Article for the Irish Independent Post author By John McHale Post date August 23, 2012 I reflect on achievements and remaining challenges in a piece for today’s Irish Independent. Categories In Uncategorized 35 Comments on Article for the Irish Independent ← Irish SME credit supply and demand: comparisons across surveys and countries → Amortising Bonds and Sovereign Annuities 35 replies on “Article for the Irish Independent” @John McHale ‘Maintaining public support depends on ensuring that the burden of adjustments are seen to be spread fairly, protecting the most vulnerable and ensuring that more powerful interests — not least in the public sector — do not succeed in pushing the heaviest burdens to the less well-organised, including younger generations. This is the ‘How?’. +1 I would have added ‘capital’ to ‘more powerful interests’. For a rating agency perspective, Simon Carswell reports on an interesting interview with Dietmar Hornung of Moody’s here. ‘The decline in investor perceptions of Irish default risk over the last year has been dramatic. But, with investors still pricing in a 50-50 chance of an Irish default, there is no room for complacency.’ No comment on the ECB role in buying/supporting PIGS bonds and driving down yields? Mortgage default, credit drought and GNP weakness go unmentioned? You are prognositcating on a headless dying turkey by ignoring the decapitation aspect and focusing on its otherwise good health. I’m unimpressed, RTE will spin this baby to vulgar and they will lap it up “perceptions of the Government’s capacity to push through a daunting fiscal adjustment” Last Sunday’s Sindo featured an interview with Minister Burton who said “middle Ireland” couldn’t take any more hits. And it wasn’t 98 FM she was discussing .. @John, “On the broader growth prospects, it is worrying that the long-anticipated return to robust growth has been continuously postponed, with a pattern of downward revisions to year-specific forecasts as the target date approaches. With economists struggling to understand the growth prospects of the post-bubble Irish economy, a notable downside risk is the continuation of prolonged “balance-sheet recession”, with households, businesses and banks all struggling to repair their financial positions.” I think there are two distinct issues in here struggling to get out. 1) The poor performance of macroeconomic forecasting models in the current and recent economic context. 2) The problem of what policies will be effective in getting growth going again. On the first, the longer the problem lasts, the more I become convinced that the macroeconomic models underlying the forecasts are broken. While the detailed workings of the main models are secret, from what I know of macroeconomic models in general I have a strong suspicion that the problem lies in assuming that the marginal relationship between exports and domestic spending by exporting businesses in each major exporting sector is equal to the average relationship for the sector. This equality is demonstrably false for key sectors, in a direction that would likely cause prospects for growth to be overestimated. On point 2, my personal view is that worrying less about an a balance sheet recession that cannot be prevented, and more about improving cost competitiveness and reducing consumer prices, is the only way forward. What struck me this morning when I saw the Moody’s story was that it has taken an outsider to give some Irish insiders pause for thought about ‘returning to market’ without an adequate safety net. I said a few weeks ago that I’m puzzled by this big deal about 2013, beyond bragging rights for Kenny/Gilmore and Noonan about reclaiming sovereignity before 2016 and so on. John, you appear to be responding to the change in international sentiment but the global recovery is very fragile and we don’t really know what the growth level will be from 2014. We do know however, that there is far from a magic formula on the jobs crisis available and that should be the main priority. Positive sentiment is important but the huge risk in Ireland is that the spin machine will go into overdrive while the soufflé deflates. There have been NO significant longterm reforms put in place and the praise for what has been achieved so far, is overdone. Most of the people who have incurred the biggest adjustment are not seen in the media — out of sight, ot of mind. Thank them, not the politicians and others whose nice earners/pensions are intact. The economy has no obvious jobs engine while too many are drawing from the State as if we remain one of Europe’s richest countries. Have a look inside the soufflé and wonder where 200,000 net jobs can be magicked from! A very well balanced piece which, nevertheless, manages to touch all the bases. I agree with the points made by BCT (which may come as a surprise to him). Gavyn Davies of the FT has two really fascinating contributions in recent days on the subject of “uncertainty” (based on the teaching, and personal investing experience, of Keynes). It is evidently to be the new fashion! Just as well! Nobody – economic pundits included – knows what is going to happen. http://blogs.ft.com/gavyndavies/2012/08/19/the-plague-of-economic-uncertainty/#axzz24OcbXUOf http://www.ft.com/intl/cms/s/0/31f0e3f8-eaba-11e1-984b-00144feab49a.html#axzz24OdBu8sI ‘Most of the people who have incurred the biggest adjustment are not seen in the media — out of sight, ot of mind. Thank them, not the politicians and others whose nice earners/pensions are intact’ “While there is no easy answer to the funding crisis in defined-benefit pension schemes, risks placed on pensioners through default risk on sovereign bonds should not be neglected.” If I was a pension fund manager I’d probably wait to see what decision is taken by the powers that be in October. There are still a lot of questions to be answered before official Ireland should start believing its own BS AGAIN. Will the debt massaging make room on the states balance sheet for the not insignificant chance of another wave of domestic bank bailouts, not to mention the recapitalization of Nama. Will the ESM take that exposure? Will the Euro survive? If so, what will our place be in Europe? Will the ECB start the printing press? Will the Germans start paying themselves more and start buying stuff from us? How will Irish citizens react to the next round of high hanging fruit picking budgets? How will the rest of society react when they realise a cut in Psector pay will only raise a billion or so? Will they stop buying the Independent? Will the Energy/Health/Dental/Rates/Rent/Childcare etc etc fees ever get taken on? Will Irish children ever learn a 2nd language? Will they all be obese? Will they have a job? Will we ever get past the ‘smart economy’ sound bite? Will Ireland get a proper public transport/cycling/broadband-Telecoms infrastructure? Will our 5 year government dictatorship terms get replaced with something that might incentivize the production of proper policy? Will public consultations ever mean anything? Will Ireland get a proper standard of journalism? Will Leitrim’s Shale gas be explored? Is there more oil of the coast of Ireland? Will electric cars get cheap enough, fast enough? Will there be some massive game changing technology? Will anyone responsible ever get brought to justice for attaching our country to the worst banking system in history? And most importantly, will Jedward ever be stopped? @ John Define “most vulnerable”. Define “least vulnerable”. If people are vulnerable because they chose to use drugs,say, should they be protected at the expense is someone who works. I’m sick of Ireland becoming an inverted meritocracy – a whingocracy and moanicracy where lack of achievement is always someone else’s fault. My brother, a dentist, will be emigrating next year because of the squeeze on the middle class to protect the vulnerable. No other country in the world transfers more wealth to its vulnerable. No other country has welfare for life for its most vulnerable. This mantra is rubbish. Society cannot guarantee everyone a good life – it can only guarantee the opportunity of one In Sweden they have reducing welfare payments for unemployment. Same in most of the western world. What is wrong with people here. Why is social welfare being protected at the expense of the rest of the economy? The Irish pathology is a desire to always be liked. It’s better to be respected than liked. Hope you enjoy the impact of Grexit on Irish bond yields (btw won’t happen til 2013) @ Eureka The reasons for healthcare professional unemployment are more complex than you suggest. Many individuals have made a good living from providing state funded services to people on lower incomes, so cutting them further is only going to send more providers to the airports. It’s going to happen nonetheless. The structure of the professions is a larger part of your family problem, which is also a core problem of our society. These service monopolies are run in the interests of their members, but particularly in the interests of the most dominant individuals and institutions. Ireland has always been a producer of professional labour for other countries, as the academics well know. The professions have now pulled up the drawbridge in traditional fashion, remorselessly excluding new graduates ‘until the good times return’. Any other approach would be unthinkable. PS Family members excepted of course @ Eureka: “If people are vulnerable because they chose to use drugs,say …” Like nicotine? Like ethanol? Like sucrose? The prohibited ‘drugs’ scene is miniscule by comparison with the three aforementioned (non-prohibited) addictive substances. No one is being ‘protected’ at the ‘expense’ of those who are privileged enough to have an earned income. Taxes are the economic rent we pay for incompetent, venal and power-hungry politicians. Who are addicted (there’s another!) to spending other peoples money – including their future incomes. There is nowt wrong with the folk Eureka – its our politicians and their sychophantic followers and financial backers who need reforming. Play a little mind-game. Reduce or abolish some SW and see what happens. In effect you are attempting a large-scale social experiment with human beings. An experiment, which if conducted on dumb animals, would get you a jail sentence. Think about it. @ All Derke Scally’s interview (IT today) with Schaeuble records; “But, as head of a ministry that itself has an increasingly hardened view of Athens, Schäuble has proven a tough negotiator with Greece. He has threatened to cut off funding to Athens in the past. Today he insists the programme will remain alive as long as it is “the best solution for Greece and Europe”. “The final goal is sustainable stable economic development in Europe,” he says. “If we do things that overwhelm Germany’s economic potential in the view of the markets, then Europe is weak as a whole.” This strategy of hard-nosed empathy has defined Berlin’s dealings with Ireland, too. For months, Taoiseach Enda Kenny and Minister for Finance Michael Noonan have lobbied Schäuble for relief on Ireland’s €64 billion banking debt burden. Recent events have, they believe, strengthened their hand: positive troika reports; the passing of the fiscal treaty referendum; and the positive reaction of markets to Irish bond market auctions. The final piece of the puzzle, in Irish eyes, was agreement of EU leaders and finance ministers that Ireland receive concessions equivalent to any debt burden-sharing deals agreed for Spain or others. Irish officials insist that, even if EU political agreements from June and July don’t explicitly state it, leaders have committed to a political deal in October. After a meeting with Noonan last month, a spokesman for European Central Bank president Mario Draghi said the position on burden-sharing was “evolving” and would be “reflected in the Irish adjustment programme”.” Curiously, the leading article – recording un-nuanced German opposition – does not draw the obvious conclusion with regard to the attitude of Schaeuble which also happens to be that – as far as I can see – drawn by John McHale. “Notwithstanding the uncertainties relating to growth and eurozone crisis-resolution policies, the best domestic course is to push ahead with the difficult fiscal adjustments required for debt sustainability, avoiding a political gridlock that would cast doubt on the capacity to see the adjustment through.” Getting recalcitrant governments, fearful of the domestic political consequences, to accept this view remains the central problem. re: Schauble interview by Derek Scally: I have to say that I am incensed by Schauble’s remarks for a number of reasons. 1. Once again, he is disavowing the summit communique of late June, that Merkel signed up to. What is the purpose of summits if any agreements arrived at can be rubbished before the ink is dry on them. The substance of that summit communique has now been rubbished several times and on several different issues by Schauble 2. He then makes a case for how the markets might react adversely to ‘Aid programme for Ireland topped up’. Why should we listen to any views of Schauble in relation to how the markets would react. What has he got right so far? Nothing. He has however succeeded in prolonging the worst crisis in Europe since WW11, and all to Germany’s benefit. 3. The more I see of Germany’s strategy, the more it seems to me to an economic version of Falkenhayn’s ‘bleeding white’ strategy of the French at Verdun in the Great War. Until now it has been successful. He has succeeded in weakening every other European country, while leaving Germany stronger. [Ref The price of Glory, Alaistair Horne] Ireland should now take a case against the ECB, as suggested by Colm McCarthy, for recovery of all bank bond outstanding as of Sept 2010, the time the first guarantee ran out, a course of action that I felt should have been taken a long time ago. Ireland will get nothing from ‘negotiation’ while Schauble holds power. In any case, the post Sept 2010 bank bonds, should never have been paid. It should not be a question of negotiation. It is a question of recovering assets lost through blackmail. One will not find any dictionary that defines Blackmail as an: ‘Aid programme for Ireland topped up’. I wonder will it be long before food banks make an appearance as part of the Irish social Welfare system http://www.guardian.co.uk/commentisfree/2012/aug/23/food-insecurity-workforce-cowed-poverty @ All The views of another influential German. http://www.financialexpress.com/news/german-court-will-clear-funds-for-euro-zone-says-regling/991774/0 @ Joseph Ryan Are you not being a bit harsh on Schaeuble or, rather, failing to see the issue from his point of view? He sees a country “sticking to the programme” (which Regling sees as working for the EA as a whole) and succeeding in the eyes of the markets. He makes the perfectly reasonable point that now is not, perhaps, the moment to disturb the perspective of leaving it by implying that further assistance is essential. He is also clear with regard to the possible precedents that might be set for other programme countries (not to mention the possible of the impact on the December budget of which he cannot be unaware). Applying the same logic, any concessions to others going beyond what was agreed for Ireland must be matched. Sentiment does not come into the conduct of business between states. Going full steam ahead with flags flying and all guns – including legal – blazing may be a seductive idea, and appealing to an aggrieved populace, but is hardly likely to succeed. @DOCM No, I do not believe that I am being hard on Schaueble. Neither am I suggesting that Ireland should abandon the program of budget balancing, though I disagree fundamentally with the details of how that is being achieved. ‘Further assistance’ is not the point. The issue is whether the original actions of the ECB had a legal basis or not. As you say sentiment does not come into it. There is no need for flags to fly etc to have a judicial review of the ECBs action in late 2010. There is of course the obstacle that an ECJ decision could divide, not on legal issues, but on nationalist lines; in which case Ireland would lose. But so be it. The discovery process would certainly inform us of the supposed independence of the ECB. In fact it is likely that the ECB would go to great lengths to stop Ireland taking a case for those very reasons. Separately altogether from the Irish case, the extent of the backsliding and reneging from the June communique, particularly by Schaueble, brings into question the bona fides of Germany in relation to its desire to resolve this crisis. Ergo my reference to the ‘bleeeding white’ strategy. @DOCM Your loyalty to The Conflationist Fallacy goes beyond the call of duty. Its implied message to the Irish lower order serfs being, as it has been for some time, ‘suck it up suckers’. Admirable consistency. @JMc. “From an Irish perspective, it is bad luck that the eurozone crisis has escalated just as the domestic effort began to bear fruit. There is little doubt that a big portion of the remaining default risk relates to broader eurozone concerns.” With respect, I think you’ve got it completely the wrong way round. This is the greatest piece of luck our bumbling adminsistration has had because it is that very escalation that has brought about the increasing possibility of eurobonds or the greater flexibility of the ESM into play. The delinking of banking and sovereign debt (the proverbial ‘game-changer’ if it does come to pass) would never have occured without an escalation of the crisis. IN this regard Kenny has been an incredibly lucky general…. It is not so much a case that the current administration has achieved a single thing in europe but that they have profitted from demise of others, something even the galactically incompetent previous government could have done. They have implemented tough budgets with more to come largely under the stewardship of the Troika….but tough and all as they were, the really tough ones are to come as they can no longer be faithful to the holy trinity of not increasing taxes, not reducing social welfare and not messing with the sacred croke park agreement. The fairest outcome would probably be a mix of tackling all 3 issues – their political popularity would stoop to an all time low however if they took the fair and brave decision – they will get my kudos if they have the Kahunas to take that approach. Luck will only take them so far in rebuilding this country. @ VB JMc’s “it is bad luck that the EZ crisis has escalated” would appear to refer to the fact that there will be no 3% growth driven by exports to soften the blow of the cuts. Muscle will have to be removed. @ Joseph Ryan With the best will in the world, I cannot follow your logic. It seems divorced from both the political and economic reality and to be based on a complete misunderstanding of the strength of the forces in opposition. I concede that your view has support. It is curious to note, for example, the RTE coverage today on the efforts by Greece to get still another concession with regard to its programme as if Ireland was somehow on the outside looking in rather than the inside looking out. But the essential point is that it is not, objectively, in our interest to pursue the line you suggest as it would give rise to exactly the phenomenon that Schaeuble identifies of (i) making markets doubt our commitment to reform and (ii) increase the default premium. The reform programme and the senior bondholders issue simply cannt be separated and it is rather difficult to see how the balancing act required between the two can be achieved. Indeed, one wonders if the game is worth the candle. It may be that this suits German interests but that does not take away from the validity of the argument. By the way, the impartiality of the ECJ has never, to my knowledge, been called into question. @ All FYI http://www.iiss.org/conferences/iiss-oberoi-lecture-series/klaus-regling/ @ Eureka ‘The professions have now pulled up the drawbridge in traditional fashion, remorselessly excluding new graduates ‘until the good times return’. Any other approach would be unthinkable’ +1 I believe all citiznes should be given the oppurtunity, training and encouragement to work. I believe that the waste of human capital makes everyone worse off in society, and is the root cause of some of the drug abuse you talk off. A job is worth an army of social workers and all that. So yes I believe that even legal/illegal drug takers/abusers should be entitled to help. In conjucntion with those in employment not at the expense of those in employment. A person should be allowed as many chances as they’re willing to take. I am in favour of employment of the professional classes in the same way as I’m in favour of employment for every class. The professional classes are getting and have got plenty of state benefits. A lot of the time the vast majority of their more expensive education was paid for by the state. They availed off massive state subsideies through pension and investment reliefs etc. Then in the health sector for example if your lucky enough to get a job they’re paid salaries of about double that of say a docter in Finland (similar population/ as expnesive to live in except when in comes to health care). I am in favour of rewarding effort but a salary of 15-20 times that of someone who is on the minimum wage seems a bit too much of a reward to me, despite the admirable effort. ‘Society cannot guarantee everyone a good life – it can only guarantee the opportunity of one’. I agree, but ripping the social floor from below the unemployed isn’t the way to go about achieving that gaurantee. Remember when there was amply work available there was only 4/5% unemployment. Do you thing the other 10% just woke up one day and felt lazy? One would have thought that any rational investor in bonds would be positively impressed by a sharp and genuine fall in Ireland’s debt/GDP or debt/GNP ratio, whatever its source. Any attentive investor would also have noted comments from members of the Irish government that imply significant debt relief is required to assure Irish debt sustainability, and that their belief in the sustainability of Irish sovereign debt relies on an expectation that we will be compensated for mortgaging our future to prop up the eurozone banking system. It seems to me that Schaeuble had to scrape around for a plusible sounding excuse for saying “no”, and that the best he could come up with was pretty poor. @BCT +1 Pretty poor excuse is a generous description of his almost child-like explanation….”i can’t help you fill in the big hole because the people who want to see the hole filled will think you are not really committed to filling it in if others are seen to be helping you fill it” His position is somewhat akin the old Vietnam war anecdote about having to burn the village in order to save it. Look the public sector wage comparisons aren’t as straight forward as they look. You need to look at work load, working conditions, length of time in training, infrastructure, ability to supplement income privately and then compare. Its apples and oranges. Nobody I have met from abroad can understand the generosity of our welfare state. And I’m talking people from Sweden, Canada etc. We need a real debate on this. Sorry to harp on about this but why has John made no attempt to tackle welfare reform? Why has there been no meaningful threads on welfare reform on this blog? I think it’s because nobody wants to be seen to be not nice. We do that in this country – we set strict invisible limits for the parameters of debate. It is actually a perfectly legitimate political position to believe that there should be no welfare state at all. It is not one I hold but it is a legitimate view point. The reason I’m annoyed about this at this point is that the government is about to increase PRSI to prevent any reduction in dole. That is is the exact opposite to what they should be doing. There comes a point when we have to stop using the language of vulnerable etc. We must be much more specific. Who does our society need to protect? And where does personal responsibility come into this? All I ask is just one thread on the Irish welfare state: – Can we afford not to reform it? @Eureka Well of course we can afford to reform it. However one needs to be mindful of the John Delaney syndrome. i.e People on mega-salaries and even more mega pensions explaining that ‘we’ have to make savings. The peculiar definition of ‘we’, does not usually include themselves. The Social Insurance Fund is in serious trouble in 2012/2013. Information on it is hard to find, but I managed to dig up something from 2010, downloadable from the following link. http://www.welfare.ie/EN/Policy/CorporatePublications/Finance/Pages/sif2010.aspx You should note that ‘universality’, is a big issue in relation to much of the expenditure. My understanding is a millionaire widow/widower would be in receipt of the full amount of the State payment. Joan Burton has moved from Jan 2102 to resolve one serious issue; the deficit in the Redundancy Fund, with the rebate going down from 60% to 15%. That reduction has imho not only saved money but has managed to to force employers to think of alternative strategies, in the absence of an very questionable incentivised scheme to make people unemployed. A facility used over the years by many very large and profitable companies. @ Joseph Ryan This is not rocket science – lets look at models that work and copy them. Let’s copy the Swedish model. 1: What is the structure of Swedish unemployment assistance? 2: how do they do rent allowance? Etc, etc Sweden is the model welfare state and yet I bet their entitlements are much more targeted and less expensive than ours. But I make a bet with you – this will not be given serious consideration on this blog because everyone here just wants to be thought of as nice. Self serving spin. I wonder will our distinguished Minister for Finance Michael Noonan be too busy attending JP’s next bash, to deal with our economic disaster–caused entirely by politicians and their cronies. @Eureka ” But I make a bet with you – this will not be given serious consideration on this blog because everyone here just wants to be thought of as nice.” That may be the case. Personally, although coming from the left, I would have no problem in narrowing the SIF deficit by a billion or two. It a question of who do want to be nice to. A self employed professional (doctors/consultants/ farmers/ legal eagles etc) pays 5% PRSI (it used to be 3%), while an employee/employer pays 14.75% on behalf of the employee. The principal and longest lasting benefit, by far, is the retirement pension. Notwithstanding that there are SW benefits that the self employed are not entitled to, it is very clear that they are being heavily subsidised within the SIF fund. There is a strong argument that self-employed people with incomes greater than a de-minimus of say ~60,000 should have to an equivalent to employers PRSI. And why on earth should widows/ widowers pension benefit and other benefits not be income related. After all, the contributions ceiling existed to advantage many people right up to a few years ago. It is only logical therefore that the benefits should be based on those ceilings that existed at the time the contributions were made. The above two ‘adjustments’ would of course affect well off people. I doubt that they will happen. The percentage cut, aka the John Delaney cut, seems to pass for an equitable solution in Ireland. @ Joseph Guarantee I’ll be right on that bet. Already though you can see that this isn’t impossible. All benefits should be income linked. Don’t think there’s any problem with that. And on the other end welfare should be based on the Swedish model. But John et al don’t tackle this. It’s an easy debate to have. Let’s have it Nicely crafted speech by Regling ‘If the adjustment and reforms are duly implemented, Europe will be back on its long-term potential growth path of the order of 1-2%, barring the world economy being hit by other shocks. For many, this growth rate may seem like underperformance, but let’s be realistic. At Europe’s level of GDP-per-capita, which is close to the global technological frontier, and given our negative demographic trends, 1-2% real growth is what the euro area can sustainably achieve over the next decade.’ That’s the benign scenario. He doesn’t say too much about debt sustainability in that context, or in the more probable worse growth scenario. Comments are closed.