Austerity games

Kevin and Philip have been keeping readers of this site up-to-date with economic analysis of Grexit, problems with EMU and other big picture items over the last few days.

If I may, I’d like to bring things back down to the level of Ireland and the upcoming referendum on the Fiscal Compact. To my mind, a few important concepts have gone out the window as the debate in Ireland about the referendum on the Fiscal Compact has descended into political games. Perhaps the first victim was cause-and-effect, with the mere correlation of banking debts and government deficits being translated by many into iron-cast causation.

A close second in the casualty list was the concept of opportunity cost: in other words, there’s not really much point focusing on how bad or economically illiterate the Fiscal Compact is in and of itself. We need to ask how attractive it is relative to the other options. As of now, the most important attribute of the Fiscal Compact is its ability to get Ireland the funding that it otherwise would not be able to get, to allow the country to gradually close the deficit. By 2020, that may be completely unimportant and we may want to ditch the Compact. But we are voting in 2012, not 2020.

With that in mind, I’ve developed “Austerity Games”, as a basic guide to voters on deficits, debt, fiscal policy and the EU’s Fiscal Compact (below, click to enlarge). Hopefully it’s useful to some readers.

choices for Irish voters
Austerity Games: choices for Irish voters

For a fuller exposition on why the IMF will not be a panacea, Karl Whelan has an excellent blog post here.

58 thoughts on “Austerity games”

  1. Mr Lyons, I note that at the start of your game there was no question asking you whether you wanted to spend forty five billion Euro on bailing out failed financial institutions and covering up the failings of a badly designed EMU.

    Without the staggeringly large financial sector bailout we are France, not Greece. This invalidates every choice from “You are no longer fiscally sovereign…” on making for a very short “game”.

    I blame Daniel Davies for this kind of thing.

  2. @Shay
    You remind me of Moe in the Bear Patrol episode of the Simspons: “Even when it was the bears, I knew it was the immigrants.” Only for you it seems everything comes back to the banks.

    You’re not so blinkered to believe that if we hadn’t bailed out the banks (but yet still somehow costlessly protected all deposit-holders/voters), that this wouldn’t apply, are you?

    A gaping current spending deficit is still a gaping current spending deficit. You won’t find any cheerleading by me in relation to the Government’s banking strategy – far from it – but how this relates to the above is beyond me.

    (My attitude towards EMU is presumably clear from the bottom left corner.)

  3. @RL
    Its certainly visually appealing – although I’m sure that is not the sort of feedback you are looking for.

    I don’t see anywhere in the options that one extricates itself from the disaster of the single currency although, it is implicit in the “are you a memeber of US/EU monetary union” if you choose “No”. However, where that leads you, is that you MUST apply to IMF, buy yourself 12 months and ultimately you lose.

    There are many permutations beyond leaving the Euro that ultimately would result in a win far sweeter than the actual wins you outline but you have failed address any of those possibilities. Of course there are no certainties but failing to identify them….puts you on to a loser in my view.

  4. Has your country got a National debt problem? Yes! Can it get out of its current level of debt without defaulting? No! Can it safely increase the level of debt it has without becoming even more insolvent? No! Then don’t borrow!

    That is the chart you should have produced you went wrong by asking all the wrong questions and by giving the right answer to all the wrong questions.

  5. @Ronan Lyons

    @Shay
    You remind me of Moe in the Bear Patrol episode of the Simspons: “Even when it was the bears, I knew it was the immigrants.” Only for you it seems everything comes back to the banks.

    Firstly I will tetchily ask whether you think that without the global financial crisis Ireland would still have needed a bailout or whether that the global financial crisis was not due to the financial sector? The story makes no sense without the banks.

    I expect smart economists (and you are both smart and an economist, right?) to be able to form a convincing narrative that includes at least the major features of the current crisis and how they relate.

    Thus I genuinely believe that your flow chart can not be useful without including the feedback between the pre-crisis financial structures and the nature of their failure and our current situation.

    It is a bit of fun though.

  6. @Ronan Lyons
    @Ronan Lyons

    @Shay
    You remind me of Moe in the Bear Patrol episode of the Simspons: “Even when it was the bears, I knew it was the immigrants.” Only for you it seems everything comes back to the banks.

    Firstly I will tetchily ask whether you think that without the global financial crisis Ireland would still have needed a bailout or whether that the global financial crisis was not due to the financial sector? The story makes no sense without the banks – What did we choose to do that made the banks collapse and why did we choose to bail them out in the way we did?

    I simply expect smart economists (and you are both smart and an economist, right?) to be able to form a convincing narrative that includes all of the major features of the current crisis and how they relate.

    Thus I genuinely believe that your flow chart can not be useful without including the feedback between the pre-crisis financial structures and the nature of their failure and our current situation.

    It is a bit of fun though.

  7. @Ronan Lyons

    Your implicit acknowledgement of the lack of social scientific validity within the Fiscal Corset is welcome – One hopes that you suggest to your students that voting for NonSense does not make good sense ….

    That said, the following assertion is open to challenge:

    As of now, the most important attribute of the Fiscal Compact is its ability to get Ireland the funding that it otherwise [WOULD NOT] be able to get … (emphasis added)

    To borrow a seasoned soundbite from the Yes campaign – there is NO CERTAINTY whatsoever that this will be the case from a NO Vote.

  8. @All

    And as the Minister for Giggling and Jobs and Giggling has just announceD live on radio:

    If the Citizenry votes NO – THEN THE CITIZENRY WILL BE ASKED TO VOTE AGAIN ….

    Democracy How are Ya?

  9. Does this apply to the second referendum promised by Bruton and then unpromised.

    Funny that its all about certainty this referendum. This is like Lisbon isnt it. The Govts heart aint in it really but good little soldiers

  10. @All

    A little birdie brings news of a Willem Buiter presentation and the following highlights therein.

    Ireland: off the charts figures on debt and errors of historic proportions on policy, most notably our favourite evening in government buildings in September 2008. Despite all the adjustment, prognosis still bleak because public debt is in the danger range while household and non-financial corporate debt still far too high. Can’t believe that regulators and ministers missed the surge in household debt 2000-2008. Now an economy with 4 deleveraging sectors (households, firms, government, banks) — it can’t be done.

    Greece: Euro exit alone will be useless or worse than useless — there will be immediate inflation and a rubbish currency. No resource boom to bail them out a la Russia and Argentina. Large scale debt restructuring throught out the economy the only option. Amazed that IMF signed on to the 2010 program and doesn’t know how they managed a debt sustainability analysis. 2010 was the time when a more contained restructuring could have worked.

    Eurozone in general. No place entirely immune from debt concerns, even German has rising CDS spreads. Spain to be in troika program this year, Italy next year. Italy managing only because the ratio of PR to performance has been so high, but underneath it’s Monti working with the same political system that got them into the mess into the first place. Does not think that Italy can comply with the fiscal compact without severe disruption given the growth rate and size of debt. In principle Italy has the household wealth to support solvency but with chronic declines in tax administration capacity worldwide, not clear that this can be tapped.

    UK: Has Irish style profile in some respects but being helped for now by inflation which is having significant impact on debt reduction due to the maturity profile.

    US & Japan. Both fiscal basket cases being protected by special factors — home bias of Japanese savers and the reserve role of the dollar, respectively. Neither can last. Outsiders will be the marginal purchasers of JGB within 5 years and yields will have to rise. US is stuck between social democratic spending preferences and tea party tax preferences. Republicans going for another showdown on debt which will be bad economics and bad politics. Thinks that markets and pundits are too sanguine about dollar as a reserve currency — it can remain a reserve currency but at much higher absolute yields. Then the fiscal crisis will kick in.

    Krugman and Summers: Complaints about both. Summers role in the US financial deregulation in the 1990s. Krugman too committed to the Keynesian cross — there is no Keynesian Laffer curve. Austerity is painful but it does reduce deficits. More austerity = more deficit reduction. The constraints are political, not economic.

    Demand for “less austerity, more growth” is essentially a demand for non-market financing. Unless a specific kitty or Santa Claus is being identified, it’s meaningless.

    Overall outlook: advanced economies need mass debt to equity conversion. Household negative equity becomes bank equity. Sovereign debt converts to GDP warrants. Huge agenda remains on banks — most Eurozone countries still have no special resolution regime for banks, let alone a pan-Eurozone one. Legislation needed to break the pari passu link between depositors and senior unsecured creditors. Household mortgages need to shift to Islamic finance — insane that the system worked for so long with highly specialized households being landed with such a rigid financial instrument like a mortgage. Massive deadweight losses to reposession and bankruptcy.

  11. If we leave the eurozone because of this – cuts to the medium of exchange via cuts to Dole , pensions , civil servants wages etc won’t work as that is where the remaining medium of exchange is coming from.

    Anymore cuts and you will have to right off private debt contracts in whatever currency you choose.
    We need to get back to at the very least a 8 to 1 credit to money ratio via printing.
    (But then again the guys really running this economy have a sick sense of humour so…… who knows ?)

    This will be much more effiecent in terms of natural resourse / import / balance of trade / avoiding money exports etc etc etc. blah blah blah.

    Otherwise its never ending capital controls to try to keep a overvalued currency inside this Bog Box.
    The aim should be enough money for bus tickets and pints but to make cars / oil central heating etc etc unaffordable to many.

    As many of yee guys don’t know what a national economy is it should be mighty crack.
    The era of the dynamic bullshit economy should be over.
    I say thank Christ for that.

    “Keynes noted that workers would resist real wage cuts if they were delivered via cuts in money wages but would tolerate them if they were induced by general inflation. The rationale was that the former would disturb relativities while the latter impacted on the wage structure more or less uniformly.
    But there is another reason why preserving nominal wages growth is important.

    Most of our contractual commitments are denominated in nominal units ($ or whatever currency is applicable). So when real wages are being cut by rising inflation (in this case by a depreciating exchange rate) but nominal wages are preserved, workers can then make adjustments to the composition of their spending without, in the first instance, undermining their capacity to meet their weekly contractual liabilities (for example, their mortgage payments).

    Attacking nominal wage levels, more readily undermines the capacity of workers to meet these nominal contractual obligations and opens the possibility for further instability (credit collapse etc).”

    bilbo.economicoutlook.net/blog/?p=19429

  12. @ Ronan Lyons

    An amusing and informative flow chart!

    Have you considered the possibility that an emergency IMF loan and a dramatic 12 month austerity cure – as detailed in summary outline – might be a winner rather than a loser?

    Given the delusional nature of the public debate, a sudden sharp shock may be just what the doctor ordered.

  13. As Scott Sumner would say, not only is it not a debt crisis, but debt doesnt really matter in any conceivable way:

    “During 1931, all the Very Serious People were obsessed with the debt crisis. In some mysterious way they believed this was a major cause of the Depression itself. I’m not sure why, I think it had something to do with “confidence.” Interestingly, the debt crisis never really got resolved. Instead it just gradually faded away as an issue, as by late 1932 it was becoming increasingly clear that intergovernmental debts were not going to be repaid. And as the debt crisis receded, people discovered that the Great Depression was still there.”

    http://www.themoneyillusion.com/?p=14312

    At times, we should listen to the Americans. They educate (some) of their young far better than we do

  14. Minister resigns …[ aside … ah now … Ed. who’s makin this up ….]

    … er .. himself to some .. er .. ridicule. [phew … back to normal ]

    Ministers “Q” up to go on Matt Cooper and admit to mistakes …. Gardai called to move on the Dole “Q” so as not to upset the ministers …..

  15. Austerity Games II just released by Ronan Lyons ….

    Factoring in the influnce of ministerial mishtakes … sales rocket!

  16. Seriously.

    You’re advocacy for a YES vote is, “sure it’s just a wink and a nod yes, we’ll feck off the moment things are better.”

    If the fiscal compact is a bad idea, then stand up *now* and say so and demand a better solution – there clearly are many to choose from.

    You’re not diagramming pragmatic politics – though I’m sure you think you are. You’re diagramming psychopathic public policy. You want us to say yes, get funding, screw over the poor and when things are better (not for the poor of course, but for the well off) escape the compact and go back to the goofiness of before.

    I’m sure Jamie Dimon had similar diagrams. I’m sure he still does.

    If the treaty is wrong, vote NO. Period. If it’s a good idea in the long term, vote YES. Period.

    Personally I will be voting NO because I think that the treaty is not just wrong for us, but wrong for Europe. And honestly the latter is the bigger issue for me.

  17. The decision tree above is amusing. It reminds me of Jack’s card game at the beginning of the Titanic.

    Its all about playing your cards right. But Its also based on luck and chance. Its subjective and lacks probity and rigour based on this and so leaves out decision tree options that should be included. Hey, this is poker!

    At the end, playing his cards right, if his hunches are right, Ronan gets a set of cards that he believes will win the game.

    If he does win this game of poker ‘nod, nod, wink, wink,’ his prize is a cruise trip on the Titanic.

    However, beyond the land of Tir Na N’Óg its been reported, there are a lot of icebergs, Cyprus, Spain, Greece, Portugal, etc about at the moment.

  18. @ Grumpy

    tks for those links, from which:

    “France’s new administration is set to cause a major headache for the Irish government. Not only have they announced a 30% pay cut to the salary of their head of state and ministers, but they are insisting that the Fiscal Compact be redrafted to include a “chapter” on growth and growth strategy. This morning, the new French finance minister, Pierre Moscovici said the new French government would not ratify the existing Fiscal Compact. Of course the German position seems to remain a stubborn resistance to any change to the Fiscal Compact but you would have to say there is a good chance of some Entente between the two countries. Where will that leave Ireland?”

    Compare the French leadership to defend the interests of French people to the leadership provided by our own embarrassing vassals. Simon Coveney TD, director of elections for the Referendum ludicrous campaign was on radio re Richard Bruton’s gaffe and again denied the substance of Bruton’s gaffe:

    http://www.independent.ie/national-news/bruton-gaffe-on-second-vote-forces-a-flurry-of-denials-3111541.html

    Not only have the present Govt failed to negotiate a responsible bailout for Ireland, not only have they chosen to hold a referendum that undermines the efforts of decent people to negotiate terms for a decent bailout be it based on ‘growth’ or other measure, not only do they wish us to ratify a Treaty that sells off our constitutional right to self determination, not only does it bind us to unconscionable and odious debt under sanction of ECJ, not only does it bind us to a Treaty that everyone in Europe expects to be binned, but, wait for it (I’m getting there 🙂 ), this is a real howler 🙂

    If the Treaty is not passed, and the FC is amended to contain substantial Hollande changes to its wording, or even minor protocol changes, the’ve made it so that the Irish people will be denied opportunity to vote even on a revised version of the FC?

    I mean this is ludicrous nonsense and incompetence of the lowest order. Its almost as embarrassing as the mess they’ve made on negotiating substantial changes to our bailout 🙂

    No doubt the propaganda machine will whip up more threats as time goes and the above is only the tip of the iceberg.

    Are our politicians in contact with the real world? We are left with the dilemma deciding whether the present Govt are incompetent, or they are liars in which case they will hold a referendum again if we vote No.

  19. Hi all,
    Thanks for the feedback. Both Shay and V Barrett’s comments seem to be predominantly about counterfactuals: what if we had started from somewhere else? While these are not unimportant questions, they are not relevant for the voter at the end of May. Future what-ifs are certainly relevant in making a decision, but not past what-ifs. In Shay’s language, this is not by any stretch of the imagination “a convincing narrative that includes all of the major features of the current crisis and how they relate”. That is not what the referendum is about. I will think about whether a similar framework (flow-chart) would be relevant in outlining such a narrative… open to collaboration on that too.

    V Barrett notes “I don’t see anywhere in the options that one extricates itself from the disaster of the single currency although, it is implicit in the “are you a memeber of US/EU monetary union” if you choose “No”. However, where that leads you, is that you MUST apply to IMF, buy yourself 12 months and ultimately you lose.”
    Perhaps Greece will lead the way here and show us that there is another step in the tree “Would you like to leave your currency union?” which will lead presumably to inflation and default – and by the terms of this game “You lose”.

    However, V Barrett, Robert Browne and DOCM – as well as a few tweeters – note that perhaps Austerity-max over 12 months might be a win, not a lose. When thinking up the outcomes and language, I tried to think of what the median household might call a win or a lose, but that does not preclude 2020 Ireland being better off with a horrible 12 months in 2013 (“You lose” in the game). That value judgement is left to the reader. If I were better at programming, I could perhaps design a game that elicits such values from the reader at the start of the game, thus winning and losing would be specific to their beliefs.

    Somewhat related to this, both Kevin Lyda and Colm Brazel believe the above to a form of ‘cute hoor’ politics. While I admire Kevin’s commitment to vote the Compact down until every last word meets his approval, I would not envy him having to explain that choice to the poor he is so keen to highlight, in the event of sudden and severe austerity due to a lack of funding. (Put in another way, Kevin, to what extent are you prepared to sacrifice the poor of this country to make sure Europe has the best possible Compact?)

    Incidentally, there are many closer to the Compact (such as Philip on this site) who believe it to be a perfectly adequate solution bringing credibility and responsibility – but still flexibility – in fiscal policy.

    Kevin, in what sense is lesser austerity under a Yes vote ‘screwing the poor’? And how on earth did you take from any of what I have written ever to be arguing for a return to the ‘goofiness of before’; I refer to your comment: “You want us to say yes, get funding, screw over the poor and when things are better (not for the poor of course, but for the well off) escape the compact and go back to the goofiness of before.” It seems your guilty of Fallacy #1 from this useful list: http://yourlogicalfallacyis.com/poster

    @Colm
    “No doubt the propaganda machine will whip up more threats as time goes and the above is only the tip of the iceberg.”
    I’m not sure what this propaganda machine is but the above is nothing more than following things through to their likely logical conclusion. If you believe there are steps missing, I would be delighted to hear about them. Personally, I’d like to do as Kevin suggests, vote No and get them to come up with a better Compact, but I don’t think we have that luxury given our lack of funding options and what is likely to happen without funding.

  20. There is a vast gulf of options between this compact and an ideal one.

    Your argument now is a flustered, “we have to do *something*!” Well, voting no is something. Voting no changes things in Europe as well as here – changes your nod-wink diagram fails to note.

    As an aside, the nod and a wink one is a better argument – it at least shows some affection for cleverness. This new one is just huffy.

  21. @Kevin
    While we may all read our own “tone of voice” into written text, I can assure you that there is no change of tone or argument from my side. My rationale for voting yes (as per last sentence of my comment two above) is as it has been since Day 1.

    I notice, however, that you are silent on my question to you. Perhaps I can rephrase. Suppose you had the following choice:
    Option (1): In Ireland, 12-month austerity with a one-off permanent 25% cut in social welfare of all forms hitting the poorest in Ireland (among many other cuts and tax increases). In Europe, from mid-2013, the Fiscal Compact exactly as you want it (presumably more emphasis on growth – thoughts on where the money for this will come from genuinely welcome).
    Option (2): In Ireland, five years to close the deficit, leading to minimal social welfare cuts for the poorest. In Europe, from mid-2012, the Fiscal Compact as it stands, with room for revision and improvement over time.

    Which option would you go for?

    You may not regard these as the two most likely options but what I’m trying to do is find out in the trade-off between optimal outcomes for Europe and those for Ireland’s poorest where you stand. Humour me.

  22. @RL

    Contrary to some of the opinions above – I applaud your willingness to divorce your economist instincts from how one should play the long game unlike the majority of academics in this country. I have worked in regulated industries long enough to see the damage that can be done by wedding oneself to textbook and theory while ignoring the real world. So while I don’t agree with much of what is in your “austerity games” I do respect the approach.

    In response to your suggestion that leaving the Euro as being something in the counterfactual, i would submit that it ought to be seen as an option in a dynamic game. I would also dispute your suggestion that Greece could show us the way on what happens to one who exits the euro – regardless of what happens to greece, I think the differences culturally, structurally and economically between Ireland and Greece are such that we should not read very much into the outcome there…..but I strongly suspect the fear brigade of Lucinda, Noonan and Co. will be dishing that at us with a side of feta cheese.

  23. @Ronan Lyons

    Your logic works if you are the type of person who looks at our country as if it is a corporation, i.e. people whose views are solely influenced by short term financial interests. I am not saying that financial interests are not critically important. I am saying they are not everything.

    What is the impact over 5-10 years for Ireland of being in a subset of the EU states dominated by large core european powers with more advanced fiscal integration and separate QMV arrangments within that subset?

    If so many countries are signing up then why must only 12 go ahead for it to be effective?

    We already signed up to one badly designed horror show. This Fiscal Compact is anti EU and anti small states. Maybe the UK is to blame by not allowing everybody to jump together. Whoever is to blame, it is a dangerous step.

  24. Of course, bahavioural economists will tell you that people discount the effect of things that will happen in the medium and long term way more than they should as compared to what will happen in the short term….

  25. @RL

    The question wasn’t posed to me but I would take option 1 (with a euro exit). I have cited Keynes on this before and absolutely believe it in terms of consumer confidence as being the key to turning an economy around.

    “if a reduction in money-wages leads to the expectation or even serious possibility of a further wage-reduction in prospect it…will lead to a postponement both of investment and of consumption” [page 263, General Theory..”]

    Keynes argued that you are far better off having a sharp shock to the system from which you can begin to grow again. We are on a sluggish downward spiral with the ongoing prospect of a reduction in money-wages (net) for several years to come. The marginal propensity to consume will continue to contract in such an environment and private consumption and investment – which ought to be the main drivers of economic growth – will be severely dampened. This is also one of the fundamental reasons I woudl advocate leaving the euro notwithstanding the initial shock to the system. But as noted by ZE I think short term considerations dominate the political and social debate.

  26. @Ronan Lyons

    I know you went to some trouble to produce the flow chart and I can understand its internal logic. I was a <expletive> about it – I posted too quickly. We have a deficit that is far too large given the current flavour of EMU.

    Pressure at work prevents me from giving a more helpful response than saying I think that each of the Green outcomes should have a decision box ahead of them that asks “Can you tailor your economic and fiscal policy enough to meet this goal?” and that the “No” that the fiscal compact entails means that all the good outcomes are in question.

  27. @V Barrett
    I wonder if the domestic political landscape has a role to play. Suppose we have the short sharp shock now: surely that would lead to FG-Lab getting thrown out and then what? It’s unlikely any part would have >40 seats and instead there would be a mish-mash of parties and independents, which presumably wouldn’t bode well for stability and thus economic prosperity.

    By contrast, a short sharp shock in 2010 might have done nothing more than usher in the FG-Lab coalition earlier.

    @Shay
    Thanks for that and engaging with the logic of the chart!

  28. If those were my two choices, I would go with option 2.

    Do you honestly feel those are our only two choices? I don’t. In fact I would argue that neither of the two options you suggest aren’t very realistic.

    Krugman’s recent post, Apocalypse Soonish, would be a good counterpoint to option 2. And option 1 could be averted by the gov’t giving serious consideration to leaving the euro (I honestly don’t want that, but it’s definitely a negotiating gambit). And that assumes the ECB doesn’t wake up and realise it’s current policies are destructive to the currency it is supposed to watch over.

    You talk of putting words in your mouth – and yet in your first reply you were happy to do so for me. I do not want a perfect compact. I want a workable one. I have voted yes to every single EU treaty to date – even though I had concerns about several.

    This compact is dangerous for Europe. And it’s not just the economy that concerns me. Economics doesn’t just drive money, it drives political direction. In the last European economic crisis right-wing extremists were empowered and millions died in a senseless war. Perhaps this time left-wing extremists will be empowered and maybe something less bad will happen, but that’s grading on a pretty steep curve.

    I would rather sensible people started focusing on growth and started coming up with ways to deleverage sectors in a way that doesn’t screw over the poor. Not just for fairness (which is a factor) but for all of our futures.

  29. @RL

    If you are going to bring the domestic political landscape into play then surely there are multitude of other factors that you could also bring into the equation – a run on spanish banks, the ultimate collapse of the euro, massive civil unrest in Greece etc….but these are exogenous factors entirely beyond our control so one does have to narrow the debate somewhat for it to have any resonance. Therefore I hope I am not guilty myself of what i have accused others earlier in this thread and that is to ask you, absent the domestic political stalemate that might ensue from the short sharp shock (and of course that might not happen), do you agree with Keynes general premise that expectations of being incrementally worse off in each subsequent period is far worse in the long run (because of its impact on investment and consumption) than being a lot worse off today but with a much brighter future?

  30. A very realistic appraisal.

    Nice to see what everybody else must be thinking…..i.e. that we should sugn up to the Fiscal Compact now if it means ESM funding…if the economics of it don’t make sense in 5+ years time (when it will actually apply to us) then we can come back to it.

  31. @Rob S

    “We can come back to it”?

    We can only come back to it if the other countries agree. It is out of our control. We don’t even have a veto.

  32. In the bottom left hand corner you include a “Note to Germany”, warning that currency union does not mean that members can never default (giving the US as your example). I find this confusing. From the beginning of the Eurozone crisis, Germany argued that those nations in trouble should write off debts. It was Germany that argued for “Private Sector Involvement” for any country accessing ermergency financing. It was Germany that pushed for higher PSI (i.e. greater debt write-offs) in Greece’s second bail-out. France and the ECB took the opposite corner: they argued that PSI would cause contagion to Italy and Spain and bring down the Eurozone. Events last year seemed to show that the French and the ECB were correct. Only at that point did Merkel bitterly concede that access to the ESM in the future will not require PSI.

    So why is your “no default” note directed to Germany?

  33. @zhou_enlai

    I have to say that is a very narrow viewpoint when the rules seem to be rewriting themselves every month.

    If the economic situation has improved in Ireland in 5 or 6 years then I doubt Ireland would be on its own if it called for the Compact to be revised to make the economics a little more balanced.

  34. @Rob S

    Just like they stepped in to reform the Euro and the ECB when we hit crisis and their flaws were exposed?

    For the record, the fiscal comact makes sense when times are good. It should not be relaxed at that stage. It is when things are bad and populations are feeding on false narratives that the Fiscal Compact is dangerous, i.e. now and in the coming decade.

  35. Given that Article 16 of the Compact commits (with some provisos) the Contracting Parties to incorporating the Fiscal Compact into the TEU and TFEU, the recommendation in the bottom left hand corner (‘scrap the compact after 5 years’) is rather optimistic. 5 years will be more than sufficient to build up the necessary ‘acquis communitaire ‘ that the Union strives to preserve. 5 yeasr from now we will – again – be confronted with a treaty that we cannot refuse and, again, those advocating a ‘Yes’ will tell us to ratify it because it is just rubber-stamping what has already been agreed upon.

  36. @Ronan 9:18

    RE propaganda machine, just listen to the adverts, if you didn’t know better, FC has nothing to do with anything else other than strengthening our fiscal finances.

    Re “If you believe there are steps missing, I would be delighted to hear about them…”

    Don’t have time to give anything but a rather circumspect answer, a more rigorous answer though would follow up on some broad tenets, such as:

    1. The need for debt writedown is absent in FC.

    2. It copper fastens the need to pay back every penny we owe.

    3. Your decision tree ignores the option of leaving the euro and does not explore any of the implications/benefits/obstacles.

    4. Your analysis presumes the euro is in safe waters and current and future bailouts will continue to be available, affordable, and beneficial to our interests

    5. Your analysis is not a broadsheet for growth and has no assessment of our prospects under any set of scenarios, nor do you provide data for any of these scenarios.

    6. Some information you given is prejudicial to the outcome you wish to achieve. For example, you make the assumption that we would face higher interest rates following default. Leaving aside the act our bonds are junk at present, interest rates have hit 7.7% and are rising to default levels, you ignore the debt writedown that would have to occur following our exit from the euro. IMF/UK/Canada etc would factor in ‘affordable’ interest rate plus debt writedown. DEBT WRITEDOWN is the capitalist key that returns a country to a fiscally healthy state, not one choked on further debt. At 120% debt to GDP ratios, I’m surprised, as an economist, to see you vote Y without provisions for debt writedown; there again, there are plenty of economists who cheered on ‘soft landing’, ‘growth’ and boom times. Iceland has returned to the markets and is not priced out of the markets as we are.

    7. Your analysis trivialises and ignores the social consequences of austerity and against the prevailing view that austerity is not working, you appear to ignore arguments against austerity.

    In summary, your main position seems to spring from the belief in austerity-lite under the prudential rules of FC for 5 years with a healthy economy returning 2020’s.

    Sweet dreams 🙂 Sorry to tell you the euro is crumbling and there is a queue a mile long awaiting the ESM tap. You might have some credibility if our debt was approx 100% GDP and the euro did not crash; as it is, its pie in the sky. But we’ll have to wait and see who’s right 🙂

    Perhaps you also need the benefit of a constitutional and legal expert to explain to you what you are signing away and why we are having a referendum about it. You might also consider the democratic nature of the the unelected, external body free from accountability and transparency and above the law you are binding this country’s constitution to, but this appears to be irrelevant and inconsequential to you.

    At best, you are looking at these matters and making an attempt to make sense of it all. But you’ve a good way to go 🙂 Keep up the effort.

  37. @Ronan Lyons

    I don’t suppose I’ll get a response so far down, but I was wondering:

    The chart says that the fiscal treaty precludes stabilisation policy. I’ve always been under the impression that, since it targets the structural deficit (or some notion of the structural deficit) that this isn’t the case. What do you mean?

  38. @ All

    Judge Kevin Feeney explains it all succinctly (for those willing to listen).

    http://www.rte.ie/news/morningireland/player.html?20120518,3290268,3290268,flash,257

    The reasons for voting Yes are a no brainer. As one acquaintance not interested much in politics remarked to me; “I’m voting Yes to save my pension”. Of course, the younger largely unemployed generation see the matter differently. They have neither job nor the possibility to build up pension entitlements.

    A No outcome might well serve their interests better. The divide is clearly visible in the opinion polls.

    Incidentally, Martyn Turner has an amuzing cartoon in today’s IT of John citizen pushing the Sisyphean rock of EU referendums up the nose of a statue representing Dev and his Constitution. This is, of course, the wrong analogy. Dev’s Constitution could not be clearer on the respective prerogatives of government, parliament and people in the matter of conducting the foreign relations of the country. The idiosyncratic Crotty judgement of the Supreme Court is the hill up which the Sisyphean rock has to be pushed.

    Maybe the political class is beginning to cop on to this. Or rather, they know full well but, like giving a ball to a large mastiff, the Irish citizenry, they are both unable and willing to get it back.

    Before I draw the ire from the usual quarters about my lack of respect for democracy, I repeat the point that not alone are all governments based on the principle of representative democracy, the EU itself is. (Article 10.1 TEU “The functioning of the Union shall be founded on representative democracy”).

  39. @DOCM,

    Indeed. As I’ve pointed out elsewhere, this has little to do with democracy and nothing to do with securing genuine democratic consent. That struggle is being pursued in the creditor nations. Let’s just hope that the very welcome re-emergence of the requirement to secure genuine democratic consent in these countries does not lead to a scuppering of the Euro project.

    The contest in Ireland is between Official Ireland (and its multitudes of camp followers) and the ‘raid, tax and spend’ brigade. It would be wonderful if both sides were to lose and for the vast majority of citizens to win. But, unfortunately, that’s not possible.

  40. @ DOCM

    Alright I can’t resist poking fun by suggesting “The reasons for voting Yes are a no brainer” because the only way you’d vote Y is by NOT using your brain ( I have to give up using these stupid smilies )

    Re “(Article 10.1 TEU “The functioning of the Union shall be founded on representative democracy”).” Ahh, those were the days when voters such as I cherished such ideals and did vote Yes for Maastricht/Lisbon.

    But the FC is a change both in substance and direction and is an erosion of such ideals. That is why we’re handing over the keys to the constitution because our constitution forbids the right to self determination of our budgetary and fiscal sovereignty with:

    “2. 1° The sole and exclusive power of making laws for the State
    is hereby vested in the Oireachtas: no other legislative
    authority has power to make laws for the State.”

    IT hasn’t posted the Turner cartoon yet, I look forward to seeing it. Dev would turn in his grave at the invasion of our constitution by the bankers.

    It really is rather foolish to base a point in favour of the Yes campaign on the principle of ‘representative’ democracy when the Yes campaign across Europe are screaming for more federalism and political union.

    Its ludicrous to suggest political union and federalism to try to redesign the euro in the image of a Federal US with the powers of the FOMC, FDIC and the FED and the political union representative democracy in the US. Bit late for that, the euro is sinking and collapsing all about us.

    I’m sure Dev is laughing in his grave at Micheál Martin TD having been part of the crew that wrecked the economy under Bertie, is now selling off the state assets of the Irish constitution to the bankers and an unelected committee in the ESM with its cousin EFSF stiflin and suffocatin and stranglin the Irish economy as we speak.

    Ah well, the euro is in its death throes, we’ll see how far it goes.

  41. Re DOCM

    Judge Kevin Feeney explains it all succinctly (for those willing to listen).

    http://www.rte.ie/news/morningireland/player.html?20120518,3290268,3290268,flash,257


    I’d like to point out Judge Kevin Feeney’s summary of the FC at the outset here is blatant propaganda in favour of the No Campaign? The reason is it concentrates on the strengthening of the deficit rules under the FC we have to follow, but it clearly does not refer in any way whatsoever to the weakening, loss of self determination, that should be for balance clearly pointed out to the electorate.

    Rather surprisingly, Judge Kevin Feeney also gets it wrong in another crucial area. He is asked a question re ECJ sanctions and fudges the answer by stating that sanctions only apply to failure to enact the rules of the FC in law by a member state.

    http://ec.europa.eu/economy_finance/articles/governance/2012-03-14_six_pack_en.htm

    “European Court of Justice (CoJ) may impose financial sanction (0.1% of GDP) if a country does not properly implement the new budget rules in national law and fails to comply with a CoJ ruling that requires it to do so. In the case of “euro-area Member States”, sanctions would be channelled to the ESM, in the case of “non-euro-area Member States”, the money would be attributed to the EU budget.”

    Apparently Judge Kevin Feeney hasn’t read the above part where sanctions are channelled to the ESM, perhaps he should do more to understanding this and imaprting this knowledge to the electorate!

    The ESM will have a variant of the following:

    “Financial sanctions for “euro-area Member States” are imposed in a gradual way, from the preventive arm to the latest stages of the EDP, and may eventually reach 0.5% of GDP. The six-pack introduces reverse qualified majority voting (RQMV) for most sanctions, therefore increasing their likelihood for “euro-area Member States”. (RQMV implies that a recommendation or a proposal of the Commission is considered adopted in the Council unless a qualified majority of Member States votes against it.)”

  42. @ Colm Brazel

    “Rather surprisingly, Judge Kevin Feeney also gets it wrong in another crucial area. He is asked a question re ECJ sanctions and fudges the answer by stating that sanctions only apply to failure to enact the rules of the FC in law by a member state”.

    versus;

    “European Court of Justice (CoJ) may impose financial sanction (0.1% of GDP) if a country does not properly implement the new budget rules in national law and fails to comply with a CoJ ruling that requires it to do so. In the case of “euro-area Member States”, sanctions would be channelled to the ESM, in the case of “non-euro-area Member States”, the money would be attributed to the EU budget.”

    Where is the contradiction?

  43. @ DOCM

    Re “Where is the contradiction?”

    Sorry, maybe I should have explained it better, but I thought I’d made the point very clearly, so tks for opportunity to clarify.

    Its a fine point that makes a distinction between sanctions arising from a failure to pass into national law ““European Court of Justice (CoJ)…..” and the crucial point of enactment of those sanctions and their implementation.

    Clarity is not helped by the actual wording:

    “sanctions would be channelled to the ESM, in the case of “non-euro-area Member States”, the money would be attributed to the EU budget.”

    This is just badly stated as it mixes in the same sentence what ought to be a separate clause namely, “in the case of “non-euro-area Member States”, the money would be attributed to the EU budget.” This requires greater clarity, but they do say the document is in progress.

    My gripe is against what programmers would regard in programming as a Trojan horse by the back door.

    Specifically you need to focus on the earlier part of that sentence,

    “SANCTIONS WOULD BE CHANNELLED TO THE ESM.”

    It’s this part of the sentence that Judge Kevin Feeney is disingenuous about. He should as an independent and objective observer be telling people what this exactly means.

    What it means is that an unelected bunch of bankers, who are above the law, the ESM committee, get to decide how well we are enacting the legislation, what sanctions will be imposed on us if there is a breach, who give themselves the big stick of the ECJ if we wobble and do not comply.

    In summary, there is a sanction for not enacting into law, there is a sanction for failure to implement the law, which is policed by the ESM committee under threat of breaches being brought before the ECJ.

  44. @ Colm Brazel

    I take it then that your are criticising Judge Feeney for something he did not say rather than anything that he did. Had he dealt with the issues you raise, I imagine that he would have adverted to the fact that the sanctions that we are discussing arise under two entirely different procedures and contexts. You have the two confused.

  45. @DOCM

    “I take it then that your are criticising Judge Feeney for something he did not say”

    Absolutely, its like describing a gift of a horse, but not saying what lies hidden within, as in the Trojan Horse. As Chairman of the Referendum Commission I would expect him to be far more impartial and neutral.

    “I imagine that he would have adverted to the fact that the sanctions that we are discussing arise under two entirely different procedures and contexts.”

    Indeed, I’m sure, if pressed, he would take that view. That is not to say he has not deliberately misled the public by leaving it to our imagination, rather than being truly objective and fulfilling his duty to inform the public, not to mislead or confuse the public.

    I have to say when I first heard those adverts on TV/Radio with the message the FC was to strengthen our finances, I firstly thought they were government propaganda emanating from Lb/Fg. It was a bit of a shock to find they had their origin in the deliberate reductio ad absurdum originating from the Chairman of the Referendum Commission.

    ‘Evasive, inaccurate and misleading’ was the basis of a court action taken by Patricia McKenna of the Greens re a propaganda leaflet put out re the Lisbon Treaty. It sums up the current so-called objective educational media campaign with adverts emphasising the ‘strengthening of rules re our fiscal finances’.

    Sure, I guess it could be worse, in another country, rather than the ESM/ECB taking control of our budget and our finances, he could be advocating that the ‘men’ take over financing previously controlled by their wives.

    http://www.independent.ie/national-news/courts/mckenna-threatens-court-action-over-partisan-booklet-1875174.html

    She won her court case. In my view, the Referendum Commission is surpassing its previous form in its propaganda for a Yes vote in the current referendum campaign.

  46. @ Colm Brazel

    You are still confused! Changing the subject does not obscure the fact. The sanctions arise in two entirely different contexts. Expecting Judge Feeney to cover all the other misunderstandings that you may have hardly seems reasonable.

  47. @ DOCM

    Re “You are still confused!”

    On the contrary, I’ve actually spent some time making sure I understand these points with crystal clarity and have explained to others and considered these points here:

    http://wp.me/pBbF3-hf

    For example, ““2. If an ESM Member fails to meet the required payment under a capital call made pursuant to Article 9(2) or (3), a revised increased capital call shall be made to all ESM Members with a view to ensuring that the ESM receives the total amount of paid-in capital needed. The Board of Governors shall decide an appropriate course of action for ensuring that the ESM Member concerned settles its debt to the ESM within a reasonable period of time. The Board of Governors shall be entitled to require the payment of default interest on the overdue amount. “

    I discuss the terrifying ‘appropriate course of action’ in that link.

    Speaking of being confused, both you and govt specialise on getting it wrong, all the time, which is some feat:

    Govt specialises in being wrong on multiple occasions, such as the fact that we will need a second bailout instead of a return to the markets in 2013; or, the fairy tale we are entering a growth cycle enabling us to pay back odious debt; or, the fairy tale the ESM is a ticket to stability when the euro is crashing all around us; or, the fairy tale that NAMA is succeeding; or, the fairy tale, that the out of control extent of mortgage debt and private debt will not require further recapitalisation of the banking system.

    Either its you, the Govt, getting it wrong all the time, are both confused and misinformed, or you and the Y campaign are being deliberately misleading and won’t describe a Trojan Horse for what it actually is.

    You are confused if you do not see the relationship between the ESM and the Referendum and wish to separate out the 2 for propaganda purposes.

    I expect Judge Feeney to run a fair public education programme informing the public as to what they are voting on, not to make himself open to the charge of leading a propaganda campaign.

    Things have improved since I drew attention tot he reductio ad absurdum or reducing the FC to a Referendum on making our finances stronger. The latest advert from the Referendum Commission has a man speaking alone without document aids, or other devices, speaking like a character out of Beckett I compare to Lucky in Samuel Beckett, rapidly condensing the FC into a minute or two of uninterrupted monologue like a fast talking car salesman.

    http://www.youtube.com/watch?v=b542GxhzYiw&feature=related

    But at least he gives the substance of the FC if in a disgracefully poor format.

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