The European Sovereign Debt Crisis

I have a survey paper on the fiscal dimensions of the euro crisis in the Summer 2012 issue of JEP.

Link here

16 thoughts on “The European Sovereign Debt Crisis”

  1. Correction: authoritative

    One could add that the political commitment that will ultimately see the euro survive is not given sufficient emphasis in the concluding section.

  2. No mention of the possible need to reform the ECB?

    I guess it is still too difficult for most economists to think that anything other than inflation targeting is pure evil.

  3. What is being described is the outcome of at least four decades of ‘political financialization’ of economies – an outcome that was flagged at least two decades ago. But the last persons to heed such warnings are politicians.

    The author asserts that, “[it] remains unclear whether national governments have the capacity … “. They do indeed have ‘capacity’ but vote maximization trumps everything. It stops there.

    I again get the uneasy sense that the economic Model-in-Use is Permagrowth. This paradigm is deeply flawed and will produce the fiscal outcomes we are now encountering – with a probability of 1.01. Temporary ‘fixes’ will be attempted and will appear to work for a while. But the underlying ‘problem’ is intractable. An economic paradigm modelled on virtuality rather than on the capacity, sustainability and limits of a physical system is a doomed paradigm. There is ample archaelogical evidence to sustain this argument. The folks that learned this handsome lesson are gone. Lesson was also lost.

    The long-tem solution – a paradigm of economic activity which mandates a non-geometric growth pattern would be dismissed out of hand. Even if there is a high probability that it will not produce the nasty outcomes we are experiencing.

    No main-stream parliamentary party (other than the Nutbangers United Party) will legislate policies for fiscal ‘babance’ (state revenue = government expenditure). The voters would lacerate them. I cannot ‘refuse’ to pay my taxes but there are some things I can do to lower the amount of tax I pay. There are many takpayers who are either doing this or will do it, despite the ‘best efforts’ of governments to widen their tax nets. Less tax revenue and the government is impaled on the skewer of Permagrowth.

    Political Realism of a nationalistic flavour will be the final arbiter. It cannot be otherwise. “All politics (and economics) is local.”

  4. @ Philip
    Very readable and succinct, Thank you.

    No one wanted to be the one taking away the euro-punchbowl, so the malinvestment took on enormous dimensions. No one wants the dirty job of allocating the losses either, hence the political kicking and screaming.

    It’s a game of Last Man Standing among the core EZ banks, which is why pressure is on the ECB to shore up the sovereign bonds in their asset base. The planned attempt to synthetically restore the spread convergence conditions which accompanied the introduction of the Euro is liable to meet the same fate as LTRO. It’s probably bust up and/or debt monetisation bigstyle.

  5. @ Philip

    There is nothing to suggest that real growth rates for advanced economies should exceed a long-term annual average of about 2 percent. Indeed, real annual growth of 2 percent may be optimistic given several factors:

    The latest data is grim; France to return to recession; UK to stagnate in 2012; US annualised GDP in Q2 at 1.5%; Industrial output down in June in UK, Germany, Spain and Italy.

    http://www.finfacts.ie/irishfinancenews/article_1024734.shtml

    However Ireland’s industrial output data went against trend, which promted some crowing today from believers in fairytales.

    The modern sector rose by 9.5% in Q2 but behind the sophisticated work of repackaging drugs, jobs in the industrial sector fell by over 8,000 in the first quarter – – an indicator from the real economy.

  6. MH,

    I think you are a bit out of date with the “repackageing of drugs” vibe. Next time you touch these shores, take a trip down to Grangecastle or go to see Stryker or a Boston Scientific plant and you will see real stuff being manufactured by a skilled workforce.

    Good to see emplyment increase y/y in the devices and pharma sector-only 1300 to 43,600 but it is up not down.

    Food and Bev output is up 13.5% y/y but that is probably not real either is it. Mostly just skinning dead animals and cutting them up or putting coloured water into bottles.

  7. Seasonally adjusted, employment in industry fell by 2,900 in Q1 according to the QNHS, after a rise of 5,300 in the previous quarter. The Q1 number was disappointing, but the worst that can really be said about it before more data appears is that it suggests employment in industry is about flat.

    Out of context, the fall of 8,000 is misleading.

  8. Good one T. Michael Henigan what would you consider “real” ? You seem to have a very old fashioned “metal bashing” view of industry?

  9. @ tullmcadoo

    It would be stupid to suggest that what accounts for the majority of merchandise exports is smoke as it would be stupid to accept headline data at face value.

    1) The ‘Modern’ sector mainly reflecting the industrial output of foreign-owned firms, had a payroll of 97,000 in 2000 and 62,000 in Q1 2012 as per the CSO last Tuesday.

    2) Industrial output in the ‘Modern’ sector from 2000 to Q2 2012 has risen by almost 80%.

    3) So allowing for the change in product mix, a fall in head count of over one-third and a rise in output of almost 80% is quite impressive if not a ‘miracle’ in the parlance of those who are addicted to superlatives.

    4) US Commerce Dept data show that from 2000, the value of ‘wholesale trade’ reported by non-financial affiliates in Ireland has jumped from $10bn to about $70bn — more than small change. So it is reasonable to assume that some output involves little processing in Ireland.

    5) Some chemical production is part of intermediate trade involving exports and reimports. I don’t know how that is tracked to avoid double-counting.

    6) The ‘Traditional’ sector mainly reflecting the industrial output of indigenous-owned firms, had a payroll of 166,000 in 2000 and 130,000 in Q1 2012.

    7) Industrial output in the ‘Traditional’ sector from 2000 to Q2 2012 has fallen by about 10%. So as expected and allowing for productivity changes, an 18% fall in head count coincides with a 10% dip in output.

    8) This week’s CSO data show that ‘Modern’ sector employment fell 5,200 in Q1 2012 and 8,500 overall while employment in Chemicals/Medical devices and Reproduction of recorded media was static and almost unchanged from Q3 2010.

    9) Exports of chemicals/pharmaceuticals/medical instruments at €27.4bn in 2000 rose to €56.4bn in 2011 in current price terms – – rising from 34% of goods exports (balance of payments basis) to 66%, while about 2,000 jobs were added in the sector over the twelve-year period, to a level of 39,000 (excludes recorded media).

  10. @ BeeCeeTee

    Out of context, the fall of 8,000 is misleading.

    You have misled yourself.

    The Industrial Production payroll data is more restrictive than the QHNS.

    The change of 8,500 is seasonally adjusted and the total employed is 40,000 less than the ‘Industry’ category in the QNHS (ILO basis).

    This shows a drop of 7,100 to 232,600 in Q1 2012.

    So let’s not nitpick about the difference.

    Comparisons above related to 2000, are in respect of ‘Industrial Production.’

    The smiley above intruded from elsewhere!

  11. MH,
    thank your for that analysis. I believe you are conceding my points that not all of the modern sector consists of “repacking” boxes and that employment in healthcare part of the modern sector has possibly troughed.

    How much better will we be when the inevitable euro break up occurs?

  12. @tull

    Michael is right to highlight the increasing proportion of employment-lite enterprise in our GDP. The abysmal lack of graduate opportunities for chemists contrasts very unfavourably with ‘our’ impressive chemical export figures.

    No harm to the many good folk working in that sector, but the FDI led ‘modernisation strategy’ has been a cul de sac in national economic development terms. In its own way, its as much of a myth as Finn MCool and the Fianna.

    As for break up of the euro, the divil knows the consequences, but it won’t be funny.

  13. PQ,
    Yes of course he has a point. I thought he over egged it. As to lack of opportunity for science grads, my impression is that demand exceed supply for skilled grads in large areas of med tech , bio tech , pharma and in the CROs. Maybe wage expectations are an issue.
    Of couse euro break up would be ugly but in the medium to long run the destruction of the entitlement culture that the left calls social democracy would be a boon.

  14. There is no overegging.

    Add is spurious services exports that may acoount for 40% of the total and all the annual growth in exports, we believe that what is fantasy is real.

    When a Facebook advertsing sale in Tokyo becomes an Irish export, what is real? It is an accounting transaction.

    It feeds delusion but the reality is in the jobless figures.

  15. Philip, you might be interested to hear that this paper is (already!) on the syllabus for the 400-level European Economy course at the University of Michigan.

Comments are closed.