The Fiscal Treaty and the Future of Europe

This post was written by Philip Lane

The Fiscal Treaty debate (at a European level, in addition to the Irish-specific context) should be understood in terms of a wider set of reforms that are important in improving macroeconomic and financial stability.

  • Public debt levels after this crisis will be a high level in many European countries.  This can be destabilising in itself (vulnerability to rising interest rates; general debt overhang issues) and also makes it more difficult to provide public support to deleveraging problems in the private sector (households, banks, etc).   Fiscal rules that are implemented in a ‘cyclically-sensitive’ way can be helpful in providing a mechanism to guide the gradual return of sovereign debt levels to safer territory
  • High public debt and high deficits are a barrier to the development of a truly European banking system (including European-level bank resolution funds), in view of the capacity of sovereigns to extract funds from local banks.   (This is a two-way process - much more should be done already to delink banks from sovereigns, so some elements of banking union can happen in parallel with the adoption of the fiscal treaty but more extensive reform would be facilitated by lower national debt levels.)
  • There are many flavours of eurobonds being discussed. I am not aware of any proposal that does not require substantial fiscal discipline at national level, in order to mitigate the moral hazard risks associated with common bond schemes.
  • A larger European central budget would facilitate joint fiscal stimulus schemes during downturns. National governments are more likely to yield revenues to a central budget if national fiscal positions are stable.
  • National fiscal positions are more vulnerable inside a monetary union (no national currency, elastic investor base for national sovereign bonds), so that a safety net of official funding (EFSF/ESM) provides important assurances that a country has backstop funding in the event of a crisis. Again, national fiscal discipline means that backstop funding can be reserved to deal with shocks rather than fiscal malfeasance.

So, the Fiscal Treaty provides one pathway to a more stable European system. The debate about the relative merits of ‘rules’ versus ‘discretion’ in policymaking will always be ongoing but an intelligently-applied rules-based framework can be an important element in the reconstruction of the euro system.

42 Responses to “The Fiscal Treaty and the Future of Europe”

  1. David O'Donnell Says:

    ‘… an intelligently-applied rules-based framework can be an important element in the reconstruction of the euro system.

    I Agree.

    ‘… an intelligently-applied “INTELLEGENT” rules-based framework can be an important element in the reconstruction of the euro system.

    0.5, 60, 1/20 ain’t social scientifically intelligent in any valid sense that I can figure out …. Fiscal Compact is NOT an EU treaty, it was pushed through in a dictatorial manner for nationalist political reasons, and it is more FLAWED than in any way pragmatically intelligent.

  2. David O'Donnell Says:

    FYI

    The Fiscal Compact – informing the 50% who don’t understand it

    OK, so according to the Sunday Times Behavioural and attitudes Survey on the 22nd April 50% of the electorate/those intending to vote (not sure which) in the upcoming Fiscal Compact referendum apparently do not fully understand the Fiscal Compact (downloadable here). This is a worry for me because if you are going to vote on something that will have profound implications for your fellow citizens you owe it to yourself and the rest of the country to fully inform yourself as to the implications of the treaty. Afterall, would you sign a contract without knowing it’s terms? Well, I suspect the answer would be no and as such therefore you should be approaching the fiscal compact with the same mindset. It is a contract between this state (through it’s citizens) and the EU.

    http://www.irishleftreview.org/2012/04/30/fiscal-compact-informing-50-dont-understand/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+irishleftreview%2Ffeed+%28Irish+Left+Review%29

  3. Paul Hunt Says:

    Wow. A veritable blizzard of very relevant material and information. But will An Chomhairle Fhiosach Chomlairleach na hEireann, as defined in the outline Fiscal Responsibility Bill, be ‘fit-for-purpose’? Or will it be just another of these optical illusions behind which Ministers and their officials will attempt to hide?

    Not intending any disrespect to John McHale, but I reckon that Prof. Lane, despite his research record in this area which would certainly qualify him to chair it, is well out of it.

    This looks like another in the long list of the sick jokes that have been played at citizens’ expense since the mid 1990s.

  4. zhou_enlai Says:

    How many EU countries will be outside of the Fiscal Treaty in the end? The proposed reforms require a significant increase in political union. Who are we entering into this union with? Will it be only the EZ countries as others opt out of future reforms. Who will be our Daddy then?

  5. bazza Says:

    @PL

    Some (rhetorical) questions:

    - Why are fiscal reforms singled out in a treaty when they were not the primary cause of the crisis except in Greece?

    - Do you think it is a good idea for all EZ countries to implement deficit reduction simultaneously as is currently happening? Do you agree with Kevin O’Rourke that this undifferentiated austerity is “mindless”? If so, do you not think the treaty should address this issue?

    - Given that a European banking system and a bank resolution regime would change the nature of the crises in Spain and Ireland, why is a bank resolution system not being put in place, or even on the negotiating table, at the same time as fiscal rules?

    - If overall debt levels are a barrier to stability, why do you think the ECB forced the Irish sovereign to pay out on unguaranteed senior bank bondholders? Is this not a massive signal as to the overriding concerns of the ECB? Why do you think the ECB is so concerned with moral hazard in the member states but not in the banking system?

    - What impact do you think ECB policy rate movements will have on a nascent recovery in Ireland?

    - What evidence do you have that the implementation of a European banking system or Eurobonds are being even considered by the German government over the medium term?

    - Are there any examples anywhere in history of debts of 150% of GNP denominated in non-domestic currency being sustainable?

  6. The Dork of Cork Says:

    The banking system extracts wealth - this crisis is a trap.
    I know its hard to believe but the banking system will have even more power if this happens.
    They mean to crush what remains of the nation state and bring in their market state nirvana.
    The fiscal debts are entirely as a result of the non monetization of these debts since the early 1970s.
    They are nothing but a hypothetical construct used to enslave nations & people as the resourses of a country remain static at ant given moment in time.
    We are sadly without Kings of stature in the Europe of today.
    en.wikipedia.org/wiki/Henry_I_of_England

  7. DavidG Says:

    Well one man at least has called it as it is.

    http://businessetc.thejournal.ie/eurogroup-head-not-seeking-new-term-due-to-french-and-german-influence-436070-May2012/

  8. Shay Begorrah Says:

    @DavidG

    I nearly lost my lunch when reading that Wolfgang Schauble is the heir apparent for Eurogroup presidency.

    The Eurozone can look forward to a fiscal consolidation sandwich with neoliberal shit on the side. Not good, not good at all. Someone in the governing parties and DoF better have an escape plan from the EMU asylum.

  9. David O'Donnell Says:

    FYI

    The [Fine Gael] press conference was chaired by Minister of State for European Affairs, Lucinda Creighton who said: “I believe passionately in voting Yes, because so many of my friends of my generation now live abroad.”

    She said there was “a moral obligation” to vote Yes, to help ensure that young people had a future.

    “This decision is about people, not party politics or ideology,” Ms Creighton said.

    She said she wanted to “acknowledge the help and support from Fianna Fáil”.

    “Fianna Fáil should be given credit for their stance,” she added.

    http://www.irishtimes.com/newspaper/breaking/2012/0501/breaking46.html

    No comment!

  10. David O'Donnell Says:

    More ‘Stances’

    THE DEPARTING HEAD of the group of Eurozone finance ministers has attacked France and Germany for acting “as if they are the only members of the group”.

    Luxembourg’s prime minister Jean-Claude Juncker, who is due to step down from the position in June, said he was not keen to remain in the position as the permanent head of the Eurogroup because of the stance of the two big countries.

  11. David O'Donnell Says:

    George Orwell grasped the political importance of nonsense long ago, in his still scary satire, Nineteen Eighty-Four. He referred to it as Duckspeak. The essence of Duckspeak is to lower the intellectual level of the conversation, spread confusion and allow the speaker to get away with something. Duckspeak was a refined version of the official language of Oceania, Newspeak. A good Duckspeaker could change his party line in mid-sentence while being quite unaware that the second half of the sentence contradicted everything in the first half. This ability was very much valued by the ruling Party. Newspeak was specifically designed to eliminate independent thought, and was essentially an impoverished version of the English language. “Newspeak was designed not to extend but to diminish the range of thought.” Tom Garvin

    http://www.irishtimes.com/newspaper/education/2012/0501/1224315400547.html?via=mr

    Only May 1 - another 30 days of DuckSpeak … and we are not at the end of Day 1 yet ….

    Ireland Calling - MAYDAY MAYDAY MAYDAY

  12. Paul W Says:

    In the first instance, and as a priority, the FC is a debt service mechanism aimed at cleaning up the past for the benefit of cr nations and their banks. The lack of any emphasis on growth in the FC underscores this fact. Any future constructive function is only possible after that.

  13. The Dork of Cork Says:

    @David
    What about the Chinese plan to build a wall in the Midlands dividing the country into two ?
    I think it deserves a thread.

  14. Joseph Ryan Says:

    @Philip Lane

    There is one major ‘reform’ that you omitted from your list to to do items.
    The German trade surplus.
    Take a look at page 220 of the EU trade statistics link below. The stats only go as far as 2006.
    http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CV-07-001/EN/KS-CV-07-001-EN.PDF

    The idea that public spending, although a problem, is at the root of the current crisis does not stack up.

    One way or the other the trade imbalance will have to be reversed rapidly.

  15. Robert Browne Says:

    @ David O’Donnell

    “I believe passionately in voting Yes, because so many of my friends of my generation now live abroad.”

    By the time she is finished in government the rest of them will be living abroad also. Of course they can always emigrate to Athlone if they qualify for a visa.

  16. Ordinary Man Says:

    Good call on the Minister a few month ago - see she hasn’t disappointed you.

    Minister of State for European Affairs, Lucinda Creighton who said: “I believe passionately in voting Yes, because so many of my friends of my generation now live abroad.”………and the irony of that statement floated gently over their collective heads.

    @Robert Browne

    +1

  17. grumpy Says:

    Was Lucinda speaking for “the mind of the government” there?

  18. Robert Browne Says:

    While I am at it, the late Yuri Bezmenov did not call it “duckspeak” he went a little bit deeper, distilling it to four essential stages. Demoralization, Destabilization, Crisis and Normalization. These were all concepts used to describe the planned assent of Marxist Leninism culminating in “normalization” when everything was supposed to be Soviet “Normal”. I believe many of our Democratic Left colleagues, now Labour colleagues were so enamoured with the Soviet system that they went inside the iron Curtain to study the techniques, one of which is saying one thing while planning to do the exact opposite. As in “Labour’s way or Frankfurt’s way” or “the Irish people have spoken (on Lisbon) their wishes must be respected”. This treaty is required for stability and to get our finances in order. When, in fact it is required to borrow even more vast sums of money and put our debt to GDP truly into the stratosphere.

    As of today, we saw what happens when the government perceive the referendum is not going their way. This, despite tying the hands of the electorate by caving in and adding a codicil’s that was inimical to the interests of the Irish people. So the big stick was wielded in typical cowardly fashion by minister Noonan, “be Gad, if you don’t vote for this, I will have to put stripes across your back at the next budget”. Very, very subtle?

    In our own way, we have gone through each of the Bezmenov stages; Demoralization, Destabilization, Crisis and Normalization with normalization now defined by me as “kowtowing to supranational elites as long as they are holding the next debt cheque for the country”. Our only policy seems to be borrow and pray that the structural changes can be put off for ever and ever, and as we are Irish I might as well add Amen!

  19. DOCM Says:

    @ bazza

    “Given that a European banking system and a bank resolution regime would change the nature of the crises in Spain and Ireland, why is a bank resolution system not being put in place, or even on the negotiating table, at the same time as fiscal rules?”

    I think that the answer to this question lies in the fact that trust between the countries of the EU - and notably between those in the EA - has broken down. Draghi admitted as much in a recent speech. It will be a laborious job to restore it. The fiscal pact is just a first step in dealing with the core problem of moral hazard in financial relations between states. Criticism of the failure to address the same issue in the context of the banks is fully justified. But the highly indebted countries of Europe were caught between a rock and a hard place and had little choice but to act in the manner that they did (with the exception of Ireland and the disastrous blanket guarantee).

    http://www.ecb.int/press/key/date/2012/html/sp120426.en.html

    Notably;

    “Despite differences in speed in different sectors, it was widely assumed that financial integration was a continuous process, that financial integration was a one-way street once all legal barriers were removed. However, the financial crisis has demonstrated that financial integration cannot be taken for granted: the process of financial integration was brought to a halt and even reversed in some market segments.

    I see two main reasons for this development. First, some market developments before the crisis were not really signs of increasing integration. What I am referring to is the complete compression of cross-country yield differentials before 2007. While the compression had been interpreted as an indicator of financial integration, it was, in fact, a sign of a systematic underpricing of credit risk.

    And second, the pre-crisis institutional set-up had shortcomings and proved unable to support the single market in times of crisis. Regulation, supervision and crisis management had been organised along national lines, with some elements of cross-border cooperation. This approach was incapable of adequately preventing the build-up of risks. Moreover, when the risks finally materialised, the fragmented crisis management arrangements led to policy responses that were rational from a national perspective, but suboptimal from a European point of view. The fragmented arrangements also induced banks to withdraw behind national borders.”

    Draghi goes on to list the less than impressive actions taken to resolve the crisis. This list will not become more impressive until the TSCG is in place.

  20. DOCM Says:

    @ All

    FYI

    A bit off topic but Martin Wolf in top form with a nuanced and persuasive view on the subject of austerity.

    http://www.ft.com/intl/cms/s/0/b2132c34-92aa-11e1-b6e2-00144feab49a.html#axzz1tYqoJSXm

  21. Bunbury Says:

    (Off-thread but related to the Europe China Trading Hub and mentioned above - posted on NWL)

    I’m not sure how this issue has come in to this thread but as someone who has followed the development closely, examined the planning application, and read the An Bord Pleanala inspector’s report today, I would like to note the following:

    (a) There is no residential accommodation included in the development.

    (b) Visitors will arrive by appointment only (not open to the public) and a maximum of 750 are scheduled to arrive daily. Athlone is a 2-hour coach journey from Dublin airport on the new motorway.

    (c) No tax incentives have been offered for the development, unlike private hospitals, nursing homes, etc, so there is no loss of revenue to the State. No resources have been committed by the State or diverted from other uses. The local authority will get development levies if the project proceeds.

    (d) International private equity will fund the development if it goes ahead. If these people want to pour money down a drain that is their prerogative. If the development goes ahead and is not a commercial success it would not be a disaster for the environment or other. The site is currently of relatively low agricultural value on the outskirts of Athlone and not of high amenity value either. It is well positioned close to the motorway though and could easily become a warehouse or light commercial centre if the Trading Hub failed. If even that failed well the site won’t go into NAMA or cost the taxpayer anything as you can be pretty sure no financing is being sourced from Irish banks.

    In short, there are no downsides whatsoever to this development. Any other place in Ireland could have come up with this idea and I can think of much better locations for such a development. However, Athlone just happened to have some go-ahead developers who spotted an opportunity and were able to pull all the bits together. I don’t imagine there is anything stopping a similar proposal in any other part of Ireland if a group of people are able to acquire land and make the necessary connections in China. If the Athlone project succeeds it will bring high-spending international visitors into the country and throughout the year – not just in the summer tourist season. There are synergies with AIT locally which has a significant number of Chinese students.

  22. David O'Donnell Says:

    @The Dork

    What is built on rock
    cannot be pulled down;
    What is held lightly
    can never be lost.

    Tao Te Ching #54

    @Europe China Trading Hub

    Nice one! The journey to the first hundred billion begins with local planning permission. Every success …

  23. The Dork of Cork Says:

    Well from here It looks like Ireland will be the next Greece.
    Our domestic demand could be nearly halved before the year is out me thinks.
    Y2007 Q4 (Peak) : 43,689 million (peak)
    Y2011 Q4 : 29,891 million
    We have a debate about the fiscal treaty referendum that never quite gets to the core of the apple.

    Our finance minister threatened the nation today that we will have more austerity (i.e. throwing people under the bus to sustain unsustainable bank credit activities) while a domestic banker threatened us with the IMF bogeyman.
    Nobody asks what have bankers got to do with money ? the coin of the realm under these circumstances.
    Central bankers concern should just be collateral , they should have nothing to do with the countries base money supply
    Its the duty of the exchequer to print notes now …. its got nothing to do with banks or the IMF or the ECB.
    Its their DUTY to maintain the money supply so as to facilitate the means of exchange - there is no ifs or buts about this most vital
    of duties.

    Its hard to escape the conclusion that this sod is inherently a evil place.

    http://www.youtube.com/watch?v=j5ptS9q3X8s

  24. paul quigley Says:

    @ DOCM

    ‘The theoretical transformation is an indirect result of the crisis. The list of the assumptions that turned out to be false is lengthy: that the financial system would be self-stabilising, that managers of banks would prove competent, that financial innovation would improve risk management, that low and stable inflation would guarantee economic stability. We have witnessed a bonfire of the verities’

    Nuanced indeed. A disingenuous anaylsis by any standards.

    Bankers are pretty competent at looting their own institutions, to the detriment of shareholders, taxpayers and others. Global accounting firms are complicit in the exercise, because the price was, and still is, right. Financial innovations have been a terrific wheeze, and asset inflation is the magic ingredient in the diet of the dominant 1%’.

    http://www.oup.com/us/catalog/general/subject/Finance/FinancialInstitutions/?view=usa&ci=9780199756070

  25. DOCM Says:

    @ Paul Quigley

    A bit harsh! MW is simply stating a view which all agree now to be accurate. There can also be little doubt that the author of the book you link to is correct in his analysis.

    I would agree view with the view that the international banking system is adept at skimming the pot. But the victims that you mention also joined the party when it was in full swing. There is little sign that any lessons have been learned and a return to “Mom and Pop” local banking, despite the best efforts of Volcker, is not on the cards.Indeed, getting the carousel re-started seems to be what the US electorate will vote for in November.

  26. PR Guy Says:

    @Shay Begorrah

    “I nearly lost my lunch when reading that Wolfgang Schauble is the heir apparent for Eurogroup presidency.”

    Yes, it’s been on the cards for some time now. I first became aware of the lobbying for him just before Christmas - largely driven by ‘the Frankfurt Group’ and supported in the wings by J-C Trichet (and God only knows what dark shadowy figures are behind him). My guess is that it’s probably been going on longer than that.

  27. paul quigley Says:

    @ DOCM

    Tough maybe, but fair I think, given the consequences for ordinary folk. Not all central bankers or financiers are guilty of looting but looting has become extraordinarily respectable. Making charitable endowments with other peoples’ money is a joke, but it happens all the time.

    Minsky has finally come into his own, and history has proven the validity of Polanyi’s analysis in the Great Transformation. Thatcher was right in many matters, but fundamentally wrong at bottom. There is such a thing as society and it was nuts to exchange an industrial base for financial/property hub.

    ‘Then, if they manage the exit successfully, which we will probably not know until the 2020s, central banks will confront a new world. They will need to balance their old roles as formulators of monetary policy with new roles as guardians of financial stability’

    As Wolf notes, central bankers are now expected to address the problem of macroeconomic stability. They continue, however, to espouse discredited economic theory, even as they are being pushed by events into actions which give a lie to the notion of equilibrium. Bernanke is no dozer, but his mind can’t seem to get beyond QE.

    The problem is far deeper, but so much intellectual and institutional capital. has been invested in the ‘free market’ meme that reining in finance is almost unimaginable. I agree that Martin Wolf has moved forward in his thinking, but the politics of Dodd Frank doesn’t give much hope.

    http://www.amazon.com/Lecturing-Birds-Flying-Mathematical-Financial/dp/0470406755

  28. David O'Donnell Says:

    A Must Read

    Terrence McDonough is professor of economics at NUI Galway

    Treaty not a safe option but a perilous experiment

    Let’s consider again what’s on the table.

    1. Structural deficits for Ireland should be about half of 1 per cent of GDP, with a 3 per cent top limit on the headline deficit even in the worst years. This requirement seriously compromises government ability to end recessions.

    The implementation of the 0.5 per cent structural deficit rule in the new treaty is considerably more stringent than any of the existing “six-pack” regulations, which are themselves unwise. Eventually, a shortage of government bonds will emerge, forcing conservative investors such as pension funds into less safe investments, risking the reappearance of dangerous asset bubbles.

    2. Debt should be 60 per cent of GDP. If debt is greater than 60 per cent, it will be reduced by 1/20 per year over the next 20 years. This would start in 2018, when the bailout terms expire, and could require up to €5 billion a year in savings to 2038.

    3. Even after we reach this target, Ireland will be forced to run primary surpluses, that is excluding interest payments on the national debt, for many years, taking steam out of the economy.

    4. If these conditions are violated, control over fiscal policy is ceded to Europe and the European Court of Justice.

    Take a country at the bottom of a depression. Force it to run budget cuts and tax increases year after year after year. Force this same policy on its neighbours and trading partners. Run this into the foreseeable future and hope it results in stability, confidence and recovery. This is emphatically not the safe option. This is a dangerous experiment, completely without historical precedent.

    http://www.irishtimes.com/newspaper/opinion/2012/0502/1224315452170.html

    +1

  29. Paul Hunt Says:

    I’m fast coming to the conclusion that there should be a rule for the principal contributors - “Don’t post unless you’re prepared to engage with the subsequent discussion”. I fully realise that those who do have highly pressured ‘day jobs’ and I continue to welcome and to be grateful for the effort they put in, but without some engagement we just keep going around in circles.

    Quite apart from the unwillingness (which, to a large extent, I understand) to post or engage on microeconomic structural issues, there appears to be a more fundamental problem. And this comes in to very clear focus in the context of the ‘fiscal treaty’.

    Our leading economists appear to be steadfastly determined to focus on the technical macroeconomic aspects and equally determined to ignore many of the key, underlying institutional economic issues. DOCM, quite reightly, highlights the efforts that are being made - and the additional efforts that will be required - to restore the level of trust among Euro Area members necessary to ensure that EMU will function any sort of menaingful way. This is a major challenge. The Fiscal Treaty is a key element in this and where there might seem to be some differences in opinion between some of our leading economists it appears they might arise because of different perceptions of this challenge.

    But what is missing from all the analyses is an understanding of the serious political power-play underlying all of this. And no, it’s not an attempt to restore the Neo-con hegemony - even if that excites Republicans in the US and Tories in the UK quite excessively. It is an attempt to restore the primacy of elected governing politicians over sovereign bond market participants and bank bond market participants and to ensure that the former are restored to their proper position at the head of the queue above the latter.

    The Fiscal Treaty is simply part - and an initial part - of the technical overlay of these key objectives. Much, much more will be required in the terms of bank supervision, financial regulation and structural reforms. And it will be a long drawn-out process. But the objectives should be clear, even if the overlaid mechanics might strike some as being ineffective or even counter-productive.

    The problem is that there does not seem to anyone with ‘public standing’ communicating these objectives - and the benefits of achieving them - to the public.

    I have absolutely no problem with the people being consulted on this matter - though I see no reason why a properly functioning parliament couldn’t deal with it (it’s just that we don’t have one and the people are called on far too often to plug the gap), but could not some few of those
    with knowledge, competence and ‘public standing’ try to cut through the cant, hypocrisy and bullshit that is dominating this so-called debate and explain to the public what is really at stake?

  30. David O'Donnell Says:

    Professor McDonough contd.

    It is claimed this situation will result in disaster, and that even if we believe the fiscal treaty is a serious mistake, we have a gun to our head. In fact, Ireland will have a number of options in this event.

    First, Ireland is certainly small – but it is still scary. A disorderly Irish default would threaten the stability of the European banking system. A European Central Bank intervention to restabilise the system would be considerably more expensive than a second bailout of what is a small country. It is highly unlikely Europe would ignore its self-interest in order to spite the Irish electorate.

    Funds would be found outside of the ESM. The European Financial Stability Facility (EFSF), for example, is accepting applications for new money up to the middle of 2013 and will stay open to administer this money in subsequent years.

    Secondly, Ireland also has the option of borrowing from the International Monetary Fund rather than the European institutions. The Department of Finance was forced to admit this over the weekend when the IMF said as much. It has been pointed out Ireland is entitled only to apply for the money. But this would also be the case with the ESM.

    A third possibility is to set about partially closing the budget deficit. The Irish tax take as a percentage of gross domestic product (GDP) is well below the EU average. Taxes on wealth and high incomes are considerably under-exploited.

    A fourth possibility is the restructuring of debt. The Anglo-Irish promissory note payments alone constitute €3 billion in any given year. Most commentators outside Ireland believe restructuring of some sort will eventually take place in any event.

    A fifth, under-discussed, possibility is the issuance of innovative debt instruments. It would be possible to make Irish bonds acceptable in payment of taxes in the event of any default. This should eliminate the risk premium which makes it difficult for Ireland to re-enter the markets at this time.

    A judicious combination of these strategies would be better than relying solely on any one of them. In the event of a second bailout, the resulting gap can be closed in this way.

    http://www.irishtimes.com/newspaper/opinion/2012/0502/1224315452170.html

    +1

  31. David O'Donnell Says:

    @all

    Getting serious …. baad baad newz …

    Euro region manufacturing shrank for a ninth month in April, adding to signs an economic slump in the region is getting worse.

    A factory gauge based on a survey of purchasing managers slipped to 45.9 from 47.7 in March, London-based Markit Economics said today.

    That’s the lowest in 34 months and compares with an estimate of 46 published on April 23rd. A reading below 50 indicates contraction.

    http://www.irishtimes.com/newspaper/breaking/2012/0502/breaking13.html

    Empirical support for Krugman’s ‘Economic Suicide’ ….

  32. Con Moriarty Says:

    Such a breath of fresh air to hear the views of Prof. Lane - a home-grown, internationally respected, unbiased economist - on the basic economics of the Treaty.

    @David O’Donnell
    “0.5, 60, 1/20 ain’t social scientifically intelligent in any valid sense that I can figure out …. Fiscal Compact is NOT an EU treaty, it was pushed through in a dictatorial manner for nationalist political reasons, and it is more FLAWED than in any way pragmatically intelligent.”

    My response: the whole point of the Treaty is to translate the former Stability & Growth Pact (which was so wishy-washy as to be meaningless in practical terms, and was routinely ‘gamed’ by the debt-heavy Italians and Greeks over the years) into something clear and concrete. That means setting clear, sensible targets for correcting your public finances every year. There are plenty of politicians out there who will no doubt squeal with displeasure at the prospect of actually being held to account for something measurable, with metrics for success and failure. This is much better than the alternative - i.e. letting everybody string everybody else along, and along, until disaster hits. Is there a hint of arbitrariness about the 0.5% structural balance / structural improvement and 1/20th rule? Possibly - one might as easily pick 0.4% or 0.6%, or a debt-reduction rule of 1/16th or 1/25th. But sometimes the best course is to make a decision - the best one you can - and just get on with it.

  33. The Dork of Cork Says:

    @Con
    I don’t get it …. you want to correct our public finances so the banks can lend for grot production again ? as that can be the only growth (?) under the eurosystem.
    Sweet Jesus.

    What is a structual defecit by the way ?

    The stability and growth pact was nothing of the sort.
    It was a instability and depletion pact.

    Nothing less then the complete destruction of article 123 is needed by whatever means at Europeans disposal.

  34. Paul Hunt Says:

    @Con Moriarty,

    Couldn’t agree more. The referendum is merely asking the people to consent to the government - and to it working with governing politicians in other member-states (collectively empowering and sanctioning the necessary institutions and procedures) - to ‘just get on with it’.

    I only hope that a plurality of voters will take this sensible view. However, we are only the proverbial ‘voices crying in the wilderness’, with no traction on public opinion. It appears that many people are confused. They have a justifiably low opinion of the exhortations of the political classes - on both the ‘yes’ and ‘no’ sides - and they are looking to those with knowledge and competence in the economic sphere - and who have secured some ‘public standing’ - to give them guidance.

    But what they are getting is a confused - and confusing - and often contradictory transmission of signals across a wide spectrum. For me, economics is simply a discipline dealing with the allocation of resources that, to the greatest extent possible, employs the scientific method. But this has encouraged most of the leading practitioners (and this is also true elsewhere) to allow themselves to be trapped in a neoclassical silo. They are either unwilling or unable to allow themselves to examine these challenges through the lens of institutional economics. So what they present tends to focus on the esoteric minutiae which is baffling to most people. Whatever the solid intellectual foundations of the nuances they seek to express, these are lost on the vast majority of citizens yearning for the communication of a clear message.

    I could name names, but I won’t because there is a preference for a deference and a politeness that is both stultifying and unhealthy, but it is probably unnecessary. Anyone who has been observing the game will know what I mean.

    These failings - and let’s be clear; that’s what they are - are compounded by the antics of the intellectual advocates of the ‘raid, tax and spend’ brigade. The op-ed in today’s IT to which David O’Donnell links is a perfect example. In this instance there is no reluctance, even if it is cunningly concealed, to venture out from the neoclassical silo - and even to thrash and ignore a vast body of theory and practice - to deploy some institutional economics. But, unfortunately, this focuses on the assumed omniscience and desired omnipotence of the state and its apparatus.

    Is it any wonder that many of the public are confused when those who claim to ‘profess’ a particular discipline are capable of advancing totally opposed positions?

    Those who profess the discipline ill-serve the public who pay them when they fail to publicly refute the economic nonsense being advanced by the intellectual advocates of the ‘raid, tax and spend’ brigade. They further ill-serve the public when they fail to address the institutional economic aspects of the challenges facing the economy. And their ill-service is compounded even more by their failure to tackle institutional and structural economic issues in the domestic economy.

  35. Con Moriarty Says:

    @Dork of Cork
    “I don’t get it …. you want to correct our public finances so the banks can lend for grot production again ? as that can be the only growth (?) under the eurosystem.”

    Correct our public finances is just the right - and inevitable - thing to do, whatever else is happening. Addressing the huge problems in bank governnance and regulation is another matter. It is childish and unrealistic to suggest we should hold off from correcting our public finances until those other problems are resolved.

    “What is a structual defecit by the way?”
    It is the real, underlying position of the public finances, when boom-time revenues (or the bust-time slump in revenues and spike in social welfare payments) are factored out. Remember when, in the early noughties, we seemed to be running a huge fiscal surplus every year? And Charlie McCreevy was telling us that since we had money, we should spend it? Well that was an illusion, as we now know. Looking at the structural deficit - admittedly easier said than done - means looking at the reality rather than the illusion.

  36. Paul W Says:

    @ PH, CM If there is a Y vote then (but only then), yes, people should get on with it. However, in the meantime, the status quo is fair game and not everyone believes that restoration of the status quo in the previous, disastrous form should be allowed. @ PH I find your analysis quite contradictory at times…you want reform of croniness, special interests, etc. Yet you strong advocate a Y vote which, for most, will entrench the very things you would change.

    This is slightly offthread. However, is Ireland really that better than Spain?

    http://www.bloomberg.com/news/2012-05-01/madness-in-spain-lingers-as-ireland-chases-recovery-mortgages.html

    Official Ireland’s primary competence these days appears to be its ability to spin and fabricate.

  37. The Dork of Cork Says:

    @Con
    For growth - you need money production.
    Its proven without any shadow of a doubt that almost all leveraged bank credit is extractive….. it follows that if you reduce unleveraged fiscal production so as to bail out the bank credit “investments” more waste and leverage will insure in the future.
    Do you really want that ?
    Unleveraged Treasury money unlike bank credit follows the most effiecent course.
    The recent transport Data from the UK proves this despite inadequate fiscal production & investment in this new growth Industry.

    Somebody somewhere has got to produce money tokens - it can either be a Exchequer with the help of its CB or the Exchequer in extremis.

    You can reduce the debt load by simply creating interest or near interest free money.

  38. Mickey Hickey Says:

    From NY Times

    http://www.nytimes.com/reuters/2012/05/02/business/02reuters-germany-inflation.html?hp

    BERLIN (Reuters) - While its European partners agonize about recession, austerity and rising unemployment, Germany is shifting its attention to a very different, and yet familiar, source of angst - inflation.

    Despite recent data showing German consumer prices rose by just 2 percent in April, the slowest pace in over a year, some economists see the beginnings of a dangerous price bubble that could come back to haunt the country in the years to come.

    The high cost of oil and signs that German wages and property prices are on the rise, after stagnating for the better part of the last decade, are contributing to the anxiety.

    But the main source of concern is the easy monetary policy of the European Central Bank (ECB), which has pushed interest rates down to a record low and provided massive amounts of liquidity to euro zone banks in a desperate bid to stem the debt crisis that has haunted the bloc since 2009.

    The central bank’s approach may be appropriate for countries like Spain and Greece, which are struggling with crushing recessions and unemployment rates approaching 25 percent.

    But it poses a growing risk to healthy Germany, the argument goes, even if the true threat to Europe’s largest economy may not become apparent for many months.

    “In the years after the euro’s launch, interest rates were too high for Germany and too low for countries like Spain and Ireland. Now the story has been turned on its head,” said Joachim Scheide, head of forecasting at the Kiel Institute for the World Economy.

    “There’s nothing dramatic happening at the moment, but the inflation dangers for Germany over the next two to three years are very high,” he said. “There is a significant risk that this ends in disaster.”

    The Kiel institute was one of eight think-tanks to warn last month in a twice-yearly report that the dire state of some euro members could make it difficult for the ECB to return to a more normal policy stance in time to prevent a strong rise in German inflation.

    A week later, in an unusual public foray into the realm of monetary policy, German Economy Minister Philipp Roesler called - in a written statement approved by the cabinet - for the ECB to return to “normal mode” and focus on its “clear mandate” of price stability.

    That made it official - the German government itself was worried about inflation.

    VISCERAL AVERSION

    Why is this significant? After all Germans have had a visceral aversion to higher prices ever since hyperinflation under the Weimar Republic in the early 1920s eviscerated the savings of an entire generation. Worrying about price rises is nothing new for Germany.

    The big difference with the current bout of angst is that it could have huge implications for Europe and its hopes of emerging from its debt crisis.

    Higher German wages, some economists believe, are precisely what are needed to get the bloc back on track.

    If German consumers had a bit more disposable income, it could boost demand for imported products from Europe’s ailing periphery, bolstering growth there. If German workers cost a bit more, Germany’s competitive advantage might be reduced, making it easier for other European countries to sell their goods.

    If there was ever a time for Germany to tolerate higher prices, it may be now.

    That’s why public expressions of inflation anxiety in Germany are worrying to some. Should the fears harden over the course of this year, pressure on the ECB to rein in its expansionary policy - from the Bundesbank, politicians and the German media - would surely grow.

    If that pressure led to a more restrictive monetary policy, it could render moot the soon-to-be-unveiled growth strategy European leaders have been talking about so much in recent weeks.

    “If the people in charge - mostly the Germans at this point - insist that the adjustment must come entirely through a fall in the absolute level of wages and prices in countries with current account deficits and large amounts of debt, then Europe is in for a difficult, and perhaps lost, decade,” MIT professor and former IMF chief economist Simon Johnson wrote this week.

    “But if part of the adjustment can come through higher German wages - recognizing productivity gains and consistent with continued prosperity - the path forward will be easier.”

    “IT’S OUR TURN NOW”

    So does Germany really have an inflation problem?

  39. Mickey Hickey Says:

    Part 2 from NY Times
    nalysis: German Inflation Angst Returns in New Threat to Europe
    Published: May 2, 2012 at 6:18 AM ET
    FACEBOOK
    TWITTER
    GOOGLE+
    EMAIL
    SHARE
    PRINT
    SINGLE PAGE
    REPRINTS
    (Page 2 of 2)

    German wages are certainly on the rise. Last month, Chancellor Angela Merkel’s conservative party said it would try to introduce a new nationwide minimum wage law in parliament by the end of the year, a move which would push up salaries in one fell swoop.

    In March, the two million workers in the German public sector received a pay increase of 6.3 percent over two years. IG Metall, which represents 3.6 million workers in the engineering sector, is demanding a 6.5 percent raise for this year alone.

    The union’s readiness to launch warning strikes this week and the bolder rhetoric of its leaders underscores just how strong its position has become in a sector where many firms are delivering robust profits, working at full capacity and struggling with skilled labor shortages.

    “It’s our turn now,” Michael Sommer, head of the DGB federation of German unions, said in a May Day speech.

    Still, fears of a German wage-price spiral seem overdone to many economists. Data published by the Federal Statistics Office last month showed that hourly labor costs in the German private sector rose at the lowest rate - 19.4 percent - of any country in the European Union over the past decade.

    In France, the increase was 39.2 percent, more than double that of Germany. The EU average was 36.1 percent.

    “Wages are rising, but this follows a prolonged period of restraint,” said Andreas Rees, chief German economist at Unicredit in Munich.

    “I honestly can’t see any reason to worry about these wage deals nor to think the inflation rate will rise significantly in the next years. German growth simply isn’t strong enough to generate runaway prices.”

    Worries about overheating in the German property market also seem premature. Like wages, German real estate prices stagnated over the past ten years, even as those in countries like Ireland and Spain shot to astronomical levels, before crashing hard.

    That changed in 2011. Rock-bottom domestic interest rates and safe-haven buying from abroad at the height of the debt crisis fuelled a mini-buying frenzy, sparking double-digit price increases in some German metropolitan areas.

    But Alexander Koch, a colleague of Rees at Unicredit who published an in-depth study of the recent price gains in March, sees no evidence of a bubble.

    In Koch’s “Overheating Barometer”, an index of five real estate market indicators which measures market excesses on a zero to five scale, with five signaling the highest alert level, Germany scored just one - below France and in line with Italy and the United Kingdom.

    Analyses like these do not reassure experts like Scheide from the Kiel institute, who believes persistently low interest rates over a period of years have the potential to produce a Spanish-style housing bubble in Germany.

    “We could see inflation of 4 or 5 percent in Germany if wages and property prices get out of hand. This would lead to a massive correction, to a recession,” Scheide say. “This is a real test for the ECB.”

    The last time Germany had inflation rates that high was in the years after reunification in 1990, when massive amounts of money were pumped into the former communist East. Over the past 15 years, annual inflation has averaged a mere 1.5 percent and never exceeded 2.6 percent.

    And that may be the crux of the issue, says Holger Schmieding, chief economist at Berenberg Bank.

    “Germany is used to having less inflation than its neighbors,” he said. “Now, because of its economic strength, it needs to get used to having more.”

    (Reporting by Noah Barkin; editing by Janet McBride)

  40. Mickey Hickey Says:

    Notice the exaggeration about inflation risks. Two percent in April and wage increases of 6.3% over two years. Compare that to 24% adult unemployment and 50% youth unemployment in Spain.

    Francois Hollande will enjoy the coming battle with the German Bundesbank. Hopefully our school teacher is paying attention to his lessons.

  41. Mickey Hickey Says:

    Purchasing management Index a leading indicator.

    http://www.businessinsider.com/german-pmi-2012-5?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+clusterstock+%28ClusterStock%29

  42. David O'Donnell Says:

    @Mickey Hickey

    Yes I noted this PMI somewhere else on the blog today … it is baad baad baad and gettin baader ….

Leave a Reply