Austerity without growth a guarantee of stagnation

A group of Irish economists have an interesting joint article in today’s Irish Times.   It is available here.   It usefully goes beyond the rather sterile austerity/no austerity debate to focus mainly on the mix of adjustments.  

Drawing on the available evidence, the article notes that fiscal consolidation measures lead to slower growth and job losses.

The evidence is clear: contractionary fiscal policy does indeed restrict economic activity and employment.

The austerity-focused policies being pursued in Europe and in Ireland will continue to drive down employment and living standards, while embedding high levels of long-term unemployment in the economy.

However, the article does not claim that consolidation is unnecessary (though it does not offer a preferred time path for bringing the deficit down), but rather focuses on the mix of consolidation and financing measures.   The authors argue for a mix that involves higher capital spending and higher taxation aimed primarily at higher income individuals.   (For the medium term, they also argue for higher social expenditures financed partly by increased PRSI contributions.)

Such an investment programme must be accompanied by “smart” fiscal consolidation, focusing on the least contractionary forms of fiscal adjustment. This requires progressive and equality-proofed taxation targeting high-income groups, property assets, unproductive activity and passive income, as well as environmental measures.

In the medium term, we should explore the potential of social insurance and local taxation to broaden the tax base while providing real benefits in return. PRSI can be expanded and combined with general taxation to provide free universal healthcare and earnings-related pensions. Stronger local taxation has the potential to be more accountable while providing investment in services responsive to local needs.

The mix of adjustments is also receiving recent attention in the international debate.   For differing perspectives on the most effective mix from a macroeconomic perspective see Alberto Alesina and Francesco Giavazzi here and Simon Wren-Lewis here

65 replies on “Austerity without growth a guarantee of stagnation”

@ John McHale

Thanks for that. On Alesina:

“Keynes vs. Alesina. Alesina Who?”


“Revisiting the evidence on expansionary fiscal austerity: Alesina’s hour?”

“First, we assume that Alesina – and his co-author’s contributions – are methodologically sound and based on robust empirical evidence. We point out that, even in this best case scenario, the thesis of ‘expansionary fiscal austerity’ is found to be valid in a minority of cases. We then briefly review the methodological critique of Alesina’s work. Such critique ranges from elementary factual errors in at least one of the historical case studies that have been undertaken by the author and his collaborators (Australia) to the pitfalls that follow from ‘omitted variables’ when studying the impact of fiscal policy on aggregate economic activity.

“We conclude by suggesting that the findings of Alesina and his collaborators resonate so strongly with at least some policy makers because of an ideological aversion to counter-cyclical fiscal policy. This ideological aversion is reinforced by lack of accountability among technocrats who design policy experiments based on fragile evidence but are typically not held accountable for the consequences of such experiments.”

I’m having difficulty finding the link, but I believe the Central Bank of Spain has also released a recent research paper looking again at supposed incidents of expansionary fiscal contraction.

Its nice but it won’t achieve much of consequence as it does not deal with this poisonous kleptocratic monetory and now fiscal envoirment.

“The remaining money in the National Pension Reserve Fund (€5.4 billion) should be used to fund such investments, and we should proactively lobby at European level for a dramatic expansion in the lending capacity of the European Investment Bank. Private pension funds are also a potential source of financing commercial-return investment. Consideration should also be given to utilising a portion of the €15 billion held by the Government in cash and other assets”

Its time to dump all of these agencies – I am very uncomfortable with the EIB becoming a quasi fiscal agent as the only organisation capable of producing paper at scale.

Its time for states to produce money again , hopefully their treasuries rather then the CBs – or at least give the banks a very junior position as one solitary desk under the exchequers rule as Friedman imagined.

This begging for cash is beneath us and is the definition of a non sovergin entity.
30+ years of domestic economy destruction is enough time to test this absurd European experiment to destruction don’t you think ?

We appeared to do well at the start with Fiscal transfers & all….. that first bought the farmers and then subseqently moved up the food chain but now these shadowey actors are in the extraction mode, -now that the country no longer has any redundancy it can be done with no apparent resistance.
We need to completly renationalise european monetory systems…….we can then transact on a rational basis both internally and externally with other countries.
Anything less now is a acceptance of the Dark Power.

I have read the article twice, and my reading of it,

– we should borrow more
– increases taxes on the wealthy
– maintain current spending
– to increases domestic demand
– that will hopefully allow the economy to grow
– and reduce the deficit through growth

It is hardly revolutionary or new but does it apply to a small open economy, that is depending on others to maintain spending at current levels?

Its rather simple. 120%-140% debt to gdp ratios requiring burden sharing. The ECB is dead set against this. Its answer is austerity. Unfortunately, this policy not only gives austerity a bad name, it renders counter cyclical policies also redundant.

Why have ‘six packs’, austerity for economies if the financial sector, the elephant in the room, is running amok through liberalisation, deregulation, no control for the financial sector as it eats market economies from within. Regulation, a ‘six pack’ curbing the shadow banking derivative market are required, alongside realistic burden sharing for debt profiles such as ours.

Re “The authors argue for a mix that involves higher capital spending and higher taxation aimed primarily at higher income individuals.”

The authors, if they do not argue for burden sharing, bringing debt to manageable levels through default. If they ignore financial markets and global reforms required including the need for burden sharing, cannot bring debt profiles of the order of 120-140% into control.

Chomsky writes on consequences of not doing this here describing ‘Assault on Public Education’ in US, its coming your way here as well:

“Claims are also made about the alleged benefits of the radical expansion of financial institutions since the 1970s. A more convincing description was provided by Martin Wolf, senior economic correspondent for The Financial Times: “An out-of-control financial sector is eating out the modern market economy from inside, just as the larva of the spider wasp eats out the host in which it has been laid.”

The EPI study observes that the “Failure of Design” is class-based. For the designers, it has been a stunning success, as revealed by the astonishing concentration of wealth in the top 1 percent, in fact the top 0.1 percent, while the majority has been reduced to virtual stagnation or decline.

Cognitive dissonance comes to mind. It is much easier to accept – we are doing the things we are doing because we actually have no choice than to believe we do and try to justify our actions.

Europe has been taken over by bankers. Democracy has been used and subverted to meet the needs of bankers. Goldman Sachs evil empire extends across the continent. There is no choice but to sit tight and do as we’re told. Europe for the people is dead. It will split.

Another Excellent piece from Steve of Virgina.
Countries or at least their NCBs can produce base Euros now – can they not ? – this will promote more efficient use of resourses….more base euros to counter the decline in domestic M1 anyhow which is shocking.

Some Quotes (I think credit is the production of base euros by his defination)
“This shortage of euros IS the credit crisis not the outcome of it. The absence of euros feeds on itself: the shortage multiplies demand for available euros and their cost in credit markets. Euros are hoarded or removed from the marketplace which pushes credit costs higher still. This isn’t debt-deflation so much as it is a deliberate policy of credit strangulation.”
“Since credit isn’t a natural resource and can be created in virtually unlimited quantities, shortages of credit are matters of policy or corruption. In the Eurozone, the absence of liquidity is the small matter of an absent fiscal structure. There is no European ‘federal government’ to provide euros. Only the national governments and the private sector can create credit: the private sector refuses and precious rules inhibit the nations themselves from doing so themselves”

“From this particular vantage point, the euro becomes the instrument of credit fraud like a sub-prime mortgage. Policy failure on the part of the European Union is to not have a lender of last resort: the fact of such an absence after ten years of euro speaks for itself.”

The sovereign is vulnerable: the borrower must take on debt denominated in the country’s native currency. Otherwise, all of his debts are external, at the pleasure of repayment on the lenders’ terms in the lenders’ currency! Here is the set trap at the center of the eurozone: no country within the Eurozone who carefully follows its rules has the use of its own currency. The euro is no-nation’s currency and all debts denominated in euros are external debts. Each Eurozone country is held hostage to private lenders: in a practical sense every European country is a colony of the finance industry.
“It is that industry that sets money rates at any given time because there is no public competition, no alternative bid. Governments lack the structural means to control their own destinies. If ‘investors’ collude so as to refuse to lend for any reason at all … there is no agency to lend in their place and compel a bid”.
“What the foregoing insists is that European nations cannot survive their human or corporate creditors … which is astonishing and suggestive. The demand is exercised that Greece in a multi-year recession must repay finance-level debts that are beyond the ability of any economy to retire and to do so at once without any support. This indicates that Greece is expected to expire: there is no other possible explanation”.…/the-abject-failure-of-economi...

“Europe’s problem is a waste-based economy not currency imbalance. No amount of tinkering adjustments will fix Europe without stringent energy conservation. The cost of borrowing to buy fuel thence burned up for nothing has destroyed Europe. What is left is the post-mortem.”

Dork – The most effiecent mechanism to reduce our money exports is to Arabia and elsewhere is to print base euros.
Spain has one of the best intercity train systems in the world yet trains are nearly empty & regional flights are full.
There is a deep monetary problem withen the Eurozone preventing a efficient allocation of resourses.

“Europe has been taken over by bankers. Democracy has been used and subverted to meet the needs of bankers. Goldman Sachs evil empire extends across the continent. There is no choice but to sit tight and do as we’re told. Europe for the people is dead. It will split.”

Except that bankers just hold the financial assets of increasingly globalised wealthy people. What we are witnessing is rich folk holding onto to their wealth come what may. That includes socialising any losses. The wealthy simply will not accept losses. Profits, yes. Losses, no.
And yes, if Europe continues on its current path of complete subservience to the financial elite and creditor nations, then it will break. And it could be an ugly breakup.

On the article itself.

While the approach makes sense, the learned gentlemen and ladies would have a lot more credibility if they spelled out specific tax policies rather than generalizations. My perception of a high income group is probably what most of these earn. I doubt if that would be their perception.

“Pre-primary education, upskilling, next generation broadband, research and development and renewable energies – these types of productive investment can result in new economic opportunities, enhanced social equity and environmental sustainability.”

Really? The people we need to get back to work are in the majority construction workers. There are over 2000 unfinished estates with as I recall approx 180,000? unfinished properties throughout the country.
The country needs a program to finish the better located of these buildings and put these construction workers back to work.
Residential rents are still rising while construction workers languish on the dole. Put the workers back back to work and force rents down.
It is time to dump the landlord class and if they bring the banks down (again) with them, well too bad.

I thought the article focussed on the stimulus aspect of the debate, in its calls for the (further) deployment of the remainder of the NPRF couple with EIB matching. There is also €4.3bn in NAMA, though €3.1bn has “temporarily” been used to repay the Anglo promissory note. NAMA’s funding costs 6-month Euribor, nominally less than 1% per annum, though NAMA may hedge that, meaning an actual rate closer to 2%. Still if you can’t deploy funds costing you 2%, and you’re in the asset management business, then something must be wrong!

Question for John McHale

Will the Fiscal Advisory Council be offering comment on tax policy ex ante. For example in the UK, they have just cut the higher income tax rate from 50% to 45%. Most of the debate over here is about raising the higher rate, and as noted by you, that is again alluded to in today’s article.

Does the IFAC have a view on this, or more reasonably, is this the type of thing that IFAC will comment on in future?


IFAC’s mandate does not extend to assessing the overall case for particular measures with significant distributional implications, where value judgements are unavoidable. In terms of assessing budgetary projections, I see our mandate as consistent with looking at the fiscal/macro impacts of particular measures. The Box on the VAT projections in the recent report is an example. For the future, looking at the macroeconomic implications of the mix of adjustment measures would be consistent with our mandate. The ongoing international debate on the issue shows that it is far from a settled area, however.

@ Dreaded

The answer to your question is no. However, it is unlikely that the authors have even considered this aspect other than implicitly recognising that dependence on borrowing has reached its limits as they are proposing one last raid on the nation’s by now minuscule piggy bank

Let them rot ………. we need to put all available fixed capital investment into linking rational nodal centres with the minimum of daily energy inputs
(rail) – these activities appear non profitable at the moment as the monetary environment is entirely artifical, as its function is to channel the remaining capital to the core.
But this monetory cocoon will not last forever.
We have declining populations withen many of the traditional city boundary districts of Cork , Waterford , Wexford etc.
Meanwhile even relatively well connected Burbs have many vacant houses.
Living in the outer burbs and sub rural areas needs to be made more expensive ( however it really won’t work in the euro monetory envoirment)

We need a radical transport strategy for Irish Transport conditions of dispersed populations in even “rational” settlements.
The Irish goverment should be in talks with Alstrom to create a Irish gauge train suitable for Irish conditions.
In my opinion a major order for Diesel X73500s (it can operate a either 1,2 or 3 carriage unit) in conjunction with at the very least a constant Midleton scale rail construction operation is desperately needed.

We are going to get constant declines of the Irish private car fleet from now on – we should be making preparations.
Outfit the Foynes / Castlemungret line to passenger route specifications – we need a Port cargo line there anyway … so if you are going to do a job do it properly and make it a multi function line that can be used for suburban west Limerick services + a summer service to the Tourist town of Adare and the beautiful & historically interesting town of Askeaton.

Private Cars have never paid for themselves in their entire History , I find it amusing that this capital waste is tolerated while Labour gets screwed.

Its a deep sickness.

I would say austerity /consolidation without growth plus fundamental, underlying solvency post adjustment is a guarantee of (continuing) regression and negative loop recession /depression.

The main problem is that Ireland Inc. is fundamentally insolvent in the first instance, given its aggregate debt level. In the presence of such unsustainable debt and debt service levels, what should only be a shorter term austerity programme to rebase Ireland Inc. to a more sustainable “going concern” basis is becomming entrenched and long term, with the emphasis completely weighed in favour of the debt service to the complete detriment of any chance of recovery. Given Ireland’s inherent insolvency, austerity in the present context simply does not equate to a reasonable chance of a stable new (lower) basis from which Ireland Inc. can relaunch itself. It equates to increasing destruction.

An agreed (with troika) debt restructure is the only way that Ireland can ensure that its debt level can be put on a sustainable basis, thereby underpinning “constructive” and necessary austerity /consolidation, and a stable basis for a new start.

One would then still need growth of course….but at least Ireland would have a fighting chance. Right now, it has very little chance and increasingly no chance of a near to medium term recovery, in the absence of a solvent foundation.

Stimulus without that solvent basis will not work either.

@John McH

As you say John there is a great deal of debate among economists and huge uncertainty about austerity vs fiscal stimulus.

At some point – probably within five years, it is possible that the question will be effectively resolved via the full-size experiments being conducted. I say effectively, because there will always be ideologues and their wacko academic supporters who will deny the obvious.

Imagine this – and it is a genuine question, not a rhetorical point. Four years hence, there is clear evidence that Austerity was the wrong choice, and that more or less full-on Keynesianism was the right one. This is accepted by private sector financial and market analysts, and the bond markets of states that engage in sensible versions of it are the destination of choice for investors.

There is at that point a very weak periphery, dependent on a core which is still insistent that ‘austerity’ is the answer. Ireland and the rest have ratified the Fiscal Compact Treaty, and it is part of the German constitution.

a) What happens then?
b) Would it have been worth it for the guarantee of ESM access and the distant possibility of Eurobonds?

Solvency of the banks seems key to whether we arrive at a safe place regardless of austerity or stimulus…
“Meanwhile, a report by Swiss bank Credit Suisse said Ireland’s banks remain the “biggest risk” to the sovereign.

“Their balance sheets are around 400pc of Ireland’s GDP, and mortgage arrears continue to rise sharply while house prices slump,” it said.

It said that on balance, it doesn’t think that Ireland will require another bailout. But for the Government to avoid this further progress on the banking sector is needed.

“If the banks still look fragile in a year’s time, the Irish Government may find it a struggle to sustainably finance itself in markets,” he added.”

In contrast RBS are more upbeat…
“In a generally upbeat report, credit strategists at Royal Bank of Scotland said fears that senior bank debt face losses are “overdone”.

Irish banks, it said, had the least exposure to their sovereign’s assets, compared with other so-called peripheral countries.

“Unlike those in Spain, Italy, Portugal and Greece, the Irish banks have not increased their exposure to sovereign bonds” since the ECB began offering three-year loans, the bank said.”

It added that Ireland faces years of austerity as it refocuses on core strengths: competitiveness, foreign investment and exports.”

But you would have to wonder about banks that got things incredibly wrong commenting on other banks equally culpable.

Interesting that our banks didn’t load up on our sovereign debt with the LTRO
I wonder why?

Where do you stand on inserting a requirement on companies to maintain a ratio similar to what we’re expected to vote decision on in the fiscal treaty.
That might have some hope of doing a good. It might have prevented eircom being raped.

In todays IT Dan O’Brien points to Baltic states as examples of countries where recessions and austerity policies have led to growth.

“Start with the austerity story. Latvia, Lithuania and Estonia suffered even deeper depressions than Ireland and even more brutal austerity. Now they are surging ahead.

Estonia’s GDP grew by a blistering 7.6 per cent last year, Latvia’s by 5.5 per cent and Lithuania’s by 5.9 per cent. The three were – by a considerable distance – the fastest growing economies in the developed world.”

What is their domestic demand ? – the core sees us peripheral Pigs & sheep as capital / wealth exporters now that Saudi Arabia has possibly reached reached peak production.
Yet they won’t even reexport capital to reduce our energy leakage…….prefering we just accept entropy as the new natural state of economics.

Its not acceptable mate.

@ CP

Re bank balance sheets as % of GDP – its around 325%, not 400%, for the covered banks, just for your guide.

Re non buying of sov debt by Irish banks into LTRO – they have to deleverage at the same time remember.

@ Ordinary Man

He must be on something…maybe the sauce.

He obviously didn’t read Herr Draghi’s comments in recent days… pay it all back, on time and honor your commitments.

Or maybe that is the second bailout…58,000,000,000. Wow

By how much do you think LTRO will reduce our M1 ?
Do you think hyperdeflation is good for the economy ?
Will it provide for a efficient allocation of available resourses ?

@Bond Eoin Bond
Thanks for clarification. Some error! RBS were flogging BOI senior unsecured bonds yielding 8.45% due 2013 in that report. Timescale looks ok as the underlying problems are unlikely to surface that quickly. Might be worth a punt.
Of course Spain could erupt before then.

@Ordinary Man

Yeah – he is toked to the gills … on power (small ‘p’) …. he could sell out our grandchildren with a smile – most worringly, he mightn’t even understand that he was doing so.

@ Paul W
I cannot see Jens agreeing with Mario to go that route. Whatever about the US going for more QE (dire job creation figures today) it is peculiar that the trillions in previous and existing programmes hasn’t stoked inflation. Maybe it is because the money was mostly used to buy toxic paper.
Interesting article on the toxic stuff..


Certainly a valid question.

There is almost always a potential cost to tying you hands, which I take to be your point.

A couple of responses that go to why I support a yes vote on the treaty, despite your valid concern.

1. While the treaty does add more permanence/teeth to the fiscal rules, I think it is important to the calculation of costs/benefits that the rules are already there, and already backed by strenghtened European-level enforcement post six-pack. I think the incremental impact of the treaty in terms of how the rules might bind — while real — is relatively modest.

2. As a relatively long-term contributor to this blog, you might recall that I have strong Keynesian leanings when it comes to fiscal policy. But we have a large debt and deficit and are unable to get private investors to lend us the money to fund it. In the context of monetary union and a limited captive investor base, I believe we are seeing that high debt and deficits that are not on a reasonably steep downward path are not consistent with creditworthiness. To have robust creditworthiness in the future, I think we have no choice put to get the debt to a much safer level. So while the rules of the preventive arm of the SGP are indeed quite demanding, I think the markets are likely to be at least as demanding. Indeed, if there is a credible fiscal framework in place, it may be easier to regain creditwortiness without very costly demonstrations of political/economic capacity to run large primary surpluses.

3. While the rules under the preventive arm are demanding, there is a reasonable degree of flexibility, including allowing for an adjustment path towards the MTO, specifying the required adjustments in terms of the cyclically adjusted deficit, and escape clauses. Market funding is likely to be less forgiving.

Summing this up, while it is possible that the scenario you outline comes to pass, and we have tied ourselves to something quite damaging (and hard to disentangle ourselves from), it seems to me that the risks of rejecting the treaty are much greater based on current information. The bit that so much criticism of the treaty and the need for austerity more generally seems to put aside — and today’s article is no exception — is how an absence of market creditworthiness is itself a huge forcer of austerity. Maybe markets will come to believe that countries that run up larger debts stimulating their economies are more creditworthy. But I doubt it.

@John McHale

“Maybe markets will come to believe that countries that run up larger debts stimulating their economies are more creditworthy. But I doubt it.”

How come then that Japan, the UK and the USA can sell vast quantities of bonds and have strong currencies having spent trillions (billions in the UK) on stimulating their economies or saving them from meltdown.
Is it only a Eurozone Phenomenon.

@ Paul W

Assuming that what is meant by austerity in the context of this thread is government efforts to balance the books either by reducing expenditure or increasing taxes, what Minister Noonan is quoted as saying in today’s IT is worth relaying.

“If you never had banking debt, the State debt is very significant as well. There is a kind of fallacy around that it wasn’t the State at all, it was the banks and, if it wasn’t for the bank guarantee, we would be in great shape. We wouldn’t. About 20 per cent of the imposition is due to the banks. An awful lot of it is due to the mismanagement of the country and the budget deficits that we were running”.

There is, indeed, considerable evidence to suggest that the nation as a whole is insolvent. But one cannot get away from the fact that the bulk of the monies being borrowed to fill the budgetary gap is being spent on maintaining levels of current expenditure in four key areas; salaries (including increments) and pensions in the public sector), unemployment benefit, social security and health. This expenditure may well be sustaining a level of activity in the economy which would otherwise be impossible i.e. the policy is counter-cyclical.

A two-fold question is posed is (i) is it fair to all sectors of society and (ii) it is the best use of the money. My view would be that the answer is no in both cases and evidence to support this view can be found daily in the Irish media (which, it must be assumed, is also seen by the policymakers of the countries actually lending us the money).

I usually recommend at this juncture that a moment be spent googling the words Buckley Report; a document written by the nomenklatura for the nomeklatura.

The game of hide and seek currently being conducted by the various vested interests is obvious, it would seem, to all but those engaged in it.

@cet. par.

Good question.

I think an aspect of the euro zone crisis that has taken many by surprise is that structural vulnerability to “runs” on sovereign debt in a monetary union. The importance of having a central bank as bill payer of last resort has been revealed to be critical to a country’s creditworthiness. The constraint seems to bind esspecially tightly when there isn’t a relatively captive domestic base of investors in domestically issued debt.

I was struck by at least four incongruities in this piece. Few readers would find in it the makings of a business plan.

Firstly, the piece does not list specific investments beyond jaded hand waving towards broadband, etc. It is all very vague.

Secondly, it is not at all clear to me that the other side of the equation, the market – for whatever vague investments might be dreamt up has been thought through to anything like remotely sensible.

Thirdly, the Croke Park agreement and the public service pay bill would seem like reasonable candidates to put on the table if a bit of money extra cash is needed for investment. Curiously given that 90 percent at least of the signatories are from the third level, there is no call for a root and branch evaluation of how the whole R&D, Smart economy, multi billion caravan hasn’t delivered the great jobs boom – except in academia presumably.

Finally, there is no consideration given over to workfare programs. I have beaten this drum frequently, but all the education in the world won’t get away from the fact that people are needed to collect refuse, clean the sewers, cut glass for the kitchen window, etc.

@ DOCM Agree with that. There needs to be consolidation to reduce and hopefully eliminate the deficit. Lots of pain in there. However, my point is that rectifying Ireland’s insolvency is the important starting point before one begins that deficit process i.e. before you begin unwinding the counter-cyclical stimulus inherent in the deficit.

Not sure what John McHale thinks “creditworthiness” is….However, by definition (in credit terms), you cannot ever be creditworthy if you are insolvent. Period. How John considers Ireland to be capable of creditworthiness given current levels of debt baffles me. On any credit measure, Ireland is insolvent – independently incapable of paying its bills as they fall due, with no material improvement likely in that outlook for the foreseeable future.

@John McH “The importance of having a central bank as bill payer of last resort has been revealed to be critical to a country’s creditworthiness.”
As someone who has been in finance for 20+ years, I just don’t know what that means. The ECB provides backstop liquidity. However, in the current situation, yes, that has become quasi-debt provision to artificially prop up insolvency.

Refinancing risk for Ireland is the key credit /creditworthiness issue. Clearly Ireland is incapable of independently accessing market funding.

@Paul W

Maybe I misunderstand you, but your argument seems to be that Ireland is simply insolvent given the current level of debt. Here I have some sympathy with DOCM. Given current levels of public sector pay, welfare rates and tax levels (in absolute terms and relative to European norms) we have the scope to substantially improve the primary balance and achieve debt sustainability. Now I certainly do agree that the adjustments should take place in a phased way to limit adverse affects on growth, but we are only insolvent to the extent there is not the political capacity to bring our incomes into line with what we can afford to pay.

Unfortunately, I think it is fantasty to think that we would continue to get support based on current conditions if we decided to default in the belief that we could keep paying ourselves as we are.

On your second comment, the experience with Italy and Spain last year shows how investors flee once they fear other investors will flee. The danger is higher the larger is the debt and the shorter the average maturity (hence the value of restructuring the promissory note). Moreover, the danger of falling into this “bad equilibrium” appears to be considerably lower when a country has its own central bank. In extremis, the central bank can print money to pay off creditors (even at the cost of higher inflation). This very capacity can prevent the bad expectations forming in the first place. With large debts that need to be rolled over, creditworthiness is fragile.

This points to the need for a strengthened lender of last function within the monetary union. This is why it is so important to strengthen the “firewalls” and for the ECB to be willing to provide direct and indirect support to sovereigns. I notice that some commenters like to write in pejorative terms about the “readers of Bild”. But is so surprising that countries taking on the largest contingent liabilities in such mutual support arrangements would want some assurance that they won’t be played for fools? Imagine if the shoe was on the other foot.

Presumably systematic pan ez investment to complement going nowhere austerity will come 3 years too late for ireland just like ltro. When france needs it it will be possible bien sur. In the meantime the sme sector can go to the wall.

@John McHale

“This is why it is so important to strengthen the “firewalls” and for the ECB to be willing to provide direct and indirect support to sovereigns”

Isn’t the fatal design flaw in the monetary union the unwillingness and inability of the ECB to provide direct support for sovereigns. It leaves speculators able to pick off any vulnerable sovereign in the knowledge that the ECB is precluded from “monetary financing” sovereigns. The indirect support ( LTRO) has been observed as being of dubious legality and as a tool is now being called into finding its way back on deposit at the ECB. It seems to have worked for a very limited time and as observed (by Grumpy, I think) supports sovereign bonds only within the 3 year timespan. As such it is creating the mother of all refinancing requirement in 2015.

Surely the answer must be to change the rules under which the ECB can operate rather than firewalls requiring complex agreements (with the concurrence of the Bundestag) any time a crisis occurs.

@cet. par.

No disagreement that such a change would be welcome for us at the moment (though we might have a different perspective in the future if they were printing euros and transfering them to others). I suppose my focus is mainly what we have under some degree of domestic control. But we should also make our voice heard in European-level reform.


Kenneth Rogoff … on something lacking in the remit of the ECB

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.

NO evidence whatsoever that present Deutsche focus of ECB will be subject to political or treaty change ….

@John McHale

I’m back to the ‘HOW’ of fiscal consolidation ….

‘… public sector pay, welfare rates and tax levels …

Ireland is under-taxed in EU terms – 3rd tax band; cap on upper levels of public sector pay; no properly thought out property tax; a simplistic penchant for universals and regressvies; no land tax; no wealth tax; closed shops in numerous professional areas with restricted entry and odious charges; shortage in certain professional areas such as hospital consultants; no proper career structure for junior hospital doctors; tax breaks galore for upper-echelons; a culture of entitlement in certain upper echelons and zero to minor penalties for massive white collar crimes; etc and an essentially middle class welfare state that consistently funnels from the working and underclass; and no political will to take on powerful goughing vested interests ….

@John McHale

No disagreement that such a change would be welcome for us at the moment (though we might have a different perspective in the future if they were printing euros and transferring them to others). I suppose my focus is mainly what we have under some degree of domestic control. But we should also make our voice heard in European-level reform.

What if, as seems to be the case, no amount of austerity or “market reform” can help us because at root the problems are international and institutional in nature? What if the both the six pack and the Fiscal Compact are a fatal distraction as well as economically naive?

Might it not be the case then that all the austerity and pandering to German political morality tales only served to make our position worse as the state of our national economy and its workforce deteriorated in quality even as we virtuously cut our deficit and paid back the ECB enforced banking debts that are the cause of our particular woes?

The Irish economic crisis is European in nature and our main focus needs to be there, every time we spend political and financial capital to prevent contagion or a recognition of Europe’s real problems we weaken Ireland and delay real EU reform.

We will have to cut the marginal rate of tax & USC by a few points as we are now out of line with the UK. At the same time we will have to raise taxes on the average worker and bring in a property tax. Prepare for howls of protest from the left over regressive policies. Universal payments are going to have to go as well.

An important requirement in discussing alternative fiscal pathways is to draw on empirical data and modelling difficult as this is in the light of recent experience since 2008. All concerned need to spell out assumptions and component elements. Calls for further tightening of fiscal screws need to be proofed against empirical reality especially where – to some extent – missing fiscal targets is linked to falling domestic demand which in turn is linked to fiscal austerity. Further work is needed.


We could do with a temporary little ‘coup of the pragmatic realists’ of ‘left, roight, and centre’ for a few years; the present political system is incapable of decisive action; the output of intellectual heavyweights such as Creighton and Hayes is giving me nightmares.

BTW, I attack regressives wherever I find them; an underclass going into its 4th generation is economic and social insanity; on the other hand, an upper echelon gouger class, parasitic on the state, and into its 7th generation is economic and social insanity.

In haste! There is a babel of voices on what should or not be done.
At official level, spin always trumps a serious assessment of the challenges say five years ahead.

Dan O’Brien cites the Baltics and in contrast Ireland is on the slow boat to China.

I believe that it would be useful to explore a scenario of 5 years ahead with no growth.

The fact that more than 40% of owner-occupiers have no mortgage compared with 12% in Sweden suggests that there is a big disparity between wealth/income in the society.

The sustainable living standard is lower than we believe and to inform policy choices we have to get a handle on what can be afforded.

Sections of the private sector have had huge drops in income but after another bleak US jobs report, talking up recovery prospects in Ireland avoids having to look at unpalatable choices.

The public pay and pensions bill in 2011 at €17bn, was about €1bn higher than in 2006 — the peak year of the boom. With a growing dependency population, there are other areas of high spending that cannot be maintained in a decade of no growth and low growth that can benefit the domestic economy.

@ John McHale

Have you any thoughts on that ‘tax liability bonds’ paper, ie the idea that we could issue bonds now, redeemable by the owner at a date (defined by us)in the future to pay down the owners tax liability with the Irish state. It’d be a way of tapping the future tax take to fund our present day required stimulus.
It’d be a super bond for as long as the state could tax, so it’d be like having our own currency again but in a sneaky way.

Would it fly in Europe? Is it legal? Would it help?

@ All

The view from Berlin! (Google Translate does a good job).

Many will find Schaeuble’s view of the crisis one-sided. However, this does not help very much as “he who pays the piper calls the tune”.

The question raised is whether the current approach of the government – against the background of the recent comments by Draghi and the position of Germany as stated by Scaeuble – is firmly grounded in reality. Time will tell.

@ John
I hope I’ve got you wrong. You seem to be suggesting that taking more money out of the economy will help and the fact that we can take more money out means that we are not insolvent as PaulW suggests.

It doesn’t make sense. Let’s say we cut pay and welfare by half. In a normal society the negative effect of this would be offset by a tax cut and the overall effect evens out. In this society the money saved is dead money to pay debt and taxes remain high. It cripples GDP and makes for a crappy country.

I suspect you must know that cuts without debt forgiveness don’t work. Be careful – I’ve seen a lot of good men get sucked into the hocus pocus of this. If something is illogical no amount of self talk can change it.

For new money to enter the economy someone has to organise a bank loan.

Austerity discourages bank loans.

However we could decide on a second source of money because with bank loans as the origin of money we can’t solve the debt crisis.

“Austerity without growth”

Is there really austerity? Giving a government guarantee to corporate bonds does not seem austere to me, it seems rather generous.

Is there really no growth? Check out Apple Corp, purveyor of gadgets for the well off.

Putting the two together I wonder if the generosity to bond holders is not showing up as purchases of fancy gadgets from Apple?

So maybe the problem is where the generosity is being lavished, and what the generosity is resulting in?

The Eurozone crisis from abroad, Paul Krugman in fine form.

Monetary Mandate Mischief

One of the remarkable things about the ongoing economic crisis is the way so many people have responded to events by adopting doctrines that would magnify our problems. The woes of Spain and Ireland demonstrate that balanced budgets and low debt in good times offer no protection against crisis, so European leaders make tougher fiscal rules the core of their agenda. The broader euro crisis demonstrates the downside of fixed exchange rates and inflexible monetary policy, so the right doubles down on the gold standard. The financial meltdown demonstrates the need for effective bank regulation; the right demands even less government intervention.

In homage one of the remarkable things about the current version of political right in Europe is that , unlike the political left who have been forced into a morass of introspection after the right flanked them through European institutions, they have come to believe that some very radical policies with so far awful policy consequences are in fact common sense – fortitude and self belief have become the permanent standins for examination and reason.

For a terrific example see Dan O’Brien’s faux balanced endorsement of the FAC report here where he comes up with this already comprehensively debunked factoid in order to support the myth of expansionary fiscal contraction.

At the other extreme in the debate are the fiscal stimulators who say things such as “no economy has ever cut its way out of recession” or “austerity is not working because it never works”.

This position is even easier to dismiss. Last year, the fastest-growing economies in the developed world were the Baltic trio of Estonia, Latvia and Lithuania.

Read the thread on Krugman’s post to see just how successful the Baltic austerity laboratory has been, or you could read this article at counter punch:

I am not sure whether Dan O’Brien truly believes what he is writing or whether like the rest of the establishment media he is trying to deliver Ireland for his fellow neoliberals in greater Eurozoneland but it is shabby, shabby stuff.

Austerity works in the long run, a lot of us also die in the long run. Not without suffering the negative short to medium term effects of austerity. Unemployment, bankruptcy, child malnutrition, social unrest and more.

If GDP drops for three years it should be safe to assume that unemployment rises, incomes fall and at some point competitiveness is restored. In 2007/2008 the Irish gov’t had good reasons to take action on minimum wages and the highly paid professional silos along with entitlement programs. Straw men were put up and quickly burnt. As each month goes by the economy deteriorates, four years wasted. There are no valid excuses such as slow growth is about to become negative in the EZ. Even the mighty German high quality export machine is faltering under the onslaught from Asia. Losing market share outside of Europe at a time when German labour has had no wage increases in excess of inflation for a decade.

Ireland has had long experience with taking in each others washing and the long periods of poverty that went with it. We can add value by exporting goods and services preferably, or people if we fail to become competitive.

The price of housing is now competitive, the cost of labour and professional services are not. The gov’t is not likely to address issues that will displease the voters, this is an age old Irish political tragedy. We simply remain fixed in aspic for long periods of time. Is it due to stupidity, greed, bred in the bone dysfunctional culture, it is probably all of those and more.

Sunday Observer

“Brussels’ austerity drive must be stopped if eurozone is to survive”

“Even this need not be a drama, if three preconditions are met. The first is that policymakers both in Spain and at the eurozone level learn lessons from the botched rescues of the past two and a half years. Experience shows that there is a need to move decisively and with speed. The second condition is that there are enough bailout funds available to the EU and the IMF to cope with the demands of Europe’s fourth-biggest economy.

“Finally, there has to be a recognition, belatedly, that Spain’s deficit-reduction programme needs growth more than austerity. The war chest available to Europe and the IMF is probably big enough to cope with Spain. But the adamantine belief in cutting at all costs shows that lessons still need to be learned.”

@ Mickey hickey

‘The gov’t is not likely to address issues that will displease the voters, this is an age old Irish political tragedy. We simply remain fixed in aspic for long periods of time. Is it due to stupidity, greed, bred in the bone dysfunctional culture, it is probably all of those and more.’

Ireland was never part of the European or metroploitan mainstream. There are plenty of useful analyses of our polity, of which Joe Lee’s Ireland 1912-85 is one. The shadow of colonialism never really dissipated, IMHO, and green jerseyed gatekeepers are in control of all significant institutions. Paul Hunt says it better than I can.

The post-war settlement has run its course. The nation state is being undermined by the market state, which is where the consumer society leads. All goods are consumer goods and politics has been reduced to instrumental politics, to the great detriment of the commons. It’s ‘ le doux commerce’ carried to its absurd conclusion.

The impact of the adjustment is modulated in Ireland by our possessors. The bulk of the population continues to seek a return to the status quo ante, as witnessed by the general election results. As the MSM and their financial backers have captured the political process, such an outcome is unsurprising.

As for Ireland being fixed in aspic, that would probably be one of the better outcomes. Arson, as mentioned above, might spread, and worse. Things will be clearer in a few years, as public services crumble and the return to ‘the markets’ is recognised for the mirage that it is.

Gavin Kostick

Enyoyed your Humbledore story, and sorry to miss the Tiny Plays. Bali o dDhia ar an obair. As they say down in the Royal County, its not over til its over, so keep hurling.

@kieran follows me slightly off thread…

I did a double take when o’brien cited latvia as a success story, that’s certainly contrary to what I’ve read. there’s a rather good report here:

Thanks for that link Kieran, Latvia’s story is heartbreaking and has key issues common with Irelands (the influence of the international banking lobby on national policy, a centre right “EPP compatible” administration, the Euro lobby’s indifference to human suffering) so Dan O’Brien mentioning it could indicate the kind of “success” he sees in Ireland’s strong austerity, strong Euro, weak left, future.

That is not fair of me – Dan O’Brien may well think that following the same policies will not have the same consequences in two different localities and as with most of the financial sector sympathetic right European establishment he is merely searching desperately for evidence to support his case. It is not unlike mentioning fringe figures like Alesina (favourite economist of George W Bush’s favourite economist – how’s that for a recommendation!).

I have some sympathy, it can not be easy looking for intellectual backing or historical evidence to support the current Eurozone policies. In the mainstream economic world outside Europe the majority of economists with credibility remaining after the global financial crisis think that EMU and austerity crazed Europe have lost it completely and are the victims of either a cult or a conspiracy (I will display balance and say “Both.”).

If the the united right alliance lobbying for the Fiscal Compact front have set out to frighten me they have done it.

To me it seems that the Fiscal Compact and the currently dominant ideology in the Eurozone establishment is at least as politically radical and dangerous as any in the last thirty five years, and possibly much longer than that. All dressed up in the language of balanced household budgets.

Hi shay, personally im not much of a fan of Dan and he’s hardly the worse of them at our esteemed paper of record.
Really i dont know what to think but it seems to me that treaty or no we’re in for long term grinding austerity as a ward of the EU and there’s probably not much we can do about it. Unless we go rogue altogether, pull out of the euro etc which would certainly be way worse. That being said I do intend to vote no.


Hi shay, personally im not much of a fan of Dan and he’s hardly the worse of them at our esteemed paper of record.

The worst is a pretty harsh measure at the Irish Times these days, and Dan O’Brien seems as reasonable as they come. I still have difficulty respecting anyone who tries to claim that the FC has a valid economic rationale as opposed to a pure political one (keeping our heads below the Eurozone parapet, hope that Spain, Portugal or Greece does the dirty work for us).

Really i dont know what to think but it seems to me that treaty or no we’re in for long term grinding austerity as a ward of the EU and there’s probably not much we can do about it. Unless we go rogue altogether, pull out of the euro etc which would certainly be way worse. That being said I do intend to vote no.

A No to the Fiscal Compact may just be the lesser of two evils but as a practising homo moralitas I am all about the evil minimization.

hey shay i responded last night but my comment seems to have disappeared. Personally Im going to vote no just for the emotional satisfaction. Of course there’s no substantive reason to vote yes and to the extent that the treaty just furthers the narrative that the entire of the problem was irresponsible government spending it probably actually hurts our interests.

However afaic it doesnt really make a difference, its not like we can do QE or a deficit funded stimulus in any case. It seems to be like the best that can be hoped for is an equitable distribution of suffering. And if we do get out from under this then I think we’d be wise to embrace “Hard Keynesianism”, which from what i hear is pretty much the mentality in latin american and asia after there experiences with bail programs etc.

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