The TSCG and Irish Fiscal Policy Post author By Philip Lane Post date April 4, 2012 My briefing note for today’s meeting of the Oireachtas Sub-Committee on the Intergovernmental Treaty is here. Categories In Uncategorized 66 Comments on The TSCG and Irish Fiscal Policy ← What If Ireland Defaults? → World Happiness Report 66 replies on “The TSCG and Irish Fiscal Policy” The session can be watched here and is due to conclude at half three. Going through members questions at the moment. Hopefully there will be some time for responses from the witnesses. @Seamus Coffey Hopefully there will be some time for responses from the witnesses. Not looking likely! @Philip “it is also vital to appreciate that the TSCG is a gateway reform” Please provide one shred of evidence that there is any political appetite in Germany or core Europe to reform the banking system or to tackle current account imbalances. Alternatively, please lend us your crystal ball where you can predict what future reform there will be. If there were any appetite for bank resolution reform or to address current account imbalances in a meaningful way they would already be in the treaty or the 6 pack. I know you can point to the present lip service to current account imbalances in the 6 pack, but if there were any appetite to seriously address this, why is Germany not currently in breach of current account surplus rules? The truth is there is no real appetite in Germany for further reform, at least not reform that would be favourable for Ireland. Their economy is doing very well, thank you. Please stop telling politicians that this is a gateway reform. You do not know that and are therefore over-reaching. @bazza @Philip it is also vital to appreciate that the TSCG is a gateway reform Please provide one shred of evidence that there is any political appetite in Germany or core Europe to reform the banking system or to tackle current account imbalances. +1 but do not hold your breath. Prof’s Lane and McHale have a faith that can not be shaken by mere lack of evidence. In my mind there are two connected points. <strong?* Firstly what incentive does Germany now have to allow any changes to the functioning of either EMU or the EU that strengthen other country’s economies versus it own after getting everything they wanted already? If Merkelism is about anything it is about power and wealth being a zero sum game. By spending so much to limit the effect of the financial crisis to just Ireland (through the bondholder bailout) we continue to allow the interests of the German-bloc to diverge from ours – they will not change their behaviour unless there are costs to not doing so. <strong?* Secondly what reason is there to believe that having been rewarded so richly for their hard line so far that Germany’s conservatives will not become even more self interested, punitive and dogmatic? What incentive do they have not to become more unreasonable? If we sign ourselves up for the ESM soup and two decades of paying for private banking debt what do we imagine that a Germany that had a rich industrialist remake its social welfare laws to be more industrialist friendly do to Europe? This is not Schmidt’s Germany, or Kohl’s or even Schröder’s – Merkel is every bit as radical as Thatcher and we can expect her to have an equally damaging effect on the parts of Europe she sees as peripheral – if we let her. It is delusional to say that the Fiscal Compact will serve anyone’s needs other than conservative Mitteleuropa’s, especially given the fact that Schauble (who fancies himself the last European) has been talking about making Europe’s economic policies even more centralized and even less democratic. Once more with html tags removed. @bazza @Philip it is also vital to appreciate that the TSCG is a gateway reform Please provide one shred of evidence that there is any political appetite in Germany or core Europe to reform the banking system or to tackle current account imbalances. +1 but do not hold your breath. Prof’s Lane and McHale have a faith that can not be shaken by mere lack of evidence. In my mind there are two connected points. * Firstly what incentive does Germany now have to allow any changes to the functioning of either EMU or the EU that strengthen other country’s economies versus it own after getting everything they wanted already? If Merkelism is about anything it is about power and wealth being a zero sum game. By spending so much to limit the effect of the financial crisis to just Ireland (through the bondholder bailout) we continue to allow the interests of the German-bloc to diverge from ours – they will not change their behaviour unless there are costs to not doing so. * Secondly what reason is there to believe that having been rewarded so richly for their hard line so far that Germany’s conservatives will not become even more self interested, punitive and dogmatic? What incentive do they have not to become more unreasonable? If we sign ourselves up for the ESM soup and two decades of paying for private banking debt what do we imagine that a Germany that had a rich industrialist remake its social welfare laws to be more industrialist friendly do to Europe? This is not Schmidt’s Germany, or Kohl’s or even Schröder’s – Merkel is every bit as radical as Thatcher and we can expect her to have an equally damaging effect on the parts of Europe she sees as peripheral – if we let her. It seems delusional to say that the Fiscal Compact will serve anyone’s needs other than conservative Mitteleuropa’s, especially given the fact that Schauble (who fancies himself the last European) has been talking about making Europe’s economic policies even more centralized and even less democratic. How come there have been no posts here about two shreds of good news – the Exchequer returns for March and the end-March Live Register? @Peter Stapleton “How come there have been no posts here about two shreds of good news – the Exchequer returns for March and the end-March Live Register?” +1 @ PS Could it be because both are illusory, designed for consumption by /influence of those only wanting to listen to how great Ireland Inc is doing….? @Livonian Its too politically sensitive. There is probally substantial Irish fiscal transfers to Eastern Europe just like what happened in the 70s with the UK providing unemployment cheques for the various Dagenham Yanks and their families…… spending it then in Cork pubs via more liquid funds. Until the mid 70s Irish GNP was higher then GDP for a very good reason. en.wikipedia.org/wiki/Ford_Dagenham @philip, John Mch, Alan Aherne Regarding “gateway reform”,I can guess the BUBA reaction to the current wage bargaining round in Germany, but when would you expect the pro-consumer spending, pro-surplus reducing political leadership to break with tradition with respect to this. If they are going to orchestrate greater consumer spending without inducing inflation, they are not likely to get a much more suitable opportunity. The Germans know the treaty will come into force (Ireland is an irrelevance to them) so the gate is open. When, in very rough terms, can they be expected to go through it? @Paul W Do you have access to alternative, more trustworthy indicators of Irish economic performance? @ Shay Begorragh Micky Hickey recently linked to a piece by John Lanchester which contained the following: “Economics as a discipline has in effect become the study of capitalism. The two are taken as the same subject. If there were ever going to be a serious and sustained theoretical challenge to the hegemony of capitalism inside economics – a serious and sustained challenge subsequent to the one provided by what used to be called ‘actually existing socialisms’ – you’d have thought one would have come along since the near terminal meltdown of the global economic system in 2008. But all we’ve seen are suggestions for ameliorative tweaking of the existing system to make it a little less risky” And I think that is what is going on here. But I also have time for Philip Lane who is clearly a man on a mission. My take, with no evidence whatsoever, is that he pretty much exploded with rage and fury at the catastophe that hit/was created in Ireland, and has set about doing his best to put it right on multiple levels of which this is only one. But a problem is that economists do see it a problem of those pesky politicians, who, if only they could have their hands thoroughly tied, wouldn’t be able to wreck the gaff. Rule of the technocrats. And though Philip Lane persistently attempts to frame the compact as counter-cyclical, the fact that there are clear penalties on the way down, but only general remarks on the way up means it isn’t really. Now, if it is a political problem, I would much rather see it sorted by political reforms of the kind Paul Hunt goes on about, plus a different architecture such as is coming into place with the IFC. I’m neither agreeing nor disagreeing with the IFC report here, but saying that if the IFC can be a learning organisation, then I would rather see this type of development than future generations being tied by current, rules based, ideologies. So, from Philip Lane’s notes: “each country must invest the modest resources required to build the analytical capacity to best estimate the structural balance. In line with the six-pack philosophy, a broad view of macroeconomic balance is required, taking into account developments in external imbalances, credit growth, house prices, inflation, competitiveness and trade shares as well as the level of output. For this analysis to be impartial and credible, it is best conducted by an agency that is independent of government.” Seems good to me, though I remain unclear as to why this can’t be part of IFC. Also, I agree, that the ‘good things will flow’ case is very weak. Domestic demand has dropped by at least a quarter from its peak and yet our oil imports / oil money exports are at a record for Y2011. This is a no brainer – renationalise the monetory system and stuff the German / Swiss / Saudi nexus with a gobfull of Punts. Watch the $ price of oil collapse when the Iberians / Italians & Irish have to use much of their internal national resourses to move around. With Irish kids walking to school again , the Spanish using their now fantastic intercity rail system to its maximum capacity – grounding all internal flights & the Italians doing whatever Italians do. We need to cut the flow of this oil cash spigot & kill the international cartels control of the spice , at least over our national sphere. I am sick of giving my money to some sick Saudi prince so that he can spend it on his concubines. I am not a conduit , I am Irish. @ PS Of course not, but that’s part of my point. The reporting in Irish newspapers is so biaised as to be propaganda. Completely biaised most of the time, as a rule. As sources of “trustworthy indicators of Irish economic performance”, much of the reporting in the mainstream Irish media is circumspect. It’s ‘amazing’ to watch (from afar). The real facts are relatively inaccessible….Bar for blogsites such as this. On a slightly different slant, I’m “surprised” that there has been so little discussion of the Indo journalist’s disclosure on Vincent Browne that he was asked not to criticise the Govt establishment on the basis that its dominant family shareholders are /were seeking O&G exploration licences. Kind of thing one sees in the most emerging of Emerging Market jurisdictions or subject to criminal-type investigations such as the NOTW stuff in the UK. ”Ireland should also press for the deeper systemic reforms that are required.” Reforms such as declaring current account balances as legal tender? Current account balances are presently liabilities of the bank since they are a potential claim for legal tender cash. Making them legal tender directly would sort the problem on the banks balance sheet overnight. It would also prevent a similar prolonged recession in the future since banks would no longer create and delete digital money. @Philip Lane Philip, were you to review this ‘TSCG’ for a 5* Macroeconomics Journal of the Objective Realist variety – would you recommend its publication, without any revisions, based on relevance, rigor, and social scientific validity? “Yes” or “No”. webofdebt.wordpress.com/2012/…/oh-canada-imposing-austerity-on- http://www.youtube.com/watch?v=3_0uz7e9A6E http://www.youtube.com/watch?v=E_fzSc_i0Tc The spice must flow…….. That was a very short document. It was a bit like a fisherman being told to wear good boots and clothing, bring along right tackle and watch out for weather, learn skills involved and being advised not to overfish. But the document doesn’t address the main issue of there being no fish in the water. It doesn’t address the impact of austerity straight jackets on government budgets. Keynesians with plans to spend out of a downturn, save in a boom, will be horrified. Fiscal imbalances at the heart of the euro project vaguely referred to in a few lines mentioning the ‘euro bonds’ are not addressed. Another piece of euro wallpaper papering over the cracks in the service of europhiles, who are willing to pay any price including selling their own souls, to keep the party going at any cost 🙂 @Peter Stapleton 4:53 Re “the Exchequer returns for March and the end-March Live Register” Don’t see how Exchequer returns for March any ‘good news’ knowing the tax returns involved are earmarked to pay for banking debt plus the lifeblood of the economy is being sucked out of it. The end-March Live Register little dip I’d have to see emigration returns for the same period to get a true measure. We are not getting enough CSO data on unemployment and emigration. True figures in my view are way higher masked as they are by filters such as part time employment and participation in employment schemes and education. But enlighten us if you feel any good news has been missed 🙂 A cash-strapped Greek pensioner shot and killed himself outside parliament in Athens today saying he refused to scrounge for food in the rubbish, touching a nerve among ordinary Greeks feeling the brunt of the country’s economic crisis. The latest data shows suicides jumped 18 per cent in 2010 from the previous year as rising unemployment, higher taxes and shrinking wages drove ordinary Greeks to despair. http://www.irishtimes.com/newspaper/breaking/2012/0404/breaking46.html?via=mr In Solidarity. Part 1, wordpress being funny peculiar. @Gavin Kostick But I also have time for Philip Lane who is clearly a man on a mission I understand how you come to praise Caesar and not bury him, Philip Lane is clearly trying to contribute to public life in Ireland and achieve something. However even if we allow that Europe’s currently dominant set of establishments are only willing to tweak their flavour of capitalism slightly and that Ireland is too insignificant to do other than follow this lead there seems to be no evidence whatsoever that the Fiscal Compact has implications that do not relate to the German rights model of market liberalism being made compulsory and permanent. In turn there seems little doubt that in a Europe run on these lines Ireland’s comparative circumstances will deteriorate relative to the core as conservative Mitteleuropa creates an EU best suited to its needs. I do not understand why neither Professor Lane’s or McHale’s icy realism does not extend to other countries behaving in their own best interest, and not in ours. We are not Greece, but we cannot be Germany. Kenneth Rogoff in Pessimistic Objective Realist mood …. Later, Maurice Obstfeld pointed out that, in addition to fiscal transfers, a currency union needs clearly defined rules for the lender of last resort. Otherwise, bank runs and debt panics will be rampant. Obstfeld had in mind a bailout mechanism for banks, but it is now abundantly clear that one also needs a lender of last resort and a bankruptcy mechanism for states and municipalities. http://www.project-syndicate.org/commentary/a-centerless-euro-cannot-hold Part 2: wordpress being fussy about some wording choices. @Gavin Kostick But a problem is that economists do see it a problem of those pesky politicians, who, if only they could have their hands thoroughly tied, wouldn’t be able to wreck the gaff. Rule of the technocrats. I think this underplays the role of political philosophy in our situation, economists on the right of the political spectrum are the dominant voices in Europe because its suits the dominant establishment voices in Europe, financial and political. The role of economists in Europe over the last two decades has been to offer a plausible economic justification for whatever the policies that best suited corporate power and wealth were – when Irelands light touch regulation was what the markets wanted they were for it, now that the banks need their hands held they are for that. I am always amazed by the economy of language and clarity of ideas in papers written by top economists. Prof. Philip Lane makes strong arguments in favour of the aims and criteria in the TSCG. However, he does not make any comment on the effectiveness of the enforcement and administration provisions in the said treaty. that is the biggest issue for me with this Treaty which lies outside the EU. He does say: “The TSCG does specify a second line of defence by which the European Commission and the other member governments can seek modifications to fiscal plans but, all going well, this scenario need not be realised for well-run economies during normal times.” This does not adequately deal with the issue for me. It does not acknowledge that well run Countries may not be treated correctly if they rightly decide to run a structural deficit where it is objectively appropriate to do so. It also does not acknowledge the risks involved in inter-governmental administration compared to Commission administration. It further does not comment on how the Treaty will interact with the EU legal and administrative structures or how it might affect future EU integration. These issues may fall outside Prof Lane’s bailiwick but I would be interested in his views nonetheless. Part 3: wordpress being fussy about some wording choices. But a problem is that economists do see it a problem of those pesky politicians, who, if only they could have their hands thoroughly tied, wouldn.t be able to wreck the gaff. Rule of the technocrats. Test. John McHale: A strong fiscal framework will be essential for future stability http://www.independent.ie/opinion/analysis/john-mchale-a-strong-fiscal-framework-will-be-essential-for-future-stability-3072048.html @ DO’D Ok, let’s follow the thread here….Repasting, editing and getting rid of the typos this time: A more balanced article, at last. “With this adjustment path, the primary balance (ie, the balance excluding interest costs) would likely show a surplus of around 4pc of GDP based on the Government’s growth forecasts. This would put the debt-to-GDP ratio on a downward path, helping to underpin renewed creditworthiness, intergenerational fairness and growth.” Again, you need to believe three interconnected things for this to work: (1) the Govt forecasting is accurate /realistic, which in turn depends on (2) growth, which in turn depends on (3) the international /global economic outlook. Clearly, the Receivership, going concern, “open for business” strategy of Official Ireland is “optimistic” re (3) and (2) and hence (1). However, this FC report is also the second warning flag in the last few weeks (first being from CBI) that there are significant downside risks. If (3) and hence (2) take a turn for the worse (e.g. Spain is already threatening stability /outlook, emergency measures are being adopted to try to control the price of oil, QE is off the table in the US….ao would blow the price of oil higher and “self defeat”, etc), then “self defeating” will increasingly materialise……and Naysayers will claim victory. Vice versa if it goes the other way. It is clear that by issuing red flag warnings, both the CBI and FC are moving a little to “the ditch”, to hedge their positions against the downside. Thin ice and all that. It is also fair to say that external, international factors have to-date not been properly weighed in the internal Irish debate, particularly by Troika Debt Programme-obsessed Official Ireland. There are worrying, real, dark clouds on this horizon. Oil related: http://www.zerohedge.com/news/andrew-hall-saudi-excess-production-capacity-promises Another interesting one from my favourite blogsite: http://www.zerohedge.com/news/how-rout-will-decide-route @David O’Donnell John McHale: A strong fiscal framework will be essential for future stability Terrifying reading. It is a conservative manifesto which, quite unironically, contains the following line about our current borrowing. And passing on the debts incurred today to younger generations, who also face costs associated with an ageing population, raises serious issues of fairness. Search the article in vain for references to the bank bailout which has made the difference between our deficit and that of AA+ rated France, a bank bailout which will actually cost future Irish generations influence over their own state and affairs. How strange that the main reason for our creditworthiness issues, the twin failures of EMU and the banking bailout go completely unremarked in McHale’s analyses. Could it be that do not fit in with the great plan to make Ireland a neoliberal debt repayment province by law? Infuriating conservative anti-democratic anti-historical cant. The future shape of Ireland’s fiscal institutions will be heavily debated in the weeks before the May 31 referendum on the Fiscal Treaty. Whatever the outcome of the vote, we hope that one positive inheritance from the crisis will be a set of financial and fiscal institutions designed to prevent accumulated vulnerabilities from ever doing such damage again. The proposed “positive inheritance” from the European component of the global financial crisis is to take control of economic decision making out of the sphere where popular democratic controlled can be fully exercised and make the government of the day effectively an administrative arm of unaccountable (oh sorry – “independent”) technocratic bodies with right wing politics baked in. These market fanatics are dangerous, dangerous people. On a more optimistic note: http://www.reuters.com/article/2012/04/05/us-eurozone-economy-progress-idUSBRE8340QG20120405 The nub of it though: “Investors want countries on the periphery to whittle down their debts preferably by growth, not from a fierce contraction in domestic demand. As such, boosting exports is welcome but insufficient.” Positive ‘advertising’ also in the WSJ. CBI putting its faith in exports it seems. http://online.wsj.com/article/SB10001424052702303299604577325413511436948.html?KEYWORDS=ireland+news Offsetting that from yesterday is: http://blogs.wsj.com/eurocrisis/2012/04/04/austerity-medicine-proves-hard-to-swallow/?KEYWORDS=ireland+news “Data for Italy, Ireland and Portugal show some progress in bringing down large budget deficits. Yet, in nearly every case, more measures are likely to be needed to meet ambitious budget targets set for the year as the economy will almost certainly slow or contract at a faster pace than projected in what is becoming a pattern of self-defeating austerity. …….In Ireland, which is in its second year of a €68 billion economic bailout by the European Union and the International Monetary Fund, an independent fiscal council Tuesday warned that a slower-than-expected growth outlook may oblige the coalition government to bring in €400 million more in tax increases and spending cuts to meet a key 2012 budget deficit target required by its bailout lenders. The warning for yet more measures comes after Ireland announced €3.8 billion in austerity measures in December to reduce a budget deficit of about 10% of GDP in 2011 to 8.6% this year.” Finally for now, here’s an informative one from two days ago on Portugal and, among other things, its hopes for its exports: http://www.mindfulmoney.co.uk/wp/shaun-richards/euro-zone-imposed-austerity-is-destroying-portugals-economy-and-its-future-prospects/ Everyone it seems is trying to do the same thing….and running into the same brick walls. @Paul W Its best if the CB prints new base interest free money……. we can have a rational domestic economy once again rather then functioning as a conduit for depleting oil based credit. Positive ‘advertising’ also in the WSJ. CBI putting its faith in exports it seems. http://online.wsj.com/article/SB10001424052702303299604577325413511436948.html?KEYWORDS=ireland+news Offsetting that from yesterday is: http://blogs.wsj.com/eurocrisis/2012/04/04/austerity-medicine-proves-hard-to-swallow/?KEYWORDS=ireland+news “Data for Italy, Ireland and Portugal show some progress in bringing down large budget deficits. Yet, in nearly every case, more measures are likely to be needed to meet ambitious budget targets set for the year as the economy will almost certainly slow or contract at a faster pace than projected in what is becoming a pattern of self-defeating austerity. …….In Ireland, which is in its second year of a €68 billion economic bailout by the European Union and the International Monetary Fund, an independent fiscal council Tuesday warned that a slower-than-expected growth outlook may oblige the coalition government to bring in €400 million more in tax increases and spending cuts to meet a key 2012 budget deficit target required by its bailout lenders. The warning for yet more measures comes after Ireland announced €3.8 billion in austerity measures in December to reduce a budget deficit of about 10% of GDP in 2011 to 8.6% this year.” Finally for now, here’s an informative one from two days ago on Portugal and, among other things, its hopes for its exports: http://www.mindfulmoney.co.uk/wp/shaun-richards/euro-zone-imposed-austerity-is-destroying-portugals-economy-and-its-future-prospects/ Everyone it seems is trying to do the same thing….and running into the same brick walls. An impartial and independent public information video on the new Fiscal Compact. Please watch it. @Dork Going back to the punt is one option – but not a very attractive one on the face of it. My argument would favour selective debt write-off of the “odious bank debt” element previously discussed, leaving Ireland with a manageable sovereign debt, staying in euros. The deficit would still have to be dealt with or course. Anyway…. My last post had some link attachments but has been held “awaiting moderation” (sent twice)…Is there a limit to attaching links? How does that work? @Shay The CONTEXT remains vichy-banking system debt. Without action on this Ireland is simply IBRC writ large. Am I reading your briefing note correctly ? “At the lower level, there is a floor of 0.5 percent of GDP for the structural deficit for those countries with debt ratios above 60 percent of GDP; the floor is 1.0 percent” Our GDP is €161b, debt is €152b, this gives 95%. The target is 60% so we pay off €2.75b per annum for 20 years and we can borrow .5% or €750m per annum. We needed €20b extra last year, we will not be allowed to borrow it this year. What is the plan ? double the tax take ? As with other Philip Lane articles on the treaty, it conveniently conflates the treaty, the existing EU laws (SGP etc) and planned Irish domestic legislation so that what you end up with is one undifferentiated stream of fiscal virtue advocacy, and almost nothing on what changes would be made as a result of adopting the treaty. As I described in a previous comment the main changes made by the treaty would be to increase the speed at which targets must be hit, and to remove flexibility and discretion by reducing the scope for temporary deviations and by having a legally binding automatic correction mechanism. These changes would increase pro-cyclicality, since everything (including the avoidance of pro-cyclical policies) is being sacrificed on the altar of rapid deficit reduction. There are also a number of misleading claims. The structural balance methodology will not be determined by an Irish agency. It will, as it currently is, be determined by an EU body – the Output Gap Working Group of the Economic Policy Committee. The datasets used are specified by Eurostat. The model allows for some country-specific variables, but each country does not get to set its own values – everything has to be agreed centrally. In practice there is no other way for central EU monitoring to work, since if every country could determine its own methodology and datasets, the system would be open to charges of unfairness with claims that some countries were gaming the system by making the model and statistics fit the desired result rather than the other way around. Also the main parameters of the automatic correction mechanism will be specified by the EU Commission, not in Ireland. In theory there is a wide spectrum here relating to how quickly or slowly deviations should be corrected, and how different types of overspending should be considered, but based on recent EU Commission statements (e.g. on Spain, pacta sunt servanda etc,) it is highly probable that the correction mechanism will be of the short, sharp, shock variety. Also the claim that the treaty is a “gateway” to eurobonds really has no place in an Oireachtas submission. There is no evidence for this at all. On the contrary there is overwhelming evidence that Germany is not moving forward to fiscal union, but moving back to Maastricht, this time carrying a big stick. Government financing is being “re-nationalized” with Spanish banks funding the Spain etc. The ECB recently changed its collateral rules to allow differentiation between countries. Many of the arguments for the treaty involve “sending a signal” to other bodies in the hope of eliciting some desired result. For governments it is “sending a signal” to the ECB, who will become more accommodative, or “sending a signal” to Germany who will introduce some sort of transfer union. The ECB think the treaty is irrelevant for themselves, and think it is “sending a signal” to the markets who will start to lend. The markets also think it irrelevant for themselves and think it all about other governments “sending a signal” to Germany. And on it goes in a circular fashion. A truly abysmal way to make policy. @Shay Begorrah An impartial and independent public information video on the new Fiscal Compact. Please watch it. “http://www.youtube.com/watch?v=TZfzAOooEOU#t=0s” Classic! @ Bryan G This Reuters report may interest you. http://www.reuters.com/article/2012/04/03/us-france-hollande-europe-idUSBRE8320LZ20120403 Matters, it seesm to me. are under active and, while it is impossible to predict the outcome, some of the outlines of a compromise deal can be discerned. As to Ireland’s decision in relation to the fiscal pact, the choices are rather stark. These cannot be identified by too mechanistic a reading of the text but in a broader assessment of whether improved budgetary discipline is in Ireland’s interest or not. Given the mess that the lack of such discipline has given rise to, the answer seems obvious. @ Bryian G Please insert the word ‘negotiation’ after ‘active’. Another element is the tug-of-war going on with regard to the implementation of the Basel III rules in respect of which a special meeting is taking place on 2 May. These pit the UK against the larger EA countries with the ECB seeking to be given the supervisory role, which is a no brainer given the desirability of doing so and the possibility in the treaties for the Member States to give it such a role. But unanimity of the 27 i.e. including the UK, is required. @Docm What lack of Budgetary discipline ? What are you talking about ? This is a monetary problem baby. @Shay B had me laughing but she is a scary one….. where Sharon gone ? Sharonnnn… Talk some cupla focal please……….. @Shay Increase the monetory base and you can tax it as less money will leak out , as stuff from outside becomes more expensive. Its that simple in many ways. The fiscal gap is there because the money ain’t. @Bryan G Thank you again for your thoughtful contributions to the debate. A few responses: You assume that the automatic correction mechanism that will follow from treaty will be more demanding than what is currently in the SGP rules set out by the Commission. While I agree with you that we need more hard information on the principles that will underly the mechanism, since these principles will be set out by the Commission it seems likely that they will align with what is laid out in the SGP implementation framework. See pages 7 and 8 of the implementation document: http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/coc/2012-01-24.pdf In saying this, I don’t mean to underplay the significance of the treaty. Even if the rules are already there, putting certain elments of them in the treaty and ultimatley in domestic law does give them more permanence and teeth. But I do still think you over estimate what is new. Having said that, your analysis does helpfully focus attention on what the treaty actually does. This will be crucial in the treaty debate. On a more general point, much of the opposition to the rules (even without the treaty) is that they will be a forcer of austerity. But I think a balanced assessment requires we recognise that the most significant forcer of austerity at the moment comes when you have a large deficit and are not sufficiently creditworthy to fund it. To avoid being forced to close the primary deficit (and default) immediately, we have been able to rely on offical funding at low interest rates. It is not suprising that official funders require a reasonably rapid path for closing the deficit and creation of conditions that allow market creditworthiness to be restored in order to limit their liability. I think Philip makes the point well that, longer term, having a credible fiscal framework in place that anchors fiscal policy will help to restore creditworthiness, allowing room for a more flexible fiscal policy. A balanced assessment must consider both the market constraints and the fiscal rules as drivers of austerity. Finally, while we would all like to see the “gateway” elements spelled out more clearly, I don’t see it as at all implausible that the willingess of euro zone countries to take on ever larger contingent liabilities (and indeed for the ECB to provide more direct and indirect supports for sovereign bond markets) is conditoned on a credible fiscal framework that reduces the chances of future defaults. While we can’t observe the counterfactual, I don’t think it is a stretch to see evidence of this conditionality in the ECB’s LTRO programme and also the efforts to expand the total size of the firewall. While I try not to respond to insults, your thoughtful and challenging analysis is in sharp contrast to the ideologically driven insults of Mr. Begorrah. If anonymity is necessary to allow people with particular expertise and insight to contribute then that is absolutely fine with me. A different word comes to mind for people who use the cover of anonymity to insult. @ Bryan G Herewith a link to a Bloomberg article on the 2 May meeting. http://www.bloomberg.com/news/2012-04-04/eu-finance-ministers-to-meet-may-2-on-basel-implementation-1-.html @Bryan G ‘… the claim that the treaty is a “gateway” to eurobonds really has no place in an Oireachtas submission.’ +1 The ‘Gateway’ arguments have no validity at the mo. Any observer of the German Political scene, such as I, would fail to find any strong evidence, albeit the SPD and Greens have not dismissed the idea. CDU are vehemently opposed to E-Bonds, and Philip himself has done valuable work in this area. Returnign to politics and the Deauville disaster – which was designed to time in with the next German general election and to reelect the CDU/CSU [it accelerated the demise of sovereign bond markets] … I note that the ESM has been brought forward to mid 2012 – but no sign of the next German election being brought forward! Rather then EU Democracy we are witnessing a regression to Gaullist type German-French dictatorial bullying. There is no evidence whatsoever on a change in the remit of the ECB – the opposite in fact. ECB policy is to place ALL financial system debt on EU citizens. The idea of a Trillion for the distressed sovereigns is unthinkable at the mo … We can observe fiscal sense without capitulation to Dictatorship. @John McHale I have no opposition to prudent fiscal policy. I’m on this blog for a few years due to the ODIOUS nature of financial system debt. Ireland followed the S&G rules – albeit based on a flawed ‘ideology’ and view of an economy, and an immature society. Nor do I have any opposition to a Fiscal Council – but I see a serious aporia/black hole in the remit of the present council – it does not address the ‘HOW? (which you have acknowledged as a ‘political matter’) – and in recent years fiscal policy has been brutally REGRESSIVE which past present and future CSO and SILC data will bear out. So do we need another Fiscal Council on the HOW? with perhaps a ‘broader social scientific or ‘ideological’ remit’ (as The Governor put it once on the banking morass) or do I continue to suggest that regressive fiscal policy be made unconstitutional? Finally, CONTEXT matters: the odious nature of the vichy-financial system debt being placed on the shoulders of ordinary citizen-serfs. I’m a dyed in the wool European integrationist of the Kantian Pragmatist variety – this time I’m voting NO and I’m actively canvassing for a NO Vote in the interest of Irish and European Citizen serfs who are being screwed due to the dictates of a Financial System Ideology. That said, your willingness to engage is appreciated. Interesting final article from Ivan in de paper…. http://www.irishexaminer.com/opinion/columnists/ivan-yates/frankfurts-way-promises-no-hope-for-battered-irish-economy-189459.html @John McHale (splitting response into a couple of posts) While I agree with you that we need more hard information on the principles that will underly the mechanism, since these principles will be set out by the Commission it seems likely that they will align with what is laid out in the SGP implementation framework. See pages 7 and 8 of the implementation document The text in the SGP implementation framework you reference has nothing to do with the automatic correction mechanism required by the treaty, as that text relates solely to the SGP/6-pack. It is clear that what Germany has in mind for the automatic correction mechanism is something that looks very like what Switzerland has, and a version of which Germany incorporated into its own debt brake law. As I said a there is a spectrum of how severe, or benign, such a mechanism could be – it all depends on the threshold levels of the “notional account” used to trigger further expenditure cuts and tax increases, how many “notional accounts” there are (Switzerland has 2) and the time period over which these additional measures must be implemented to eliminate the notional account balances. At the moment nobody in Ireland knows what these will be – at some point, if the treaty is passed, the DoF will presumably be informed by the EU what the scheme is and told to get on with it. To me it is far more sensible to proceed with the utmost caution and only to accept clearly defined and well understood measures if they are seen to make sense, rather than to accept something sight unseen. With Rehn running the show at the Commission and Schauble about to take over in the Eurogroup, I would expect the needle to be far closer to “severe” than “benign”. More generally, quoting measures from the SGP or the code of conduct by themselves can be misleading since the treaty itself limits some of the flexibility contained in the SGP. For Germany, after all, that was a key point of the whole process. What it failed to achieve via the Community process, it achieved by intergovernmental pressure. @John Prudent fiscal policey once states could not borrow from themselves involved a decapitatistion of physical systems to pay interest. One must ask reading some of the embroidery that you post what is the objective ? The man on the De Paper asked that simple question. What is the final objective of this direct rule by the Guild ? @John McHale On a more general point, much of the opposition to the rules (even without the treaty) is that they will be a forcer of austerity… Nobody around these parts is arguing the case for fiscal irresponsibility or ditching all such frameworks. The arguments relate to what the detailed rules are; who has control of the rules and how they can be changed as circumstances change; and how balanced a view of the overall picture they take. For example – the IFAC report argues that in order to restore creditworthiness there should be faster & deeper cuts. However I did not see any comments from any market participants that supported that position. I did see a number of comments like Chief economist Alan McQuaid (of Bloxham Stockbrokers) warned against further austerity as suggested by the council. “We certainly wouldn’t be advocating the Government implementing more fiscal austerity . . . More austerity than is absolutely necessary would in our view send the economy backwards instead of forwards, as required at this juncture. “The onus now should firmly be on promoting growth, not dampening it further.” So if creditworthiness as seen by the markets, needed to end official funding, is a key aim, surely the views of such market players should be given more consideration. Markets are going to be looking at the big picture, and seem to look on the treaty itself as a pet project for Merkel, who has shown repeatedly that she is taking a very one-sided and unbalanced view when constructing solutions to the current problems. The treaty seeks to entrench this more extreme view, and could, by shifting more control away from national governments towards an ideologically-driven core group of countries, even worsen the overall picture. @Ivan Yates ‘ ENDA Kenny’s presidential address to the Fine Gael conference included the obligatory sentence: “Ireland will not default on its debts”. They refuse to get it. Ireland is marinated in debt at every level. These debts are unaffordable. Whether it’s promissory notes, tracker mortgages or Eircom, the solution will require, sooner or later, debt restructuring. Debt deferral only buys time. For Ireland’s economic recovery and societal salvation to be achieved we have to face our problems with honesty. The same scriptwriters that convinced Brian Cowen, that a sovereign bailout was avoidable, have persuaded the cabinet that economic growth can lead us to debt sustainability. They were wrong then and are wrong now. ‘ Read more: http://www.irishexaminer.com/opinion/columnists/ivan-yates/frankfurts-way-promises-no-hope-for-battered-irish-economy-189459.html#ixzz1rCmkIfKv +1 Ivan Best wishes on the comeback! @John McHale (last part) Finally, while we would all like to see the “gateway” elements spelled out more clearly… I think this is mixing up correlation and causation. The LTRO was needed to avoid a huge bank funding cliff, and in my view would have happened anyway, whether there was a treaty, or some sort of Article 12/14 fudge as Von Rompuy wanted, or just a commitment to continue on with the 2-pack. It is the desire for more IMF money that is driving the (temporary) increase in EFSF/ESM. Nobody other than Germany wanted a full treaty change – there were 26 countries opposed to it. However since the UK did not support it, Van Rompuy suddenly took his compromise proposal off the table and left a “voluntary” inter-governmental treaty as the only option. The reality is that everybody other than Germany wished the treaty idea would go away. Hardly the basis for claiming that it is a gateway to many good things. @DOCM Matters, it seesm to me. are under active and, while it is impossible to predict the outcome, some of the outlines of a compromise deal can be discerned. Hollande is backing away from eurobonds since there is no possibility of this happening. EU proposals on project bonds, and more/better use of structural funds and EIB investments have been around for quite some time. Who knows – maybe by the fifth anniversary of the crisis this Summer there may be some action taken? @The Dork of Cork My quip on taxation was not serious. I should have said “turn off the Education and Health sectors?”. The Deutsche Gateway is a one way street … Seven months after Minister for Finance Michael Noonan embarked on a campaign to ease the burden of the €31 billion Anglo Irish Bank promissory note scheme, the unyielding German stance presents a serious hurdle. Arthur Beesley reports: http://www.irishtimes.com/newspaper/finance/2012/0406/1224314438393.html Austerity without growth a guarantee of stagnation Hey – a few more academics and economists here: SIGNATORIES Prof Bernadette Andreosso, Dr Sheila Killian, Prof Peadar Kirby, Dr Michelle O’Sullivan, Joseph Wallace, University of Limerick; Dr John Barry, Queen’s University Belfast; Brendan Bartley, Dr Proinnsias Breathnach, Prof Rob Kitchin, Dr Mary Gilmartin, Dr Mary P Murphy, Prof Seán Ó Riain, NUI Maynooth; Michael Burke, economic consultant, London; Dr Tom Healy, Dr Michéal Collins, Dr Rory OFarrel, Nevin Economic Research Institute; Prof Gerard Hughes, Peter Connell, Dr Jim Stewart, Prof James Wickham, TCD; Dr Sheelah Connolly, Prof Terrence McDonough, NUI Galway; John Corcoran, Limerick Institute of Technology; Dr Daryl D’Art, DCU Business School and UL; Dr Roland Erne, UCD; Prof David Jacobson, Patrick Kinsella, DCU; Dr Nat O’Connor, Tom McDonnell, Sinéad Pentony, Tasc; Tony Moriarty, Michael Taft, Unite; Dr Tom O’Connor, Cork Institute of Technology; Dr Colm O’Doherty, Tralee Institute of Technology; Dr Michael O’Sullivan, author; Odran Reid; Paul Sweeney, Ictu; Prof A Dale Tussing, Syracuse University (US); Colin Whitston, National College of Ireland http://www.irishtimes.com/newspaper/opinion/2012/0406/1224314438666.html Now if we could only get a 1000 more …. @DOCM As to Ireland’s decision in relation to the fiscal pact, the choices are rather stark. These cannot be identified by too mechanistic a reading of the text but in a broader assessment of whether improved budgetary discipline is in Ireland’s interest or not. Given the mess that the lack of such discipline has given rise to, the answer seems obvious. Due to Bryan G’s impressively patient but admirably complete refutation of the arguments for signing the Fiscal Compact in this thread DOCM has here alluded to what every reader of the blog has to grasp by now – viewed purely in terms of its content and economic policy implications the Fiscal Compact is somewhere between utterly useless (it will not stop bubbles) and seriously counter productive (it will make them more difficult to recover from). It is a statement of shared ideological purity rather than any attempt to help the non Germany-bordering parts of Europe to recover from the last crisis in capitalism. As the economic theory behind the treaty has failed to blind us with its beauty we have been forced down to the next level of rationalization, which as far as I can see has three parts. * Access to the ESM (Thanks Minister Noonan) for when the continuing bank bailout and the lack of any state stimulus forces Ireland into another state bailout. This is the more or less factual one, even if it is a self fulfilling prophecy of doom. * Signalling, confidence building, demonstrating seriousness and other matters of a basically psychological nature (again, covered by Bryan G). Rather than making efforts to rebuild the economy (which is verboten) we will determinedly signal it back to health. * The power of prayer to affect German politics. The advocates of signing the treaty believe that it will lead to actually useful things happening in the EU despite all the evidence to the contrary. Now I freely admit to having ideological baggage but I do not think I have any of the theological kind. Can the same be said about proponents of the Fiscal Compact for whom faith seems to be an increasingly important part of their analytic process? @Shay Begorrah I think that’s a good summary of the arguments – as the appeals to beauty and truth aren’t going to work, appeals to fear, duty and faith need to be pushed into service. @David O’Donnell Seven months after Minister for Finance Michael Noonan embarked on a campaign to ease the burden of the €31 billion Anglo Irish Bank promissory note scheme, the unyielding German stance presents a serious hurdle. Not mentioned in the article is that Greece, the worst boy in the bailout class, has just been given €120bn in EFSF bonds for its PSI and banks. So Ireland, the best boy in the bailout class, cannot get equivalent treatment for a fraction of that amount. And the reason given is – “you’re the best boy in the class – you’re the success story”. You couldn’t make it up. Really. These bonds are not issued by borrowing in the markets – they are conjured up out of thin air, and even that’s a step too far??? Yet Ireland is supposed to vote for their nonsense pet treaty to show solidarity with the European project??? @Bryan G “So Ireland, the best boy in the bailout class, cannot get equivalent treatment for a fraction of that amount. And the reason given is – “you’re the best boy in the class – you’re the success story”. You couldn’t make it up. Really. ” +1 @DOD “The fund cannot be deployed without the unanimous endorsement of euro zone countries. Furthermore, all German disbursements must be specifically approved by the Bundestag.” As I have repeatedly said ..the Oireachtas is subservient to the Bundestag. Ivan has it right. This course will simply not work. Finally, our Mickey is some boy “The side-stepping of a €3.1 billion cash payout by the State on this year’s instalment on the promissory notes with the issuing of a 13-year Government bond last week showed that the troika didn’t regard the terms of the notes as “untouchable”, said Mr Noonan. “It shows that from the troika’s point of view, including the ECB, the terms of the promissory notes are not sacrosanct because if you can change it in one respect for one instalment, then it is open to change by negotiation,” he said.” Draghi didn’t seem to think so….pay up on time pacta etc. @Ceterisparibus I guess Noonan has already forgotten his Dail statement from last week: This proposal does not involve any adjustment or variation to the terms of the promissory notes. The constant repetition of “no cash payment by the state” when there was a cash payment by the state, in full and on time, is also an insult to his audience. At this stage it has all become rather sad and pathetic. @Bryan G ….as the appeals to beauty and truth aren’t going to work, appeals to fear, duty and faith need to be pushed into service. The EU Fear, Duty and Faith treaty has a certain ring to it. In a spirit of mischief I wonder if any other readers can any suggest alternate titles for our proposed new collectively signed confession to the economic crimes we did not commit[*1]? * The Fiscal Error Compounding Compact (or FECC) * Common Remorseful European Economic Pact * EU Peripheral Economy Suicide Treaty Any takers? Note [*1]: The treaty generously allows Ireland to repeat the mistakes we actually did make, and in some cases compels us to do so as doing otherwise would interfere with the market. FYI Michael McDowell, a barrister and former PD leader and minister for justice, said that voting no to the upcoming fiscal stability referendum would be akin to inflicting a “fatal toxic shock” to our economy. What neck! PD toxic ideology with its FF fellow travellers is largely responsible for present mess; and this is the same Mick who engineered, with other AGs in the ‘precious’ dodgy 8, the defeat of the Oireachtas committee referendum, and who sat at the same cabinet table as many discredited ministers … Mr Ó Cuiv said that Europe was seeking ratification by Ireland of three treaty changes: an amendment of the definition of the treaties governing the European community to include reference to the treaty establishing the European Stability Mechanism (ESM); a treaty setting up the ESM; and the fiscal compact. “It is my understanding that the ratification of the first change, that triggers the possibility of the second and third changes, requires the ratification of all member states of the European Union,” he said. “The Government recently confirmed in the Dáil that the first two treaties will not be ratified until after the referendum. I welcome this…presumably this decision was informed by the possibility the Irish people might reject the fiscal compact…Should that arise I would presume that we would not ratify the first treaty until our concerns are addressed. “If our concerns are fully addressed we can always vote again on treaty changes,” Mr Ó Cuiv said. http://www.irishtimes.com/newspaper/breaking/2012/0406/breaking62.html?cmpid=lunchtime-digest&utm_source=lunchtime-digest&utm_medium=email The debate was chaired by Christopher O’Toole, the secretary of the National Forum and, a centre right think tank, set up in 2010 to tackle what its members see as left-wing dominance in public debate and politics in Ireland. ‘left-wing dominance’ – U gotta be kiddin me … @all Faith, Hope and the dubious Charity of Dictatorial Stranglers! Good thread. ‘We can always vote again…’ Jesus wept. @ Bryan G ‘I think that’s a good summary of the arguments – as the appeals to beauty and truth aren’t going to work, appeals to fear, duty and faith need to be pushed into service’ + 1 and for your terrific analysis which gets all the better from the many interesting responses. Classic stuff IMHO. Illegitimi non carborundum. Politics has lots of irrational elements. One only has to consider the history of Church/state relations in Ireland. The more the wheels come off the domestic economy, the more people will be seeking magical solutions. Expect more moving statues or maybe aliens in Tallaght. There is always a market for profitable snake oil, like the supposed WMD issue in Iraq. The MSM have been captured, but thankfully there are still a few folk willing to face reality. Comments are closed.