The Devil is in the Principles

This post was written by Colm McCarthy

Twenty years ago this summer, Europe’s currency arrangement, the ERM, began to tear apart. Fixed exchange rates last as long as the markets fear that central banks can out-buy the sellers. The Bank of England ran out of reserves in September, making George Soros famous, and the system broke up in the middle of 1993. There was no buyer of last resort for the weaker currencies.

 

Under EMU the sovereign bond market plays the role of the forex market. There is no buyer of last resort for the weaker sovereign bonds. The unwillingness of the ECB to play this role means that Spain and Italy can be forced out of the market. Their total bond stock is approaching €3 trillion. Ongoing deficits and rollovers mean their gross issuance could not conceivably be financed by official lenders.

 

So they must be kept in the market or the crisis enters the endgame. The ECB has suspended its SMP (Securities Market Programme) which bought sovereign bonds in the secondary market. It pursued this programme in half-hearted fashion, worrying in public about the quality of the bonds it was buying. Sterling would have crashed out of the ERM more rapidly if the Bank of England had gone around bad-mouthing the quality of the sterling it was supporting back in 1992.

 

Selling sterling to the Bank of England, if the latter possessed unlimited reserves, would have been a mug’s game. Selling Spanish or Italian bonds to somebody with unlimited stocks of Euros would be suicidal.

 

The Brussels summit has opened the way for the ESM to buy bonds in the secondary market, so the ECB has been replaced with a buyer whose balance sheet constraint is known. This is actually a retrograde step. The ESM could quickly become Bank of England Mark II if a sizeable bond market run re-emerges.

 

Nobody in their right mind will short an asset into the Central Bank against money. They cannot run out of the stuff. Nobody can operate a credible reverse tap in the Spanish and Italian bond markets except the ECB, or some agency with unlimited facilities at the ECB.

 

Some useful decisions were taken at Brussels last week but the crisis will persist until this central issue is addressed. Spain and Italy cannot pay more than 4%, or maybe 4.5%, and retain debt sustainability. A reverse tap operated by the ECB places credit risk on its balance sheet and extends the moral hazard (liberally available to European banks) to Mediterranean governments. So the fiscal compact must be implemented and the political commitment problems resolved.

 

The devil is never in the details. The devil is in the principles.   

67 Responses to “The Devil is in the Principles”

  1. David O'Donnell Says:

    The Principle of Solidarity demands an LOLR Print with Fangs.

  2. The Dork of Cork Says:

    Intelligent article but it explains the Machiavellian nature of this long term process - manoeuvring these countries into a Euro killing zone.

    Look the post 1987 world has been devastating to these physical economies - ok … they were on the receiving end of credit - but credit for what end ?
    Less and less rational economic acticity took place in these countries over time.
    Spain had the misfortune to enter this convention of Eunachs in just 1986 but the damage to its people ,landscape , character has been catostrophic.

    The dynamics of these interactions is pretty simple on one level - each of the political classes in these countries gets paid in Euros.
    Therefore they have a incentive to wipe out all rational domestic activity to sustain interest on overvalued lets say Italian bonds as in the late 1990s.

    This transfers economic activity to Germany ,low wage Eastern Europe and Asia…… the remaining Italians become customers for ultra long distance commerce (slave / energy arbitrage trade) supplied with bank credit.
    The country dies inside.
    Why would you want to sustain such a arrangement unless you are one of the few who gets /got paid in a large amount of Euros over the years.

    We are not asking the most simple of questions
    Who benefits ?

    The trade patterns both withen and outside the Eurozone is now quite clearly absurd as a result of massive capital export /wage deflation since the early 1980s.
    We are all with the exception of the top maybe 5% better off outside this Colosseum.
    Even if you were a man of honour in the top 5 % you would want out of this banking circus.

  3. Brian Woods II Says:

    @ Colm

    I think you are overplaying the “market vs the central banks poker game” aspect. The market dumped Sterling in 1993 because it was overpriced and silly CBs tried to shore up that price. The yields on PIIGS sovereign bonds are the market’s assessment of the default risk, not a game being played by the marketeers.

    By definition, there is always enough to finance a government deficit, as the deficit finishes up in somebody’s bank account. Unfortunately, within the EZ that money is gravitating towards the centre. It has therefore fallen to be an official responsibility to channel it back to where the deficits arose.

  4. DOCM Says:

    I posted this link on the KOR Munchau thread. The Google Translate version is comprehensible apart from the fact that it could not cope with use of ‘coal’ as a colloquial term for money.

    The “Sun King without money” has his work cut out. Until there is a clear indication of intent, the ECB will not play ball. (It took Mitterand two years to reverse engines).

    http://www.welt.de/debatte/kommentare/article107701495/Francois-Hollande-der-Sonnenkoenig-ohne-Kohle.html

    Bearing in mind that Germany and France account for half the economic bulk of the EA, what Hollande intends to do about the state of the French economy has been the key question from the beginning.

    An extract from the article, courtesy Google Translate.

    “Clever tactical games

    However, it is questionable how long will a European Union still believes in a key partner to be able to compensate for lack of willingness to reform through clever tactical games. If Hollande his country - and Europe - wants to keep from falling, he will very soon have to make clear how he intends to reform it.

    With an increase in property tax because it would be hardly done. Even a tax increase, which has always Hollande rejected during the election campaign and now - surprise - would come anyway, will not be enough to plug the huge holes.

    Hollande is no option but to make huge cuts in overstretched public sector. This means, ultimately reducing the number of officials as well as the amount of benefits. From both in France there are too many who get too little.

    France has the second highest public expenditure in the EU with a state share of almost 60 percent.”

    The jury is out.

  5. Jagdip Singh Says:

    So, supranational oversight in return for a “reverse tap” which in principle (!) sounds fair enough.

    But putting that supranational oversight in place at the detailed level required will take a decade, if past experience is anything to go by, by which time we have at least one big European economy defaulting.

  6. Paul Hunt Says:

    The devil, indeed, is in the principles, if the asserted principles are ill-founded. In this case I’m not so sure they are. The summit sought to limit and reduce the exposure of selected sovereigns to the cost of resolving banking messes they had largely created, or allowed to happen, themselves. But it’s pretty clear that the creditor nations are making damn sure that fiscal incontinence - and the steps are required to become continent - are primarily the responsibility of the fiscally incontinent. The quid quo pro for finally, finally acknowledging the bank resolution elements of fiscal pressure on selected countries - and beginning to address them - is a clear application of individual sovereign responsibility for purely fiscal incontinence.

  7. Paul Hunt Says:

    Apologies..continues..

    The penny may yet drop in the PIIGS (+FR & BE) that fiscal adjustment is their responsibility and that it will need to be counter-acted by meaningful structural refroms - and the creditor nations will keep up the pressure until it drops.

  8. The Dork of Cork Says:

    @DOCM
    Watch out for Italian GDP figures in the second quarter.

    http://www.tradingeconomics.com/italy/gdp-growth

    My prediction is that it will shock most people and if this continues - France & Germany will account for 2 thirds of declining economic activity .

    Once France loses its Diesel ration because of its non sovereignty its quite clearing better off out….its playing for time me thinks……it has used the resourses of the periphery these past 4 years now wisely ,Germany not so much.

  9. The Dork of Cork Says:

    @Paul Hunt
    The best most effective structual reform is to go back to national currencies.
    The true waste withen their flawed credit dependent structures will manifest themselves.
    Italy needs its Industry back.
    It does not need more fiscal torture to extract another pound of flesh.
    They tried this before remember ?
    Late 1990s ……. what did it achieve ?
    It gifted wealth to its “sovergin debt holders” for a few years.
    But at what price ?
    It exported its capital.
    I think they make Fiat 500s in Poland now.
    http://www.youtube.com/watch?v=bdn7mhP6xv4

  10. DOCM Says:

    Coincidentally, a report in the Indo which confirms in real time the accuracy of the analysis in this CMc contribution.

    http://www.independent.ie/business/european/finnish-and-dutch-governments-cast-doubt-on-latest-eurozone-deal-3155512.html

    One could also reference Krugman in today’s IT but there is nothing new there.

  11. Aedin Doris Says:

    The excellent Paul de Grauwe has an admirably clear piece on voxeu that covers some of the same ground as Colm:

    http://www.voxeu.org/article/why-eu-summit-decisions-may-destabilise-government-bond-markets

  12. Michael Hennigan - Finfacts Says:

    “There is no silver bullet,” as Jörg Asmussen said on Monday and given Colm’s outline of the limitations of the ESM and the apparent lack of impact of the ECB’s own bond buying programme, the best that can be expected is that the fire brigade would be around teh corner in teh even of a blaze.

    The Big 2 also have limited readies to assist.

    France is heading for a debt/GDP level of 90% and the German level will dip from 81% to 79% in 2012.

    Hollande has to switch from campaign poetry to governing prose pronto and likely in a few months national strikes will be called.

    An Elmer Gantry will always find a ready cast of suckers in these stricken times and it seems a bit distant when there was a clamour for the Irish referendum to be postponed to await the growth provisions to be added to the Fiscal Treaty.

    People of course seldom learn and just move on to new fairytales.

    “There will be tax increases; there will be spending cuts,” said the finance minister, Pierre Moscovici, last week. “But I reject any talk of austerity. We must avoid a budget policy that hurts economic activity.”

    Indeed!

    Live horse and you’ll get grass!

  13. Brian Woods Snr Says:

    If you create a complex, tightly coupled system and some of the components are dodgy (but you are unaware which) then when the system comes under stress it will ‘fail’ - chaotically. Emergency measures are useless (they were never part of the original SOPs). Invoking them simply makes the situation worse. (Though you do feel psychologically somewhat better.) You know which component/s are malfunctioning but you cannot halt the process to remove-and-replace. You’re goosed.

    @ DOCM: Krugman’s IT piece was pretty poor. Again the lad has an Economic Model-in-Use which is also malfunctioning. Do intelligent folk have no knowledge or understanding of Easter Island? Seems not. Fukishima? Now there is a classic.

  14. The Alchemist Says:

    Finland and Holland say they will block any bond buying program. According the the ESM contribution key they contribute less than 15% of the pot (7.5%)hence they cannot block this move - 85% majority required for actions.

    However, the contributions of Spain, Portugal, Italy, ireland, Greece, Germany and France are just under the 85% mark (84.268). In principle if all the others were against bond buying, the policy could fail. However, assuming that Belgium doesn’t want to be caught in the headlights the policy would go through.

    Not being an economist, I don’t favour bond buying as it removes investment risk, pushes all the downside onto the taxpaying entities and creates a win-win situation for bondholders. Some other method including amend and extend deals would seem preferable in a market system. Just my two cents.

  15. zhou_enlai Says:

    Is it being envisaged that after the ESM funds are disbursed the ESM may face being overwhelmed with a resultant loss of all capital put into the ESM by the individual states?

    If that comes to pass, won’t those circumstances create sufficient cover for the ECB to step in and become the LOLR to the sovereigns because there will be a greater fiscal transfer and greater losses fo thte core if the ECB does not so act?

  16. seafóid Says:

    I think it is market nature to get excited over the most recent summit especially since it came at the end of the quarter and the numbers look better now . If the EZ situation is resolved it will be as a process rather than an event but for institutions that trade by the nanosecond patience tends to be shorted.

  17. seafóid Says:

    The ESM could end up with a banking licence and the market would be delighted. The whole thing is ludicrous, really.

  18. Paul Ferguson Says:

    I agree that in the normal run of things paying interest at 4% or perhaps 4.5% is sustainable but this is by no means the normal run of things.

    Bear in mind that money comes from bank loans and is deleted as loans are settled with the banks. For the money supply to expand to repay such bonds we need to collectively organise more loans than we repay. Note that producing more doesn’t increase the money supply.

    So far householders have been the main creators of money and mortgages have taken longer and longer to repay. However they’ve reached their natural limit taking two careers to repay and they cannot increase further. Hence this is by me means the normal run of things and even 4% or 4.5% yield on bonds seems unsustainable.

    Allowing Governments to create some or all of the digital money supply could end the debt crisis almost overnight and it wouldn’t be different conceptually from their ability to create cash.

  19. The Dork of Cork Says:

    @Aedin
    Why this rush to centralise ?
    There is clearly no redundencey remaining withen the European experiment because of this mad rush to become America mark II.

    All that characteristic madness has been bleed from the place to be replaced by a devastating Euro blandness.
    Enough already.
    Besides a CB with treasuary like powers is Mordor like somehow - don’t you think ? Total Power and all that.

    What does politics mean in such a strange envoirment.
    Are we willing to give up everything for a few more years of peace.

    Lets wreck this joint and watch the BRICs and oil fall like dominoes.

  20. grumpy Says:

    @Zhou

    No. See Article 20 ESM Treaty which deals with pricing. There is not the spare capacity in the fund for item 3 to be used to deliberately make loss making investments ( plus, can you imagine the politics of that).

    I’ not sure I agree with Colm that no one would short assets into a CB that was paying in money. There are two reasons you might. One is if you thought the politics would undermine the policy (in 1992 it was an understanding of Tory backbench attitudes and influence that allowed you to ignore the UK rate hikes, and this time German politics could be the rug-puller). The other is that you can sensibly sell the currency being printed (though that requires you to hold a particular view on the fx reaction) and if the Market joins in the CB can be pressured out.

    I think we all agree that the EZ needs a bigger boat than the ESM. Maybe Barroso is the Mayor who just wants to keep the beach open.

  21. The Dork of Cork Says:

    Last chance saloon before Europe becomes a even stranger theme park.

    The Euro is not what is seems.

    It was developed by ancient slave traders.

    “One of the world’s leading train makers has set its sights on a new manufacturing plant in India.

    Spain’s Construcciones y Auxiliar de Ferrocarriles (CAF) is planning to set up a new manufacturing hub in the country to take advantage of an increasing demand for railway vehicles and equipment.
    Speaking about the plans, Juan Jose Garcia, international division director of CAF, said: “There is a tremendous opportunity in India.
    Also, I think it can be the hub for the entire Asia.”

    “Our intention is to come up with a manufacturing plant in India. It is an important market for us and we need to become Indian to cater to the market.”

    The Euro created the BRICs - if we destroy it we have a chance.
    If we don’t our children will become slaves in a Euro Disneyland horror show of a service economy.
    But servicing who ?

  22. Yields or Bust Says:

    @The Alchemist

    +1

    The one overriding error that is continually made by those supposedly making the rules is that no one must take a loss, particularly the bank bondholders. The Greek write off was the start on the road to recovery except it didn’t go nearly far enough. Investors into bust businesses lose. That’s life. Until we get over the issue that loss making is part and parcel of risk taking the saga continues.

    Ask yourself a question do you believe Ireland today would be a better place had Anglo/AIB/IPTSB and BoI been allowed to go bust in a controlled fashion i.e. the ECB committs to standing behind deposit holders (does its job) up to a certain level and bond, equity and deposit holders beyond a designated level simply lose money following an agreed sale to the highest bidder ?

    To me there is no doubt had the natural process been allowed to proceed the circus that is the EFSF/ESM/ECB etc etc could have been curtailed at source. In not allowing bad business with bad models to fail we all fail. This is the absolute heart of the problem. Sadly the end result will eventually require the currency to fail to reset the clock and no amount of bluff coming from Brussles or elsewhere can hide the fact that bad business decisions should cost investors regardless of type. The notion as expressed by Karl Whelan that the ELAs agreed for Anglo cannot be renaged upon is simply an extension of this problem - the ECB made a bad call, Anglo was a hopeless case and as a result the PMs should not be paid. Tough titty.

  23. Joseph Ryan Says:

    @Aedin Doris

    re De Grauwe article:
    http://www.voxeu.org/article/why-eu-summit-decisions-may-destabilise-government-bond-markets

    Vox credits him with advising the Barroso and the EC Commission!!
    His arguments seem clear and persuasive, so who is it that will not listen.

  24. Seamus Coffey Says:

    There is no doubt that only the ECB has sufficient firepower to act as a credible lender of last resort for the Eurozone.

    The provision in the ESM Treaty that it could buy sovereign bonds in the secondary market was always going to be a replacement to the ECB decision in May 2010 to serve this purpose.  It is very likely that the ECB had a large role in the addition of Article 18 on the Secondary Market Support Facility to the ESM Treaty.  Some commentary from the ECB on the July 2011 version of the ESM Treaty stated that

    … the ESM should, in the longer term, also have the capacity to intervene in secondary government bond markets in order to effectively combat contagion in situations of acute market instability.

    This was added. All last week’s summit did was restate a provision that has was not in initial ESM Treaty signed in July 2011, but one that was included by the time the final version was agreed in February 2012.  When it comes to the secondary market for sovereign bonds no new powers were announced for the ESM last week.

    The last time the ECB purchased bonds under its Securities Market Programme (SMP) was the week ending 9 March 2012.  The ECB could reanimate it but would be very reluctant to do so.

    One of the many problems the ECB had with the SMP was that it could not apply any conditionality to the operations.  Article 18(3) of the ESM Treaty says:

    The conditionality attached to the secondary market support facility shall be detailed in the MoU, in accordance with Article 13(3).

    It’s a control thing.  The possibility that the ECB will have to provide funds to a reconstituted ESM remains.

  25. DOCM Says:

    @ Joseph Ryanup

    There is, it seems to me, a significant hole in the argument of both CmC and De Grauwe in that there is a failure to give full weight to the fact that a Central Bank does not exist in a vacuum. Its status is a reflection of that of the government that set it up which in turn is reflected in the credibility of the currency that it issues. Its capacity to issue currency is only infinite to the extent the sovereign authority on whose behalf it is acting lends credibility to its actions i.e. it is committed to maintaining the intrinsic value of the currency.

    That is the dilemma with which the ECB is confronted.

    The EA is not Zimbabwe. It has taken a remarkable level of ineptitude on the part of politicians and technocrats to get to the point that the future of the euro is in question. The game of pass the parcel has to stop.

    Members of the Hollande government have been notably cautious in their public utterances about its intentions and with regard to maintaining the essential alliance with Germany if the circumstances are to be created in which the ECB can act. These are several months away, at best.

  26. DOCM Says:

    @ DOCM

    Apologies for the typo.

    The French PM is addressing the National Assembly at the moment (in a rowdy athmosphere). Allowing for the usual rhetoric, the central message seems to be that “everything is on the table”. It needs to be.

  27. Joseph Ryan Says:

    @DOCM

    Pas du tous! Thank you for info.

  28. grumpy Says:

    Shamelessly off topic but: http://ftalphaville.ft.com/blog/2012/07/03/1069611/and-with-an-inflexion-of-the-eyebrows-bob-was-gone/

    For those who don’t get it, governance via a network of “forbidding eyebrows” was part of pre-big bang culture.

    @docm

    You have started typing to yourself - just like PR Guy did a couple of weeks ago. He got banished to France to writhe pornography.

  29. seafóid Says:

    He got banished to France to writhe pornography.

    A Freudian slip, presumably, Grumpy

  30. grumpy Says:

    @seafoid

    Spotted that, and was wondering the same thing.

  31. Peter Says:

    Great post.

    On the govt spending: the nation could do with a cost and headcount breakdown - broken out into frontline services, capital investment and admin by department.
    The public perception is that all government spending is inappropriate wastage - that market failure is a thing of the past. FG have been keen to cut the low hanging fruit rather than actually prioritise services holistically.
    Maybe RTE could ask Colm McCarthy (the knife!) to participate in a series on this. If only the timing wasn’t “all wrong” for fiscal union…

    On the “banking union”. Is it not just fresh rhetoric for centralised regulation? …the thing Maastricht set out. It might be an admission of failure if they were to be consistent with terminology. It says a lot.

  32. David O'Donnell Says:

    CARTOON OF THE DAY

    http://www.presseurop.eu/en/content/cartoon/2289071-mr-no

  33. David O'Donnell Says:

    Eurozone
    The end of the Merkel method
    3 July 2012 Frankfurter Allgemeine Zeitung Frankfurt

    Let me get on with it – and trust me! In the midst of the European crisis, the German Chancellor’s usual approach has hit its limit. If she wants support for her policies, she first has to talk to all the people of Europe.

    http://www.presseurop.eu/en/content/article/2286671-end-merkel-method

  34. The Dork of Cork Says:

    ++++ Yields

    The currency was written off the moment they bailed out the truely massive Ruropean bank bond market.
    Its now a question of a catostrophic deflationary failure or a hyperinflation event.
    They could have taxed people with little private debt , but you can’t tax people with a world of debt Atlas could not shoulder.

    In truth these criminals don’t see the Euro as a currency but as a Yield instrument for parasites.
    This was proven in their lack of care for malinvestment during the boom that a baby could see and then for people who are real slow by their efforts to save their bum chums at all costs.

    I hope the F$£ers go down in flames.
    Nothing less then the production of pure Treasuary fiat will take the leverage power away from these bastards.

  35. grumpy Says:

    @seafoid

    Have decided to run with h being next to t on the keypad screen thing.

  36. David O'Donnell Says:

    Row Over Euro Policy
    German Party Leader Threatens To Axe Coalition

    Chancellor Angela Merkel faces growing resistance to her European policy from within her own coalition. Horst Seehofer, the leader of the powerful CSU party, sharply criticized the outcome of last week’s EU summit, and threatened to let the coalition government collapse if Berlin makes any more concessions to ailing euro members.

    Seehofer also criticized a suggestion by Finance Minister Wolfgang Schäuble that Germany should hold a referendum on a new constitution that could relinquish national powers to Brussels. “Hands off our constitution! We have this constitution to thank for the most stable state and the most stable democracy there has ever been in German history. We don’t want a different constitution,” said Seehofer.

    http://www.spiegel.de/international/europe/german-csu-leader-horst-seehofer-attacks-angela-merkel-over-euro-policy-a-842380.html

    Der Split in Der Bundestag - General Election anyone? I’m sick of waiting for the Deutsche version of the PeeDees to implode.

  37. David O'Donnell Says:

    Berlin - Press Review

    Germany’s domestic intelligence agency chief has resigned in what commentators say was a necessary step to rebuild confidence after his organization failed to stop a neo-Nazi terrorist cell. But he wasn’t personally to blame for the errors, they say. Instead, the intelligence system needs an overhaul.

    http://www.spiegel.de/international/germany/german-press-commentaries-on-resignation-of-spy-chief-heinz-fromm-a-842310.html

    Herr Professor Sinn has a neu Working Paper out on all those Tractors to Irish Farmers and the risk of the IFA to The Deutsche Target-2 Balance and the Failure of the Intelligence Services to monitor the Tractor Flows.

  38. Brian O' Hanlon Says:

    @ CMcC,

    What one tends to understand increasingly, as one looks at the relationship between member states and the ‘core’ in European borrowing and taxation terms - is that what is occurring today - is not unlike, that which occurred in Ireland shortly after it had gained independence. Namely, a comprehensive loss in faith and confidence in the ability of local regions, within the island of Ireland, to finance and organise their own affairs.

    So what we witness in Ireland (fiscal deficits and all of that ignored for a moment), is the creation of a strong central executive - in which ‘programs’ are constantly being invented, and re-invented - to find ways in which local funding that can spread back over across the whole island, and released from the centralised holding depot.

    In fact, what we do not have in Ireland is government. What we have is a central distribution for funding, which tries to invent ways in which to re-distribute local monies back to local levels. There is very little ‘representation’ as such that happens at national level in our houses of parliament, and even less that happens as European parliamentary levels.

    What we also see on the island of Ireland, is that a part of the island (the northern part), is managed and maintained as a region, rather than as part of the giant central bureaucracy. The funny thing is, Northern Ireland never seems to see this as a handicap. Imagine, if in the morning, we were to tell Munster, Leinster or Connaught to go and establish their own system for administration, governance and financing.

    What we see at a European level though, is not unlike, what we saw in Ireland following after independence. What we see in Europe, is increasingly the irrelevance of regions, and the promotion of centrality. More Europe, not less Europe.

    What we seem to be getting in Europe, more and more, are the creation of lots of new quango’s to carry out this and that - like we saw in Ireland during the boom years. Would we not have been better off, in Ireland during those years, instead of creating central quango organisations, to strengthen institutions, which would operate in themselves at regional level, on the island of Ireland?

    Would we be in a better situation now, if regions within the island of Ireland were better able to respond locally, to their own regions, and define their own needs in terms of policy and strategy to best weather this European scale crisis? Northern Ireland for instance, may be implementing its own set of policies of austerity or whatever, which suits at its level. But there is no central bureaucracy in Dublin, which is relaying to northern Ireland, instructions that it only receives from Europe. BOH.

  39. Brian O' Hanlon Says:

    @ All,

    I suppose, the question I am asking, is why is it that Ireland always seems to appear like it has a bureaucracy and mechanisms of state, which would be more suitable to a nation many times its size in terms of population and physical scale?

    And yet, when one looks at tools for administration and problem identification at a REGIONAL level in Ireland - one sees nothing much more than a few courageous university professors - trying to stir up some kind of a row. BOH.

  40. Robert Browne Says:

    From the David O’Donnell provided link above.

    “Seehofer said several euro countries needed to drop their debt mentality.”

    “The fact that others want to get at our money without asking too much of themselves is deeply human,” he said. “But it won’t solve the problem.”

    I find myself in full agreement with Herr Seefofer and am even tempted to write to the German’s shortly as the changes I desire and my country needs, are being retarded by Angela “caving in” to our begging bowl.

    Ireland has asked a miniscule amount of itself, by way of structural reforms. We have sought to blame others for our own stupid mistakes and have raised our debts levels to suicidal levels to protect those in their 40’s 50,s and 60’s, especially those in their 50’s and 60’s who are undoubtedly were the decision makers responsible for the mess.

    Herr Seehofer should know that the amount of the ill gotten gains that have been given up are in the proverbial “farthing” of ‘pfennig’ category. I have learnt a lesson in parenthood from this crisis, that parents, are more than willing to sacrifice the future of their off spring to protect their acquired taste for the finer things in life. Especially, since they had convinced themselves that they were smarter than everyone else, a class apart and entitled to help themselves to largesse from an exchequer swollen by Celtic Tiger, temporary windfall taxes.

    The government and unions, I hate to be a party pooper, seek to maintain unjustifiable benefits” thinking that the same level of taxes can be extracted from a shrunk private sector economy decimated by MOU’s FC’s and Six Packs etc, all of which seek to deflate and shrinking the real economy. Won’t work.

    We need careful laser or keyhole surgery directed at the tumors not a tonic of more debt which various elites simply tap into for some more intravenous relief.

    Two sentences in a statement, and we are being told that we are “redeemed” that soon, we will have manna from heaven. Why do I think that it will not take too long for the touted “game changer” results of summit No. 19 to end up in the trash can of history? We are only shifting debt around and constructing false partitions. The only real game changer will be if the ECB is given the nod to print money and monetise debt and I still don’t see that happening. Selling off equity in banks for fractions of what we have put into them is not a solution to celebrate and the ESM is debarred from paying for losses incurred on what were insolvent banks.

  41. DOCM Says:

    @ Robert Browne

    Being one of the parents that you mention, I could not agree more. However, I think that there is also a genuine fear on their part that the party cannot last and that now is not the time to be less careful with whatever cash one has as it may be needed when the state can no longer provide.

    The answers are obvious and there is no lack of awareness; simply a collective unwillingness to face up the consequences of putting things right i.e a general drop in standards of living.

  42. The Alchemist Says:

    @Brian OH

    I suppose, the question I am asking, is why is it that Ireland always seems to appear like it has a bureaucracy and mechanisms of state, which would be more suitable to a nation many times its size in terms of population and physical scale?

    Cargo cult thinking is a reasonable explanation for much of it. The rest divides between cronyism and public purse gouging.

    Questions for you: how many are supported from the public purse in Ireland? How many are actually required by a population of four million?

    Substitute MPs, local authorities, enterprise boards, hospitals, etc. where appropriate.

  43. DOCM Says:

    @ Seamus Coffey

    With regard to your comment above, it may be a “control thing” but is is also, it seems to me, to be an effort on the part of the ECB to get EA governments to organise themselves as guarantors of the solvency of their banks collectively, a task which rightly belongs to them and not to a central bank e.g. TARP in the US.

    I am also rather surprised that this report in the IT has drawn so little comment.

    http://www.irishtimes.com/newspaper/frontpage/2012/0703/1224319267101.html

    Now, what analysis of the overall situation prompted the two German officials mentioned to act as they did, assuming the report is true? A sudden conversion by the ECB in response to criticisms meted out to it! I doubt it.

  44. Brian O' Hanlon Says:

    @ The Alchemist,

    What never happened I would say, after independence in Ireland and that movement towards a very centralised administration of public resources - was that the local authority system should have been reformed in some manner. What happens in Ireland maybe, is that there is too much of a gap between the national executive representation, and the local authority.

    Clearly, I think that a better solution for all going forward would be to hand some of the decision making and administration back to a small number of regions, down from the national level. Clearly, trying to administer programs of investment or austerity from a national level in Ireland is not working. You end up with too large a size of central bureaucracy, to administer the said programs to re-distribute the purse nationally, to the four million inhabitants.

    There is a clear collapse in accountability also, when a national representative from a place like Limerick or Clare or Cork, travels to Dublin, to bargain for something back home. Maybe it harks back to the days, when Irish MP’s had the travel to London?

    What I am asking is, would it be easier or more difficult, for a province, or a region such as Connaught to implement its own austerity program? Would it be easier or more difficult for a region such as Munster, to implement its own infrastructure development agenda?

    There seems to be so much unnecessary nonsense that goes on, in trying to centralise all of this administration in Ireland.

    Why don’t we hear as much about northern Ireland finding itself in fiscal dire straits, or its banking system collapsing, or whatever? Maybe the answer is, because there is more accountability and administration carried out, at a more local/regional level?

    By the time we ever seem to write up any policy or design any program in Ireland - to me, with all of the chatter - the only folk who really seem to gain out of it, is RTE broadcasting and a few independent media stations, who can make current affairs programs out of it. BOH.

  45. Brian O' Hanlon Says:

    @ All,

    What makes the broad central national system of administration in Ireland so unwieldy too, is that regions within Ireland such as Connaught suffered from very poor infrastructure and services - even before austerity began in post 2008.

    So one could argue, that certain regions within Ireland, are experiencing a form of austerity, imposed on a pre-existing form of austerity.

    The only reason that we don’t hear more hoo-hah in national media broadcasting, is that different parts of Ireland have settled for totally different levels of expectation, and have different tolerance levels for misery. ‘Misery’ for those in the eastern corridor may not equate exactly, to that which is considered misery on the western corridor.

    To a large extent, I would argue that a national representative from Connaught, and one from the Eastern seaboard, in the parliament in Ireland, are effectively trying to represent two different nations. BOH.

  46. Brian O' Hanlon Says:

    Also,

    The real lost opportunity was in de-centralisation, where they were not brave.

    What de-centralisation should have meant, was the creation of powerful administrations at regional level - and to slightly dilute all of that legacy multitude of local authorities - which are too expensive and ineffective to run.

    But that did not happen. The central administration ensured that de-centralisation would be crippled from its birth. BOH.

  47. Brian O' Hanlon Says:

    Qualification: I will admit also, of course, that the Eastern seaboard/corridor region, can experience problems, which may be unfamiliar to others, luck enough to make a life outside of those areas. BOH.

  48. Joseph Ryan Says:

    @DOCM

    re ECB ‘change of heart’: Irish Times article.

    You may disagree, but the veiled threat of an ECJ action by Colm MCarthy (in a recent article) may have had an influence.
    It would have forced all documents on to the table. Not something the ECB would relish.

    Other than that, it is apparent that the ECB policy of ‘no bondholder left behind’ is now effectively finished. The ESM will not write cheques willy nillly to banks without burden sharing. Firstly because it cannot afford to and secondly if it did the ESM would merely become a conduit for bank debts being routed back to states, the very issue the summit agreed to avoid.

  49. DOCM Says:

    @ Joseph Ryan

    On your first point, I have no idea! I somehow doubt, however, if the possibility of legal action entered the picture.

    I agree that the ‘no bondholder left behind’ era is over but this has been obvious for some time, notably in relation to “bailing-in” investors in banks.

    I think your point with regard to the ESM is correct and it is the only explanation that I can think of for agreeing the change to the ESM treaty. As Seamus Coffey put it, it is all about control. However, as the reaction of the Dutch and Finnish governments has shown, they think that it still provides only a peashooter when a big bazooka is what is required. Which raises the question whether to whole approach has been thought through.

    Almost certainly not!

    The contradictions in Merkel’s manouevres are also evident. A stimulus programme to which she was originally opposed becomes a “essential concession” as does bank supervision to which her own national authority, Bafin, is probably as opposed as the UK government.

  50. DOCM Says:

    @ Joseph Ryan

    Apropos! The budget measures announced by the French Minister for Finance suggest that the Socialists recognise the precariousness of France’s situation - the most important subject for “control” - and intend doing something about it from the get-go, to use the modern term.

    http://www.lepoint.fr/economie/collectif-budgetaire-la-rigueur-c-est-maintenant-04-07-2012-1480711_28.php

    Unfortunately, most of the up-front effort is on the receipts i.e. taxation side.

  51. Joseph Ryan Says:

    @DOCM

    re: “Unfortunately, most of the up-front effort is on the receipts i.e. taxation side.”

    Why unfortunately?

    I read Galbraith’s ‘The Great Crash’ back in 2009 in order to try to understand what was happening.

    As one of about five reasons causing the great crash, he listed the huge disparities between top and bottom income levels. The relative income levels had apparently diverged considerably during the 1920s.
    The same happened during the late 1990s/ early 2000s

    In layman’s terms, a person earning €400pw will spend it all to survive.
    A person earning €4,000 per week will save most of it, the savings to be ‘invested’ by 25 year old bankers somewhere in the financial outer space.

    What is better for the local economy?
    One person on €4,000pw or 10 people on €400pw.

    You will not get many on €4,000pw to give a honest answer to that.

    Tax increases will be norm for the next 20-30 years.

  52. Robert Browne Says:

    It appears Merkel is taking a roasting in Germany over her capitulation.

    Spain ’s justice system, unlike Ireland’s, can send ministers to trial without showing any deference for reputations. Rodrigo Rato Spain’s Economic Minister from 1996 through to 2004 has been arrested for banking fraud.

    http://www.telegraph.co.uk/finance/financialcrisis/9376938/Fraud-trial-for-Rodrigo-Rato-over-Bankia-collapse.html

    Anglo, has put Bankia in the shade. I was astounded and sickened when our own governor of the Irish Central Bank told us that he was not interested in naming names, he was interested in process, in systems theory and the like. We have a long way to go have we not? Perhaps, we think the untended rotten waste will turn into some sort of marvelous financial compost from which will sprout two banking “pillars” on which we can construct our recovery?

    @ Joseph Ryan

    Your logic is far too good, however, instead of higher taxes what we are likely to have is a stagnated economy with unemployment above 20%, a poorer society with everything below a certain level, left to wither on the vine, eventually this will give way to civil unrest with people voting SF not because of their wunderkind economic politics but out of their need to inflict serious damage on the others. Same reason why the present government were voted in.

  53. DOCM Says:

    @ Joseph Ryan

    I have no argument with you on your basic point. But France is already a wildly over-taxed economy. Moscovici, the new minister for finance, made no secret of the fact that the effort of putting the French economy back on its feet would be concentrated on increased taxation in the initial phase with reforms on the expenditure side spread over the life of the new government. Quelle surprise!

  54. DOCM Says:

    @ All

    The latest from Martin Wolf! That the key is a return to growth in Europe’s economies is a truism in one sense but no less relevant for all that.

    http://www.ft.com/intl/cms/s/0/284c3146-c430-11e1-850c-00144feabdc0.html#axzz1zh2XxI8Y

    The several very positive references to Ireland may be noted.

  55. DOCM Says:

    @ Joseph Ryan

    Even the FT is hedging its bets on what Hollande is really up to. I would be inclined to pessimism myself. A 75% top rate of tax has a rather archaic ring to it. This does not surprise me as French Socialists have been stuck, in my opinion, in a time warp for half a century.

    http://www.ft.com/intl/cms/s/0/b4f1ba84-c5c1-11e1-a5d5-00144feabdc0.html#axzz1zh2XxI8Y

  56. David O'Donnell Says:

    The Classic

    The Plank - Eric Sykes & Tommy Cooper - 1of5.wmv

    http://www.youtube.com/watch?v=uVc9vr2Ov2A

  57. Robert Glynn Says:

    There is no way out of this for the Irish. We are absolutely f..d. The chattering class seems to think that something new and important will emerge from recent talks. Nothing could be further from the truth. There will be nothing agreed that will get the Germans to go jointly liable for all their feckless neighbours including us. Merkle would be committing suicide if she tries to commit her countrymen to bailing us all out.

    The solution to the problem is provided by the Austrian School of Economics. It involves a radical set of actions including the end to the ponzi (fractional reserve is finally made illegal) the State must shrink to a size that the productive economy can afford to pay for and banks must be let fail.

    These three steps; end the ponzi, shrink the State to say 25% of its current grotesque size and let the banks go bust starts a process of recovery. The key is taxation and its being gradually largely removed from our lives. ie. income tax, VAT and corporation as well as taxes on employment.

    By removing the government from the equation nearly totally we solve our economic problems. Solve our economic problems and we solve our social problems.

    Any other proposal must involve our departing the Euro. The Euro in this story is not really the problem. It prevents competitive devaluations much like the Gold standard used to do. It forces governments to tow the line or ruin their nations. It is ironic that the architect of the Euro Delors (an ardent Socialist) unwittingly launched a de facto gold standard into the European project. We must tow the line which means stopping being fools. Eliminate our borrowing requirement by dropping the Social Welfare State.
    Support individual property rights and let the free market reign.

  58. paul quigley Says:

    And then there is this view

    http://facta.junis.ni.ac.rs/pas/pas2005/pas2005-05.pdf

  59. seafóid Says:

    @ PQ

    Thanks. I will read it.

    Here is another angle. Weekly Standard hack Caldwell on utopianism

    http://www.ft.com/intl/cms/s/0/2c6a6306-f58c-11e0-94b1-00144feab49a.html#axzz1zdyZNfIN

    And the reply

    http://www.ft.com/cms/s/0/b7fe3a1a-fb12-11e0-bebe-00144feab49a.html#ixzz1zkHDoiTv

    From Profs Giorgos Kallis and Joan Martinez-Alier.

    Sir, Christopher Caldwell, in “Décroissance: how the French counter capitalism” (October 15), refers correctly to Nicholas Georgescu-Roegen as an intellectual hero of the degrowth (décroissance) movement, but qualifies him wrongly as a “utopian thinker”. Far from a utopian, Georgescu-Roegen (1906-1994) was a distinguished fellow of the American Economic Association and a professor of economics at Vanderbilt, holding a PhD in statistics from the Sorbonne and a degree in mathematics from his native Bucharest. As a Rockefeller scholar at Harvard he worked closely with notable economists Joseph Schumpeter and Wassily Leontief. Paul Samuelson called him a “scholar’s scholar, an economist’s economist”.

    A truly “worldly philosopher”, Georgescu-Roegen in The Entropy Law and the Economic Process (Harvard University Press, 1971) argued that economic growth increases entropy; useful energy is dissipated, it cannot be recycled. He predicted that the economy simply cannot continue to grow forever no matter how much technology advances. Once fossil-fuel stocks are depleted, a simpler living out of renewable, flow resources will be inevitable, and the descent had better be a smooth rather than a catastrophic one.

    For his disciples in the community of ecological economics, the crisis came as no surprise: energy and food prices knocked the economy down. It is easy for the financial system to increase private or public debts and to confuse this expansion of credit for the creation of real wealth. But the real economy of energy and materials cannot be forced to grow at the compound interest rate necessary to pay off debts.

    It is a hopeful sign that the degrowth movement is grounding its view of the economy on the thermodynamic analysis of Georgescu-Roegen. Utopian is to think that endless growth is possible in a finite planet.

    Giorgos Kallis and Joan Martinez-Alier, ICTA, Universidad Autonoma de Barcelona, Spain

  60. John B. Says:

    I tried to go through the discussion but it is too large for me. But if I can comment on the article, I do agree with you. As from my point of view (I am a Canadian), you named what is plaguing the current EU. Even it does not look so, but our countries have many things in common. Our is currently being plagued by RE (I recommend to check Most Risky Real Estate Market in Canada? ), while yours is already plundered by it (and by the debts you have taken).

    The current bond market under the ECB is really bad strategy, because it can (and probably will) take many victims in the foreseeable future. Italy and Spain are depend, Ireland is also highly in debt and who the hell cares about the Greek.
    With the ultimate reveal of the plans of the UK prime minister about the Greek immigrants, I´m asking how long can hold this fragile confidence between other European nations?

  61. Robert Glynn Says:

    PQ and Seaf.

    Marxists and Keynesian cheerleaders like Samuelson and the above guy have nothing to contribute to the debate as to how free market capitalism is unshackled and released from the enslavement of the planners. These are people who are planners. They believe that an elite intellectual clique which includes themselves will provide for the masses a social construction that will keep them fed ( for the most part) and out of too much trouble. The underlying mentality is elitist, fascistic and often psychopathic. There is no sense that that this elite would tolerate a free society. Every manifestation of the society they have constructed and which today is crumbling before there eyes, was designed to limit the opportunity of the individual to control the output of his own productivity. This is a recent development in as much as one hundred years ago most of the societal controls had not yet been instituted.

    We cannot look to the Sociologist to map a path for humanity out of this morass. Only the Economists give us a means to do so.

    I do not consider Marx, Keynes, Friedman, Samuelson, Krugman et al as understanding the idea of liberty in the economic context. Look to the Austrians for answers.

  62. EWI Says:

    They believe that an elite intellectual clique which includes themselves will provide for the masses a social construction that will keep them fed ( for the most part) and out of too much trouble.

    The myopia of this smug statement is great-taking. So, Milton Friedman, Hayek etc. are neither intellectuals nor planners, so?

  63. EWI Says:

    And as for this:

    There will be nothing agreed that will get the Germans to go jointly liable for all their feckless neighbours including us. Merkle would be committing suicide if she tries to commit her countrymen to bailing us all out.

    I know that the so-called ‘Austrians’ are famously insulated from the real world, but surely by this stage you’ve noticed that the “feckless” Germans are actually bailing their own banks out here.

  64. Robert Glynn Says:

    smug?

    Look get real guys. Friedman was the leading theorist of the Monetarist movement. The current leading exponent is Ben Bernanke. I rest my case.

    As for Hayak, read his “Road to Serfdom” for his perspective on planning.

    If you think the Germans are bailing out the rest and that this is likely to become the new norm, forget it.

    Germans “feckless”? What are you talking about?

    It might be a good idea for people to try and understand the Austrian position before slagging it off. See http://www.mises.org.

  65. EWI Says:

    Your response bored me, to be honest. Do Hayak’s books come with a template for argumentation on the back, I wonder? I could have written out nearly exactly what you were going to come back with (right down to the stock exhortation to “read Hayak”. Er, no thanks. No interest in Rand, either).

    This I couldn’t pass by, though:

    Germans “feckless”? What are you talking about?

    Who lent recklessly to Irish banks to fuel the Irish property bubble?

  66. John Corcoran Says:

    Professor Paul De Grauwe of the LSE outlines the solution to euro crisis in the link below;

    http://blogs.lse.ac.uk/europpblog/2012/06/07/eurozone-ec-ecb-action/

  67. Robert Glynn Says:

    De Grauwe would have the state effectively take over the bond system. Assigning rates is inherently coercive and can never be seen as a proper reflection of the markets assessment of the risk attached to a bond. It is the markets that expose profligacy and waste by governments. One might as well simple unfurl the hammer and sickle outside the European parliament.

    His idea that countries that are earning surpluses should reverse their behavior and start to run-up deficits is a sick Keynsian joke.

    The problem has always been the scale of the derivatives market which is another way of saying the expansion of the money supply. The debt based fiat currency system was always going to lead to this mountian of debt. http://www.zerohedge.com/news/lie-bor-unwinds-just-how-much-stake

    Also, as TBTF banks have got bigger since 2008 they are now an even greater risk to the world economy. The Libor scandal is the latest revelation. It looks like either a massive de-leveraging of debtors (a Jubilee) or the destruction of the fiat currencies by printing are the two remaining policy options. The social welfare state is still toast regardless.

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