on the Merrion Road…I think the 46 a got him.

On a more serious vein, can anyone tell me where we are going to get the 1.5 billion to build all those new schools as announced today.

An alternative perspective from Sweden:

Thatcher has won the battle for Europe

“Its economic objectives are stability and keeping inflation under control. Full employment, however, is relegated to the second tier. European governments have no other choice but to submit to the rules of economic discipline, whatever the social fallout. The mandatory rules are set by the financial markets – and for their profit”

Theres a very big difference between a drop in the money supply which may or may not be debt that Micheal seems to be calling for and a drop in the bank credit supply.
If it takes colourful language to tease this out so be it.
There was some very big winners & losers from the 1837 panic I imagine.

But the clear difference in the the post 1987 world especially in the eurozone is that Irish debt for example is no longer in Punts , its not even Euros.
Its merely denominated in Euros – making us very very vulnerable to the money changers.
Its time we change this dynamic don’t you think ?
Its now or never.

@ Dork Agree that there is an opportunity now to change….but any change in denomination /currency involves alternative vulnerability(ies) in any event as well as so many [social, etc] aspects beyond money itself. Difficult to see Ireland /the Irish people getting together to “free float” their collective lives.

I agree with Michael that, in the absence of Irish leadership and integrity of that leadership (for and with the people), many would prefer “foreign rule”. Strange how Irish nationalism is utterly changed. The moral “legitimacy” of Irish govt is undermined /damaged /sunk.


‘In a SPIEGEL interview, French Socialist Party presidential candidate François Hollande reacts to German Chancellor Angela Merkel’s refusal to meet with him in the run-up to the election, explains how he would like to renegotiate the European fiscal pact if he is elected and shares why it is unlikely we will soon hear the term “Merlande” if he is elected.’,1518,820660,00.html

@ Dork By the way, the net cash extraction I refer to involves deleverage i.e. reduction of net credit in the economy. So real and increasing pain. The N Europeans have little sympathy for debtors in this context…and will sweat the Irish economy until they get (most of) their money back, in the absence of Irish default. The ECB /IMF, via the Govt, is the main supplier of credit nowadays in the Irish economy (at the gross level)….and will wants its /their money back…..That Swedish article sums up the senitiment very well.

The Irish /Ireland will be paying off its mortgage for many, many years to come if it stays to this route. At least the people decide on some of that in this referendum.

“EU countries want to impose tax on financial transactions”, headlines Süddeutsche Zeitung . The Munich daily reports that finance ministers from nine countries – Germany, France, Spain, Austria, Belgium, Finland, Portugal, Greece and Italy – have addressed a joint letter to the Danish Presidency of the EU requesting that it “overcome all obstacles” to the implementation of a Tobin tax by July 2012. According to the ministers, the measure would create –

More on Game Theory Mark-2

“Q” will be pleased with such recognition.


On a more serious vein, can anyone tell me where we are going to get the 1.5 billion to build all those new schools as announced today.

The Cabinet placed €3.1 billion on Hurricane Fly (win) and Kauto Star (place) with PaddyPower.kom with the imprimatur of the IMF last Friday week.

The punt didn’t go away you know.
It has an exchange rate of 0.7 to 1 Euro.
So if I owe BNP 1,000 Euro I owe them 700 Punt.
If I go back to the punt I still owe them 700 punt. And if the punt falls to 10Punt to 1 Euro I still owe them 700 punt.
Don’t believe me …. look it up.
Going back to the punt isn’t that big a deal

@Paul W.
Yes modern Irish society likes its Grot – indeed its has grown dependent on this oil waste.
That was the idea I guess.
Get the dumb bastards hooked and then slowly take their opiate away.

Boiling green frogs come to mind.

@ Eureka Only if you can dictate the applicable law of the debt contract…..

@ Dork Just to be absolutely clear: my net cashflow extraction language is meant in debt service terms (banking as opposed to economist lingo)….

@ Paul W
The contract was made in the belief that the Euro would continue to exist in the state it was at the time of the contract. Since it no longer exists in that state there are two choices: 1: declare the contract void or 2: declare the contract valid using the exchange rate that existed at the time
If they don’t like it they can get stuffed

….in the situation where we were forced to leave the Euro, for example (e.g. by telling them to stick their fiscal treaty..)


“That they are too minor to make it worthwhile to discuss them.”

You can take one of the following two positions on this:

1) The Fiscal Compact treaty essentially makes no difference to what is already there.

If so, it renders the whole exercise a complete waste of time, and Germany expended a lot of political capital to achieve, well, exactly nothing. Voting for or against the treaty makes no difference since the consequences of the existing fiscal responsibility rules will kick in anyway.

2) The Fiscal Compact treaty does make a difference compared to what is already there

This is Mrs. Merkel’s view, and is also mine. She thinks the changes are for the better (a “masterpiece” if I remember correctly); I think they are for the worse.

@ Bryan G

Agreed re 2). Despite that, the Irish public may /probably will anyway decide to vote Yes.

What I find seriously objectionable is “Official Ireland”‘s aversion to truth /proper representation of the truth, in fear apparently that the”plebs” cannot be trusted with the real decision. What nonsense…..lack of democracy, etc.

@Paul W

I think (c) and (d) do remain in place, since this is the subset of deviations allowed by the Fiscal Compact, taken from the set of all deviations allowed by the SGP, at least as I read it. (I’ve a little more on this in a posting in John McHale’s thread).

I think a way to look at it is that there are multiple programmes/rules all operating in parallel, and that the criteria that apply will be the strictest criteria taken from any of the programmes/rules. For example Ireland is under an EU-IMF programme that ends 2013, and also under an EU Commission excessive deficit programme, that specifies a target of 3% GGD in 2015. The budget for any given year has to satisfy both programmes.

Some of the rules specify when they enter into force. For example the debt brake rule doesn’t start until 3 years after exit from an EDP programme, and there are some complex rules to do with the transition period. The Fiscal Compact treaty would be yet another layer on top of this already complex structure, but it hasn’t entered into force yet, and so is not a consideration for what has been happening with Spain recently. When it does enter into force, it will likely be more difficult for Spain to unilaterally change its intermediate targets, for example.

@ Bryan

Thanks for the detail. Most informative and clear. I don’t claim to be an expert in the area…but the lack of coherent /clear argument from our senior irish economist experts is frustrating to say the least. For absolute clarity, where is it stated that “the debt brake rule doesn’t start until 3 years after exit from an EDP programme, and there are some complex rules to do with the transition period.” I may be a “pleb” but I still want to understand and, where possible, see the detail myself.

@Paul W

(still one step behind – responding to your last but one post)

“What I find seriously objectionable is “Official Ireland”’s aversion to truth /proper representation of the truth, in fear apparently that the”plebs” cannot be trusted with the real decision. What nonsense…..lack of democracy, etc.”

Agree with that. Of course articles like Philip Lane’s piece in the SBP are rhetoric – designed primarily to persuade while taking the outer form of being a more neutral piece. This is done through a careful selection of facts and positions to present. For example, Sweden gets a lot of airtime these days, and is pushed into service as a poster child for the Fiscal Compact treaty. However a recent Economist article looking at the reasons for why the US is recovering faster than the EU noted:

(Continuation – post was being rejected so trying to split into multiple parts…)

The McKinsey report pores over two episodes that it considers most relevant for today: the experiences of Sweden and Finland following their banking busts in the early 1990s. Debt reduction took place in two stages. In stage one, the private sector reduces its debts; the economy is weak and public debt soars. In stage two, growth recovers and the longer-term process of reducing government debt begins. In both these cases growth was buoyed by booming exports, a boon that seems unlikely this time. But it is telling that Sweden did not begin its budget-cutting until the economy had recovered; and that when Finland tried an early bout of austerity, this worsened its recession.

So if the success story of Sweden did not begin its budget-cutting until the economy had recovered, unlike Finland that overdid it and worsened its recession, should that not be included as a consideration in any detailed piece that included Sweden as a role model? Would the changes introduced by the Fiscal Compact treaty not push things more in the direction of 1990s Finland rather than 1990s Sweden? In an informative article it would, of course, be considered, but for a rhetorical article it would only serve to distract from the message being imparted.

@Paul W

(and now responding to your last post…)

More details on the debt brake’s entry into force conditions and transition period (in section B(1)), and indeed all the rules, can be found in the EU Commission’s Code of Conductdocument.

@ Bryan G

You misunderstand the position that I am advancing. As far as the fiscal compact faces towards the EU i.e. is operating within the EU legal framework, there is little or no difference, a point that is being driven home in the exchanges on the other thread opened by John McHale.

What neither of you appear to have grasped, if you will forgive me for saying it, is that the real additional substance of the fiscal pact lies lies in those elements where it is facing in the other direction viz. towards the commitments that the participants have entered into as far as their national legislation is concerned.

This is what Merkel considers vital and exceptional, as do, indeed, her legal advisers as they have stipulated – according to Der Spiegel – that a “constitutional” majority of two-thirds will be required to get it approved by the Bundesatg.

Until this Janus-like element in the fiscal pact is fully teased out, there will be confusion as to its implications, notably in relation to the powers of the Commission. It cannot act in the second role in the same way as the first and does not have any particular powers other than that of proposition. It is “volunteering” its contribution. It would, if I have understood some of the reports in the matter correctly, be legally impossible for it to act otherwise. (The UK, to quote Cameron, was watching this aspect “like a hawk”).

@ DOCM “there is little or no difference”. The debt brake element is new, among other aspects.

“Until this Janus-like element in the fiscal pact is fully teased out, there will be confusion as to its implications”. Why then are there unquestioning, unequivocal pro-yes articles appearing in the media from our best and finest?

I would agree that this piece seems far more like advocacy than analysis, it is notable that the only two new worthwhile elements mentioned (Eurobonds and central responsibility for banking regulation and resolution) are not part of the fiscal compact and that the German right and ECB, who effectively now jointly run Europe, are strongly against these measures. Why mention them at all?

It seems to me that informed support for (as opposed to fearful acquiescence to) the Fiscal Compact comes from two overlapping sets of people, those on the political right (free market, small state, no problem with increasing inequality, disgusted at the long term unemployed for not trying harder) and those whose status is tied to the success of the current version of the EU (ECB ubermonetarist fellow travellers, lecturers and practitioners of European law, the financial sector fraternity). The financial compact does serve their interests and if I were a right wing economist or a financial capitalist fighting to label the latest crisis in capitalism as a crisis of social democracy I would be fully behind it.

However anyone not a member of one of these two sets of people and anyone who believes that the EU needs to have popular democratic input to prosper should oppose the compact for what it is: A nakedly political and opportunistic effort by Merkel, her acolytes and conservative fifth columnists to make right wing economic dogma law in every Eurozone country.

It would be good if Karl Whelan could overcome his worries about Ireland’s lack of access to the ESM and if Colm McCarthy could lets his sense of natural justice overcome his sneaking regard for Euro-Thatcherism because without some support from public intellectuals (with Irish characteristics) the fight against this immoral and wrong-headed policy is going to be particularly difficult.

At the very least let us adopt Paul Hunt’s wait and see policy, Europe might develop some backbone before we need to consider taking a stand against the compact.

This article is absolute bollocks. Ireland stands no chance of achieving a budget deficit of 3% by 2015. the implications of trying to do so are further severe austerity measures which will depress an already messed up economy. If you want to be run by germany and you want our kids to have to emigrate for the next 20 years, then by all means vote yes in the referendum. The euro is a failed experiment, I would strongly advise you go down to paddy power and see what odds you can get on it being dead within 2 years!

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