Mortgage Principal Relief: Possible Lessons from the US

On the Private Debt Relief thread, commenters Brog and John Gallagher (same person?) usefully draw our attention to the debate on participation of the GSEs (Fannie Mae and Freddie Mac) in the HAMP-PRA programme (Home Affordable Modification Program – Principal Reduction Assistance).   

The federally sponsored GSEs hold a substantial fraction of US mortgages, and so their position is somewhat analogous to Ireland’s state-owned banks.   The GSEs are administered by the independent Federal Housing Finance Agency (FHFA).    John draws our attention to correspondence from the US Treasury to the agency, urging its participation in the HAMP-PRA programme.    (See here; speech by head of FHFA at the Brookings Institution here.) This program, one of a number in operation to improve the functioning of the US housing market, provides subsidies to mortgage holders for principal reductions.   The gist of the correspondence is that such reductions could, depending on the case, have a positive net present value for the owner of the mortgage.   Indeed, it is argued that the gains in NPV would more than cover the cost of the subsidy, resulting in a net gain to taxpayers.   The correspondence also discusses strategic default concerns. 

Of course, given the differences in the housing markets – e.g. the relative importance of non-recourse loans in the US – the estimations are at best suggestive for the Irish case.   But the broad approach to thinking about the issue is useful.  

One issue that is not explicitly taken into account is the possible macroeconomic benefit of facilitating household balance sheet repair.   Here again the Irish situation is different given the state creditworthiness challenge and the importance of avoiding further losses at the banks.   A programme that ends up with a net cost to the state (from combination of any subsidy and the need to inject further capital into the banks) would further erode the financial position and creditworthiness of the state.   To the extent that weaker creditworthiness (and the associated “fear of default”) feeds back to higher interest rates and lower growth this would be a macroeconomic cost.   Nevertheless, it is worth looking at how these issues are being addressed elsewhere. 


SSISI Seminar

Here are some details of an upcoming SSISI seminar.

Justin Doran, Declan Jordan and Eoin O’Leary of the UCC School of Economics are to present a paper to the Statistical and Social Inquiry Society of Ireland at the Royal Irish Academy on Dawson Street on Thursday November 1st at 6pm. The paper is called Effects of R&D spending on Innovation by Irish and Foreign-owned Businesses. Details and a draft of the paper are here.

The paper finds that Irish owned businesses are significantly more likely than foreign-owned to introduce new products as a result of creative R&D work undertaken. Foreign-owned businesses, which spend nearly six times more per worker on R&D than Irish-owned, enjoy very high returns mostly from the purchase or licence of patents. According to the authors this points to a dichotomous Irish innovation system.


An EU budget for the fifties not the future

This was the reaction of Swedish EU affairs minister Birgitta Ohlsson to the publication yesterday of the Cypriot Presidency’s revised proposal for the next EU multi-annual financial framework (MFF) covering the period 2014-2020. This is because it proposed big cuts in research and cross-border infrastructure while largely protecting the CAP budget in line with the Commission’s proposal.

The Commission has proposed a trillion euro budget (actually €1,091,551 million for EU-28 including off budget items) for the seven-year period which, depending on how the comparison is made, is seen as representing a 5% real increase in the resources available to the EU. The European Parliament, never shy about spending other people’s money, considers this a minimum amount and would prefer a higher increase. In the other arm of the budget authority, the Council of Ministers, opinions are split. The net recipients, grouped in the ‘Friends of Cohesion’ group, support the Commission proposal. The net payers, which form the ‘Friends of Better Spending’ group, want to rein back the Commission proposal to a real freeze in resources or even more. But there are differences within this group over whether the cuts should fall on the CAP or cohesion budgets (both of which are roughly 40% of the total) or on the remaining headings which account for just 20%. Not surprisingly, both the Commission and the Parliament’s Budget Committee reacted caustically to the Presidency proposal yesterday.

The Cyprus Presidency proposal explicitly sets out the implications of how a reduction in €50 billion might be made, while recognising that in the negotiating endgame further cuts will be required. The following graphic shows how it proposes the cuts should be made (all changes relative to the Commission’s revised MFF proposal in July 2012). Further details on the makeup of these figures can be found in this post.

The protection of farm spending in the EU budget emerges clearly from these figures. While in the short-run the Irish authorities will be pleased with this outcome (even if they will not state this in public, we are negotiating after all), it is worth asking whether our longer-term interests would not be better served by a budget for Europe rather than a budget for farmers.


Requirements for solvency

Wolfgang Munchau has another thought provoking piece in Monday’s FT.   While he believes that the announcement of the ECB’s OMT programme has stabilised things for the near term, he remains pessimistic that the crisis – which he sees as fundamentally one of solvency rather than liquidity – is on a path to being resolved. 

Although I share many of Wolfgang’s concerns, my take is a bit different.    My starting point on the solvency issue is also quite pessimistic.    Defining state solvency is not easy.   A necessary condition is clearly that the debt to income ratio is not on an explosive path.   In terms of levels, we see that some countries (Japan being the most dramatic case) appear to be able to roll over debt and fund deficits even at debt to GDP ratios in the region of 200 percent.   On the other hand, low-income countries can struggle to be creditworthy with debt to GDP ratios of 20 to 30 percent.    Lacking their own central banks that can lend to governments in their own currency in extremis, euro zone countries with high debt/deficits and weak/uncertain growth prospects have been revealed not to be creditworthy.   In a very real sense these countries would not be solvent without official sector support – and are unlikely to become so for some time.   The important question then is whether official sector policies can be designed to allow countries to be robustly creditworthy.   Designing these policies faces a double credibility hurdle: that the support will be there (if only as a backstop) if countries meet the conditions for eligibility; and that it is credible that the countries availing of the actual/backstop support can meet the conditions. 

The requirements for effective official support policies seem to be the following:  (1) Supports must be reliable – countries must be able to rely on the support being there without forced PSI as long as they continue to meet the conditions.  Where PSI is deemed to be unavoidable, this should be recognised early and done decisively so that it can be taken off the table to the maximum extent possible.    (2) The conditions must be reasonable – taking into account underlying growth prospects and the negative impacts of fiscal adjustment on growth, the required adjustments must not push the political capacities of governments to push through large adjustments beyond the breaking point.  (3) The conditionality must be flexible – unanticipated adverse growth outturns should not lead to requirements for ever larger adjustments.   And (4) the link between banking-sector losses and state debt must be broken.  

Euro zone crisis resolution policies are moving slowly in this direction, although there is some way to go on both reliability and flexibility in particular. 

Following the IMF’s new analysis on the likely size of fiscal multipliers in a liquidity trap, there is a need to revisit the appropriate conditionality regarding fiscal adjustment.    But where the current policy stance leaves huge uncertainty over whether the crisis will be resolved, this must also act as a huge break on growth.   (I discuss this further in an Irish Times piece last week.) 

Of course, the policy mix described above is a big ask for stronger countries, either directly or through the ECB.   They are being asked to take on large risks and put a lot of faith in the willingness of countries to meet the conditions.   The development of the necessary crisis resolution and prevention policies must be seen as a two-way process, where all euro zone countries submit to tighter rules on budgetary management and more intrusive surveillance (see Mario Draghi’s recent comments in an interview here).   Much of the debate in the run up to the fiscal treaty referendum seemed to completely miss this point, reaching its nadir in complaints about a “blackmail clause” regarding access to the ESM. 

I believe the crisis can be resolved.   But only if the stronger countries recognise the kind of ongoing official support regime that is required to robustly restore creditworthiness, and all countries recognise the necessary pooling of sovereignty that is required to make this regime politically feasible. 


Private Debt Relief

The debate over the private debt relief has developed a lot of momentum, with the both the Central Bank and the Department of Finance now seemingly increasing the pressure on banks to provide debt relief.   While there certainly is a case for targeted debt relief, it seems to me that there are a number of confusions in the debate.   I think the following points are worthy of some discussion. 

1.       The distinction between accounting loss recognition and debt relief

This is a point that has previously been emphasised by Greg Connor (see quote here).   The processes of loss recognition for accounting purposes and debt forgiveness are very different.    In part motivated by the Japanese experience, it was recognised early in the crisis that it is critical for banks to recognise losses and then to be properly recapitalised.   Failure to do so can lead to the “zombie banks” phenomenon, whereby effectively undercapitalised banks are unwilling to lend.    This can further be associated with “zombie borrowers”, whereby banks engage in “evergreening of accounts – essentially lending more money to prevent default – so as to avoid having to recognise the losses.  

Through the PCAR process, Irish banks have been forced to recognise losses and to be propertly recapitalised, although concerns about mortgage losses have left lingering doubts about whether the process has gone far enough.   But this process is consistent with banks doing everything possible to maximum the recovery of loans – even loans that they have written down on their books.   Minimising the need for yet further capital injections requires that banks only forgive debts if it actually increases the expected recovery.

2.       The “debt Laffer curve”

I have mentioned the “debt Laffer curve” before, but I think my exposition just caused confusion.   But I still think it is a very useful device for thinking about the case for debt forgiveness.   The basic diagram is here.    The horizontal axis measures the present value of payments to the bank assuming full repayment on a given debt obligation.   The vertical axis measures the expected present value of the repayment.   The “debt Laffer curve” shows the relationship between the present value of the debt obligation and the expected repayment.   The basic case for (mutually advantageous) debt relief comes from the possibility of the curve beginning to slope down beyond a certain point.   This means that debt forgiveness could actually raise the expected value of repayment.   This could happen, for example, if lowering the debt burden means the borrower has stronger incentives to raise their income or to avoid default (where repossession would b e costly for the bank).    Such cases are certainly conceivable, but it is a fairly demanding hurdle.  (I would be very interested in commenters’ views on this.)  

There is, of course, the extra complication of the much discussed moral hazard/strategic default.   If the bank provides relief for people in certain conditions, then there is the potential for a bad “pooling equilibrium” where people have the incentive to be in those conditions.   Colm McCarthy has famously put this in a pithy way:

Since you cannot get blood from a stone, it is desirable to streamline the personal insolvency arrangements so as to recognise this reality.  But no incentives should be created which encourage those who can pay to disguise themselves as stones.

Now it may well be that the government wants the bank to provide debt relief even where the curve is upward sloping but relatively flat.   The relief would have the added advantage that it could help stimulate household spending.   But if this is the policy, then it is better to admit up front that the policy means bigger losses for the bank and, where the bank is State owned, ultimately for the State.   There is a danger that State-owned banks will be forced to follow a range of political objectives, storing up longer term fiscal problems and making harder to gauge the ultimate performance of the banks.   If the government wants broader debt relief, then it is better to provide appropriate subsidies and then let the bank get on with – and be accountable for – maximising value. 

3.        Insolvency rules

One way to make it more likely that the bank has an incentive to forgive debt to prevent outright default is to strengthen the “threat point” of the borrower through more debtor-friendly bankruptcy laws.   Making bankruptcy or other insolvency rules more borrower friendly is likely to reduce the value of the banks.   But I think the focus here should be on the overall design of the regime.   The current regime is archaic and brutal and needs to be reformed.   If moving to a modern regime results in losses, then additional losses for the banks is a bullet to be bitten.

However, much of the discussion in pitched in terms of a trade off between debt and creditor rights – and creditors understandably get little sympathy at the moment.   But it is important not to forget the “instrumental role” of creditor rights in ensuring there is an incentive to provide credit in the first place.   Everyone’s creditworthiness is tied to there being reasonable protection of creditor rights. 


Statement by the EC, ECB, and IMF on the Review Mission to Ireland

available here.

Banking Crisis Economic history Fiscal Policy

Benchmarking the US and UK economies post-2007

What is it with these economic historians? Schularick and Taylor cast a dim eye on UK economic performance here.
HT Paul Krugman.
Economic history EMU Fiscal Policy

In which Barry Eichengreen and I are shocked



Kilkenomics 2012

The annual festival where economics meets comedy in Kilkenny is on this year from 1st to the 4th of November. I’m speaking at it this year and really looking forward to it. The lineup looks good and the sessions will definitely be interesting. Here’s a video of the type of stuff that goes on. The festival has always sold out. I’m told the tickets are almost gone now so if interested, readers of this blog should book them now.


Ajai Chopra on the fiscal multiplier in Ireland

The following statement by Ajai Chopra, Deputy Director in the European Department of the International Monetary Fund (IMF) is issued in response to media queries regarding the recently published research in the IMF’s World Economic Outlook on the impact of fiscal adjustment on economic growth and its implications for the EU-IMF supported program in Ireland:

“Putting public finances on a sound footing and promoting a durable economic recovery are both imperative for Ireland’s future. To contain the impact of fiscal consolidation on growth, adjustment has been— from the start of Ireland’s EU/IMF-supported program—phased over several years. The composition of budget measures is determined by the government, with the IMF, together with the EC and ECB, emphasizing the importance of implementing high quality measures that are as growth friendly as possible.
“In the current discussion of the impact of fiscal adjustment on growth, it is important to note that no single fiscal multiplier is applicable to all countries and circumstances. And although there is uncertainty around any estimate of multipliers, there is no compelling evidence that a higher multiplier was at work in Ireland than the one assumed under the program.  With overburdened bank, household and SME balance sheets, and weak growth in trading partners, a number of factors besides fiscal consolidation have been a drag on growth in Ireland.

“The pace of consolidation under the program has struck an appropriate balance and continues to do so for the period ahead, enabling Ireland to make steady progress in reducing fiscal imbalances while protecting the still fragile economic recovery.”


Colm McCarthy:Ireland gets its reward for being EU’s little pet poodle — nothing

Colm McCarthy expresses understandable frustration with the pace of developments in meeting the commitments made on June 29th(see here).   Central to Colm’s criticism is what he sees as a fundamental inconsistency between the government’s claims of success in its crisis-resolution policies and calls for some form of official relief on banking-related debt.

Since the resort to an EU/IMF bailout in November 2010, the Government has pursued a strategy with two central components. The first is that Ireland’s debt is sustainable, since the economy is recovering and budgetary adjustment will be delivered on schedule. Ireland will re-enter the bond market and exit the programme at the end of 2013. The second is the pursuit of relief from a portion of the bank-related debt, on the grounds that it was improperly imposed.

Last week’s events should highlight once again the inconsistency of this strategy. If things are going fine, why is there any need for debt relief? The best case for debt relief (Greece was relieved of €100bn) is inability to pay.

The insistence that things are fine, that budget adjustments are on schedule, three-month Treasury bills can be sold and Ireland will exit the rescue programme next year, is a serviceable domestic political message. But it is also an open invitation to our European ‘partners’ to offer no assistance whatsoever outside the terms already agreed.

A better negotiating platform, and one with at least equal plausibility, is the following: that the debt is not sustainable and will reach 150 per cent of national income; the economy is flat and will remain so; the politics of further retrenchment are getting too difficult and debt relief is inevitable. The Government should quit behaving like the marketing arm of a debt-management agency.

Although I always hesitate to disagree with Colm, I don’t see the government’s strategy as fundamentally inconsistent.  Since peaking at 15.81 percent on July 15, 2011, the yield on the benchmark 2020 bond has followed a strong downward trend to close at 4.53 percent on Friday (Bloomberg).  Assuming a recovery rate of 50 percent in the event of a private-sector default, that the yield on the equivalent German bond represents the risk-free rate and risk-neutral investors, the implied probability of default peaked at 83.8 percent in July 2011 before more than halving to 39.7 percent on today.   

Of course, a default probability of close to 40 percent is still very high.   I think the main reason that the perception of default risk still remains so high relates to the uncertainty surrounding growth prospects.   A poor outcome on growth could make the necessary fiscal adjustments to meet the conditions for official support without a private-debt restructuring politically – and possibly even economically – impossible.   Adverse growth shocks will also do more damage to the ability to meet deficit- and debt-reduction targets the higher is the starting debt ratio.  

Recognising the common interest in a successful return of Ireland to creditworthiness, there is a case for making adjustments to official policies that reinforces the improvements made so far.   One such improvement would be to lengthen the period for paying down ELA and make continued access to that funding more reliable.  By rewarding countries that meet their commitments rather than the opposite, such actions should also help to reduce official-lender concerns about moral hazard. 

I worry that emphasising unsustainability under current conditions would suggest a weaker commitment to meet the conditions required for official support.   Any resulting weakening of perceived creditworthiness could itself undermine growth by raising the spectre of Greek-style chaos.   I believe it is better to emphasise that Ireland fully intends—and expects – to do what is necessary to avoid default, but there are certain factors that it simply can’t control.    Recognising this, there is indeed a common interest in adjusting official support policies to further support a “well-performing adjustment programme.”

Banking Crisis Political economy Regulation

A Brave Speech from the Irish Central Bank – The Missing Paragraph

The Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, Fiona Muldoon, has been widely praised for her speech to the Irish Banking Federation, calling for faster action by the banks in dealing with the mortgage arrears crisis.  The speech makes clear that the damaging nexus of the former Fianna Fail government, linking the politically connected property development industry to the banking industry and an overly compliant bank regulator, is no longer in place. The Irish Central Bank is now able and willing to stand up to the industry that it regulates in order to protect the public interest, and it is supported in this stance by the ruling coalition. This is an important positive outcome.

The speech was a step forward, but it was not an unusually brave speech, despite the impression one gets from the wide praise it received in media coverage. A truly brave speech would not be widely praised, since it would need to unsettle people rather than confirm their existing beliefs. The speech ignores a big part of the reason for the mortgage arrears crisis – the deep-seated Irish political aversion to house repossessions. Without facing up to this big part of the mortgage arrears crisis, there will be no solution.  Here is an extra paragraph, offered with proper humility, which might have changed Fiona Muldoon’s partly brave speech into a truly brave speech. I have kept the “teenagers” motif, which was a clever oratorical device in the original speech.

“I cannot come here and give a speech about mortgage resolution without once mentioning repossessions; that would be cowering. The notion that 167,000 mortgages-in-arrears can be resolved without a substantial proportion of repossessions is delusional. We on the senior Central Bank staff could give speeches ignoring this reality, thereby pandering to political sentiment, but we will not do so. Meanwhile, the government’s most recent attempt at reforming Ireland’s repossession laws was a shambles, and virtually the entire law was declared invalid by the Justice Dunne ruling in July 2011. This has left Ireland, and it’s banking system, with virtually no repossession system at all since that date. Rather than fix this urgent legislative cock-up of its own creation, the government has chosen to ignore it and pretend that it will go away. The ruling coalition is acting like a bunch of teenagers; blaming everyone else in the household for their problems while neglecting to do their own homework.”


Eddie Hobbs: Don’t Expect a Celtic Comeback

Eddie Hobbs’s widely discussed WSJ article is here.   Seamus Coffey provides a detailed response on the debt points here.


Workshop on Multinational Firms, Trade and Innovation at NUI Maynooth

26-27 October 2012 – Workshop on “Multinational Firms, Trade and Innovation”

Hosted by: Department of Economics, Finance and Accounting at NUI Maynooth

Keynote Speakers: J. Peter NEARY (Oxford) and Peter EGGER (Zurich)

Co-financed by: The Leuven Centre for Irish Studies (LCIS – KU Leuven)

Local Organisers: Gerda Dewit and Dermot Leahy

For more information:

All welcome. For practical information, please contact


IMF on Austerity

This article is informative.


Ireland is not Denmark when it comes to mortgages

We know Ireland isn’t Iceland. It’s not Greece, and definitely not Spain. Now we know that when it comes to mortgages, at least, Ireland isn’t Denmark. A Bill (.pdf) introduced by Senator Sean Barrett designed to add the stable Danish mortgage model to the obviously unstable Irish model was shot down by Minister Noonan this week. Simply put, the Bill’s idea is to allow a balance principle to regulate mortgage credit. A 2007 IMF paper on the Danish market (.pdf, again) noted that

The Danish mortgage system is widely recognized as one of the most sophisticated housing finance systems in the world. Through the implementation of a strict balance principle, the system has proved very effective in providing borrowers with flexible, transparent and close-to-capital markets funding conditions. Simultaneously, as pass-through securities, mortgage bonds transfer market risk from the issuing mortgage bank to bond investors. Lastly, strict property appraisal rules and credit risk management by the mortgage banks have also historically shielded mortgage bonds from default risk.

Naturally enough, the Minister felt the need to shoot the Bill down.

The Minister’s reasons are outlined here, but essentially they are:

1. We are not, nor were we ever, Denmark.

2. Changing wholesale to this system has risks, most of which I won’t go into here, but the Danes give defaulting households 6 months and we’d really like that to be longer, say a year.

3. Changing to this system would imply loans at 80% LTV, most banks are at 92% LTV, this would make it more difficult for first time buyers.

4. We’re in the middle of negotiations on the various capital requirements directives, this could throw a spanner in the works with the EU.

Senator Barrett is to be congratulated for bringing a fresh perspective to the Mortgage market in Ireland. It’s a real pity the Bill didn’t get more traction, but hopefully parts of it may make it into other pieces of legislation.

EMU European politics

Paul Mason on Golden Dawn

It would be a good thing if the leaders meeting in Brussels today were to take reports like this one seriously.


Michael O’Sullivan: Jobs and credit crises call for clear policy response

Michael O’Sullivan has an interesting piece in today’s Irish Times, have a read here.

Best bit (for me anyway):

The political response to the jobs crisis is pitched at the micro level – the drawing in and amalgamation of disparate projects. This might help boost shorter-term employment figures, but doesn’t necessarily bolster the potential long-term economic growth rate. Arguably the correct response is a more coherent strategy, one that links economic factors like our banking system and household debt with social issues, as well as incorporating our strategy on Europe.

In Ireland job creation is popularly associated with tax cuts, multinationals and the IDA. But the employment crisis is much less regularly traced to our balance sheet recession, or rather blockages in the banking system and household finances.

A lack of employment growth is the sclerotic and very unfortunate effect of these underlying difficulties, and of important decisions not taken throughout the past year. Should we fail to address them now, there is a high risk of the “Japanisation” of our economy.


The Knowledge Economy

Michael Hennigan spoke at last weekend’s DEW conference in Galway:




The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2012: Alvin E. Roth, Lloyd S. Shapley

Details here.


Blanchflower on academic economics during the crisis

Danny Blanchflower has a forthcoming book chapter critical of the role of academic economists during the crisis. I post it here for debate rather than as an endorsement of everything in it. An illustrative quote is below.

“I am greatly concerned that the economics profession has had so little involvement in the major issues of the day.  That has resulted, in my view in some of the worst economic policy errors in a generation.  Economists need to focus on real policy questions rather than simply on publishing trivial technical extensions in academic journal.  I suspect that will also mean a movement away from theoretical papers with no data to papers that involve empirical testing and the search for patterns in the data.”


CSO: National Employment Survey 2009 and 2010 Supplementary Analysis

This includes new analysis of public-private pay differentials.


“Overall, I don’t think that I owe the Irish taxpayer any apology.”

Written by Jamie Smyth, the Analysis page in the FT today is devoted to Sean Quinn, including this quote from him.


New CSO Releases

So much basic information can be learned from the new Household Budget Survey here.

Measuring Ireland’s Progress 2011 is also fascinating – here.


Opinion versus Reality

Writing in today’s Irish Times Vincent Browne has an opinion piece that purports to look at the impact of austerity in Ireland.  Much of the argument is based on this graph from a presentation by Thora Kristin Thorsdottir at a NWCI/TASC conference on Monday.

I don’t know anything about the Icelandic data used in the graph but it may be worth noting a couple of points on the Irish element of the graph:


The Eurozone Debt Crisis – The Options Now

The Buchheit-Gulati paper is here.


The Eurozone’s Narrowing Window

Ashoka Mody (formerly IMF, now at Princeton) has a Project Syndicate article here.


Ireland Keeps Faith in Bank-Debt Deal

Read Eamon Quinn’s WSJ interview with Michael Noonan here.

Fiscal Policy Political economy Uncategorized

ESRI Geary Lecture…and Seminar by Tim Besley

Further information on Geary Lecture and seminar by Tim Besley below. To reserve a place at either/both event(s) please email and state clearly which event(s) you wish to attend.

Geary Lecture: Tim Besley

4pm Friday 19 October at ESRI

Making and Breaking Tax Systems: The Institutional Foundations of Fiscal Capacity

We have become accustomed to governments having the fiscal capacity to support revenue raising of more than 40% of GDP.  But such levels of taxation were unheard of before the 20th century.  This lecture will review some of the trends in taxation over the past one hundred years and how the tax systems were created which support the needs of modern governments.  It will use this historical perspective to reflect on the challenges that need to be confronted in trying to build a centralized fiscal state in Europe.    

Research Seminar, 1pm Friday 19 October, at ESRI

The Welfare Cost of Lawlessness: Evidence from Somali Piracy

This paper estimates the effect of piracy attacks on shipping costs using a unique data set on shipping contracts in the dry bulk market. We look at shipping routes whose shortest path exposes them to piracy attacks and find that the increase in attacks in 2008 lead to around a eight to twelve percent increase in shipping costs. We use this estimate to get a sense of the welfare loss imposed by piracy. Depending on what is included, we estimate that generating around 120 USD million of revenue for pirates in the Somalia area led to a welfare loss of anywhere between 0.9 and 3.3 USD billion.  Even at the lower bound, therefore, piracy is an expensive way of making transfers.


Competitiveness in EU Member States

The latest overview of competitiveness for the 27 member states is here. Ireland gets a mixed review, with the Commission reporting:

Ireland has made good progress in achieving its adjustment programme’s goals. Despite the remaining challenges, these efforts have improved business prospects and strengthened competitiveness.

The challenge for Ireland is to improve the prospects of the domestic SMEs. The sector is held back by weak domestic demand, lack of innovation, problems with access to finance, and rising costs of doing business at local level. The government should continue to keep a close eye on access to finance, as improvement in this area is crucial for future growth. The lack of domestic demand and lack of finance have lowered the level of investment in equipment, which remains under the EU average.

The Irish government’s ‘Action Plan for Jobs 2012’ is a broad-based plan to address these challenges. If implemented steadfastly, it could considerably reduce the differences in the competitiveness of the domestic and multinational sectors. The challenge is to avoid the fragmentation of efforts, and to increase policy focus on the most promising initiatives enhancing innovation and growth.

They show the following graph for Ireland, which makes for interesting reading.