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50 Responses to “Statement by the EC, ECB, and IMF on the Review Mission to Ireland”
However welcome the emphasis on unemployment is, I find the following particularly objectionable;
“An orderly phasing out of the costly Eligible Liability Guarantee Scheme would improve bank profitability and thereby support lending capacity”
Of course it would improve the ‘profitability’ of banks if they were relieved of costs amounting to over one billion. But why should they be relieved of it? And even if it supported their lending capacity, who says they would lend more?
The Banks have collapsed the State. The ELG should remain in place for all Irish retail banks until every cent or pingin of the €64 billion is recovered. Period.
The Irish government should refuse, if it is their lexicon, any attempt by the banks, no matter how powerfully supported, to wriggle out of that.
What kind of unadulterated nonsense form The Troika, that would see the State continuing to offer deposit insurance for deposits up to €100,000 at zero cost, to protect the depositors from bank recklessness; the same banks having just bankrupt the State.
Maybe the Troika think the Paddys are completely witless as well as gutless. We have given the enough reason to believe both.
Well, if the ELG fees mean the banks losses are larger…then the capital base will be wiped out quicker, surely? (Unless you advoated a cunning strategy of increasing/collecting ELG fees this way and then asking the ESM to recapitalise the banks for the hole! Brilliant, ‘legacy’ issue sorted!)
Attempting to bleed the price of recapitalisation from the banks over a couple of decades doesn’t seem as efficient as getting them profitable and sold off.
Of course, this all assumes a no bank deal situation.
Prospects for growth in 2013 are for modest pick up to just over 1 percent as domestic demand declines moderately, although weak trading partner growth may continue to dampen net exports despite Irish competitiveness gains.
The more realistic report on the Irish economy issued today (see below) was from Davy Stockbrokers which stated that exports will not pull the domestic economy out of recession.
I recently met the IMF resident rep, in Galway and I told him that it was was foolish to rely on Irish headline exports and competitiveness indicators.
He was surprised to learn that Dell could close its Limerick factory, sell its Lodz, Poland plant to Foxconn of Taiwan who assemble Dell PCs there, and remain as one of Ireland’s top merchandise exporters.
One irony of this situation was that the Dell workers benefited from an EU Globalisation Fund.
Conall Mac Coille chief economist of Davy:
However, doubts remain whether the robust growth of services exports and the multinational sector truly reflects economic activity in the Irish economy or merely tax-efficient strategies. In 2011 the gap between GDP and GNP expanded enormously. Nominal GDP was 20% higher than GNP in 2011, up sharply from just 14% in 2009. This means that international comparisons of Irish labour productivity growth and unit labour costs are flattered by the multinational sector. The growth of GNP per worker has been less favourable. In summary, the strong performance of the multinational sector has not translated into labour demand and employment.
It’s good to have some company in this argument. The next step would be for the likes of the Central Bank and ESRI to call a spade a spade.
Here’s the sales statement on the bond that the EU just sold to fund our tranche
The €3 billion bond matures on 4 November 2027, pays a coupon of 2.5% and yields 2.621%. Funding cost will be passed on to the beneficiary countries without any margin. The disbursements are foreseen for 30 October 2012, the settlement date of the bond.
Geographically, Germany/Austria had the highest allocation with 31% of the bonds, followed by the UK (25%), Benelux (12%), Switzerland (10%), France (9%) and the Nordic Countries (7%). Other Europe had 1% and 5% was allocated outside Europe. In terms of investor type, asset managers were in the lead with 52% of the allocation, followed by insurances/pension funds (21%), banks (13%), Central Banks/Official Institutions (9%) and others (5%).
If we can fund via those customers with an EU stamp with such low yields, then we can probably fund to them at somewhat higher yields as long as there is some EU backstop to the thing. Either way we’re selling to the non-bust parts of Europe under some kind of oversight from Brussels.
The idea that the richest region on the planet, or any part of it, is “bust” is one of the beliefs that causes markets to behave irrationally. Governments maybe! But certainly not the economies involved.
Home-help worker Margaret O’Brien from Kilmainham said the issue was one of both pay and quality of care.
“When people come home from hospital, our time runs over with them. They need extra help, but we don’t get extra pay. We are not getting the money we should be getting, and the people are not getting the care they should be getting. I deal with some people who only get half an hour of home help – how can you look after a person who is 88 in half an hour?”
Not sure about the sanity returning, but you are certainly correct that ‘bust’ is not a word that should be applied to European economies in general.
In fact if the GDP falls had been evenly spread, then there would be far less cause for alarm. An recent Irish example is worth pointing out.
There was a lot of justifiable indignation at the €1 billion paid by AIB to its bondholders earlier this month. But there was not a murmur when AIB (we) decided to transfer €1.1 billion of property assets, to make sure that AIB staff would suffer no loss of their promised gilt edged pensions, their pension trustees having managed to lose a goodly portion of their pension assets. That asset transfer of €1.1billion is now being used to retire people in their late 50s and early 60s on very fine pensions and very fine pension lump sums, while the cost has been transferred to people, the majority of whom have no pensions.
Not a murmur of dissent did I hear. From right, left or left out.
I notice the IMF’s concern over ‘low lending to households and SMEs’. Obviously this is a concern under the current system since money comes from bank loans. However we have to acknowledge that banks loans create a higher amount of debt than the do money.
Mervyn King had another confirmation of where money comes from in his speech to the South Wales Chamber of Commerce at The Millenium Centre, Cardiff on 23 October 2012. He said;
‘When banks extend loans to their customers, they create money by crediting their customer’s accounts.’
I’m unsure how we’re expected to resolve the debt crisis under such a debt based system?
We need some source of debt-free money to keep the system running smoothly.
MR. BEAUMONT: … On the issue of the bank recapitalization debts, we outlined in the previous staff report how a potential ESM direct bank recapitalization could benefit Ireland. We assumed for illustrative purposes that €24 billion–which is the amount of the bank recapitalization under the program–could be instead funded by the ESM. This would immediately reduce Ireland’s debt by about 14 or 15 percent of GDP, which would significantly reinforce its ability to access market funding on reasonable terms.
…MR. BEAUMONT: Well, one option would be simply for the ESM to purchase with cash the equity stakes in the banks, and for the Irish authorities to then to use the cash to reduce debt. Another option would be a debt-equity swap where the ESM would acquire equity in the banks and simultaneously there would be a corresponding reduction in Ireland’s EFSF debt. There’s no decision on the exact modalities but those are some options.
John Mark McCafferty, speaking at its pre-budget event today, said Government talk about protecting the vulnerable was “just rhetoric”.
The reality was Government did have choices about where to cut in the forthcoming budget and despite all its claims about protecting the most vulnerable, it was the most vulnerable who had so far been most harshly targeted, he said, adding the cuts had targeted sectors.
Isn’t it very strange,or perhaps typical,official policy for older folk is to avoid longterm nursing home care and remain at home, where most seniors would prefer to be,but govt then cuts the living daylights out of the budget for homecare provision instead of matching a homecare spend with genuine and growing needs!!
‘That asset transfer of €1.1billion is now being used to retire people in their late 50s and early 60s on very fine pensions and very fine pension lump sums, while the cost has been transferred to people, the majority of whom have no pensions’
Some decisions are so ‘natural’, ‘obvious’ and ‘necessary’ that even to debate them would be unthinkable, even sacriligeous. Like the socialisation of the private bank losses, or the rescue of the university staff pension deficits. As Mancur Olson described long ago, the state is captured by well organised vested interests.
Our banks were so ‘respectable’ (all that Wicklow granite) that bank jobs were defacto state jobs, and so (morally) ‘entitled’ to state guarantees. It’s all about confidence and trust, and as Sammy David Jr said ‘Sincerity is everything. If you can fake that, you got it made’.
The news this morning about extra conditionality if the ESM is to take over some banking debt does, however, underline the fact that the vested interests in question have to be dealt with; if you are broke.
For whatever reason, the physicians seem willing to change the formula that is killing the patient. The tone of German newspaper articles is remarkably changed.
Do newspapers everywhere have a ‘group think’ mindset, or do they just write the latest government line!!
The IMF multiplier miscalculation seems to have provided a convenient excuse for countries to change tack.
That report from Spiegal is relatively benign compared to the Reuters report today which suggest Greece will miss its targets by a country mile and require 30 billion extra funding (under favorable conditions).
Samaras is reported as saying..
“Antonis Samaras told a crowd in Thessaloniki:
Only one enemy can beat us, and that is discord [...] I promise you that… in less than ten years… Greece will be better and much stronger than today, as long as we stay united.
Referring to Greece’s bankruptcy in 1893, he added:
Despite bankruptcy and international control, Greece rose again and managed to turn its weakness into strength.”
There is a big deal being made about reclaiming sovereignty while Michael Noonan’s colleague Richard Bruton has been in California this week scratching about for job projects.
Meanwhile, Jerry Brown, California’s governor, has warned that the wealthiest US state will have to close schools for up to an extra three weeks if voters do not back temporary tax increases on the rich.
In the three decades interval as past and current governor, a dysfunctional fiscal system has brought austerity for some and comfort for others in the most populous state.
“When I was governor last time, personal income was $165bn and the top 1% earned 8% of it,” he told the Financial Times in an interview. “In recent times the top 1% has earned 22% of personal income, which is now $1.9tn.”
Austerity is also focused in Ireland and is commonly used as a selfish argument to defend privilege and the ill-gotten gains of ephemeral bubble growth.
The tax and social security revenues total as a percentage of GNP in 2011 was at 35%, similar to the average of the 34-member country OECD; similar to the UK’s GDP ratio and lower than well-run comparable countries such as Austria, Sweden, Finland and Denmark, which are all in the 40s.
Those who talk about austerity generally in the media, do not experience it while it’s also a remote concept to most interviewers at a national level.
“It’s a recession when your neighbour loses his job; it’s a depression when you lose yours, ” Harry Truman, former US president, commented in 1958.
This week, student teachers got moral support from the teacher unions. It would sure seem grand if everyone was able to earn €200 grand plus car and benefits like the INTO general secretary.
It would also be seem grand if everyone was guaranteed a job by the State and there was no need for a dual labour force as in many countries — with haves and have nots.
Then again, after almost a half century of evidence, Raul Castro even saw the writing on the wall.
The Irish Examiner says today in an editorial today:
Yesterday’s decision by the Government to push through the Oireachtas budget of €112m for 2013 was entirely inappropriate, especially as every other institution or business in the country must review, if not cut, its expenditure.
It flies in the face of promises on transparency and making our parliament more relevant.
As if those criteria were not enough to condemn the parliamentary shakedown, the suggestion that each and every member of the Oireachtas costs around €500,000 a year adds to the frustration.
Democracy is not cheap but today’s challenges decree that this let-them-eat-cake parliamentary sleight of hand is unacceptable.
Maybe some real conditionality for those at teh upper half of teh pyramid would be a good thing?
The cost of running the Oireachtas was €85m in 2004.
Grannies and grandads fighting the crisis
26 October 2012 Le Monde Paris
Picking up grandchildren from school, donating cash to balance their children’s household budgets, and taking time to demonstrate against the austerity policies advocated by Brussels: Spain’s abuelos have emerged as a pillar of strength in a faltering society.
Public Policy Brief No. 127, October 2012
Fiscal Traps and Macro Policy after the Eurozone Crisis
Greg Hannsgen and Dimitri B. Papadimitriou
Should the United States pursue a European-style policy of fiscal austerity by allowing drastic cuts in federal spending to take effect in 2013? Research Scholar Greg Hannsgen and President Dimitri B. Papadimitriou answer with a resounding no. Austerity measures in the eurozone and the UK have not healed these economies; in fact, ill-conceived austerity policies are part of what the authors term the “fiscal trap.” Governments fall into the fiscal trap when fiscal pressure leads to spending cuts, which in turn reduce economic activity and therefore revenues. An ever-increasing spiral of cuts, falling revenues, rising borrowing costs, and ballooning budget shortfalls is the result. However, there is a way to escape the fiscal trap for countries that control their own currency.
The authors offer a Keynesian perspective on the impending budget sequester, and conclude that budget cuts, such as those suggested under the Bowles-Simpson plan, will do more economic harm than good. http://www.levyinstitute.org/pubs/ppb_127.pdf
Working Paper No. 734, October 2012
The Crisis of Finance-dominated Capitalism in the Euro Area: Deficiencies in the Economic Policy Architecture and Deflationary Stagnation Policies
In this working paper, Eckhard Hein, Berlin School of Economics and Law and Institute for International Policity Economy, offers an analysis of the euro-area financial crisis as the latest crisis created by finance-dominated capitalism. He argues that the crisis threatens the continued existence of the euro because of deficiencies in the architecture of economic policymaking in the euro area. The failure of euro-area policymakers to correctly diagnose and treat the underlying problems has unnecessarily prolonged and deepened the crisis in many countries.
Hein analyzes the development of income distribution in 11 of the initial European Union countries; compares two types of macroeconomic development leading up to the crisis (i.e., “debt-led consumption boom” and “export-led mercantilist”); examines the interpretation of the crisis and responses to date; and, finally, offers policy alternatives to put euro-area economic policy on a better course. As the euro area faces the threat of another recession, Hein’s analysis is a timely contribution to the current debate.
““The Finnish welfare society is under severe threat,” he said. “No matter how much it irritates me to clean up the mess other countries have made, it’s still better to fix the European economy to ensure we fare better.”!
When the flood waters begin to ‘lapp’ at their own door, the ‘let them drown brigade’ have a quaint way of changing their tune.
It should be obvious to even the most casual observer that economics is not a science. That this is not obvious to many is clear evidence that epistemology, the philosophy of knowledge, is little understood by economists. There is no possibility of repeating experiments because the “laboratory” conditions keep changing. As a consequence, there is no possibility of establishing causality, or at least not in a rigorous fashion. Predictive validity, therefore, cannot be achieved. As William Sherden has outlined the problem with economic predictions is that they do not work – or at least only work when the predictable happens. With surprising events, it is better to toss a coin:
The difference between Finland’s then situation and Ireland’s now is (i) they had nobody else to blame as they were not subject to any of the restrictions – real or imagined – inherent in membership of a monetary union and (ii) they simply got on with it and turned the situation around on their own (as did Sweden in similar circumstances).
The Finnish position – or at least that of the country’s Prime Minister – is perfectly logical. If we were in the same situation, I have little doubt but that we would adopt a similar one.
Bit harsh towards the Finns. Our own problems are sell inflicted – first in joining a stupid and badly designed EMU and then electing govts who failed to run the place properly. However, maybe the Finns have concluded that it is best to help fix Europe less they disappear into Putin’s near abroad.
@ DO’D: There was this unpleasant geezer of American-Norwegian ancestry – Veblen. Wrote a few inconvenient truths on matters of Political Economy – of his time, 1890s -> 1920s.
‘The Engineers and the Price System’ (1921). You would think you were reading about the current mess. Its hardly lite stuff, but very insightful. How come Veblen’s political economics is not part of mainstream undergrad courses?
I suppose when reality meets theory: you trash reality.
The Finns had their own currency at that time. It might be worth having a look at its value relative to its main trading partners at the time.
But, to agree with you, I am sure they made a better effort than our non-effort to hose down our many well protected enclaves.
I understand their teaching professionals are paid significantly less than ours.
I posted the link, which seemed to me to be pertinent to the topic under discussion, as it reflects an assessment of the realpolitik – as identified by Tull -that is driving the Finnish position. The fact that a similar hard-headedness seems finally to be emerging in the policy debate here is greatly to be welcomed. (Debate on any other basis is simply pointless. States do not do moral arguments.)
As I pointed out on another thread, Berlin and Paris are supportive of the special case status of Ireland but for clearly different motivations. The difference in approach is best summed up in the unresolved issue of the scope of the supervisory powers for the ECB cf recent coverage by the Brussels Blog of the FT.
Economists got far too cosy with political class
By Brian Lucey
Saturday, October 27, 2012
Economics is in crisis.
We know this is the case because many have said so. Even such personages as Britain’s Queen Elizabeth II, who is so divorced from the hurly-burly as to not carry a purse, asked why economics didn’t see the crash coming.
Economics is in crisis… except where it’s not.
Economics is not a discipline — nor is it a profession. It is, instead, a way of thinking. In its best manifestation, modern economics shows its roots as an outgrowth of the philosophical wing of the Scottish enlightenment. At its worst, this thinking has more in common with the Taliban, with dogma and assertion replacing argument and evidence.
A bit of topic; the deteriorating economic situation in France and the evident inability of the new government to do much about it. The fact that the “advice” of international institutions is being sought is, in itself, an indicator that the new government is all at sea.
“The present generation of senior journalists and editorial staff, with a few notable exceptions, seem incapable of rising to the challenge.”
I keep meeting former members of that group who are now out of a job and lately replaced by free ‘interns’ in what seems to be a deliberate attempt to dumb down the Irish media – and save oddles of money at the same time.
I’m not sure about France. Poor government or a case of inherited such a can of worms that it may be beyond salvation? I’m not sure which is the worse scenario for the EZ.
It’s easy for us all to throw rocks from the sidelines at politicians but apart from François Hollande’s luck that DSK didn’t give attention to Henry Kissinger’s famous remark that power is the ultimate aphrodisiac, he ran a campaign where there was no leeway to lead overdue reform.
The destiny of Europe is in France rather than Germany or the peripherals.
If the Eurozone’s second biggest economy cannot reform, what hope is there for struggling economies?
A budget deficit every year since 1974 and a trade deficit every year since 2002, suggests that the country cannot live beyond its mean indefinitely.
That that might be part of the explanation did not occur to me.
As you will be aware from other contributions by me, I agree that the decisions that France takes internaly are the key to future developments. The one saving grace is that the honeymoon for Hollande is much shorter than that enjoyed by Mitterand and I think that the Germans are very conscious of the need to assist.
The next key hurdle is the debate on the 2014-2020 budget or, to give it its correct name, the Multi-annual Financial Framework (MFF). Charlemagne of the Economist had a recent comment.
It is remarkable, however, that he manages to omit any real analysis of the elephant in the room; the UK rebate. The deal struck by Thatcher reflected a historical compromise which reconciled the UK to EU membership by, effectively, removing its contribution to the cost of a detested major policy – the CAP – while remaining a net contributor. As the broad circumstances have not changed – other than that a re-united Germany has a bigger interest in maintaining the CAP – it seems likely that there will be political recognition that the deal must continue. The real political difficulty relates to (i) who makes up the cost and (ii) UK objections to any rise in the budget pushing up the size of its net contribution.
The only realistic measure that assesses the political and economic costs is the size of net or positive balances relative to GNI. The historic record on this is buried in the Commission’s annual financial report.
Of course, the EU budget is of no macro-economic importance whatsoever at an EU level. However, it is of significant political importance, and for those countries that are substantial net recipients, of major domestic economic importance.
The European Parliament’s role has been enhanced by the Lisbon Treaty. It provides this useful interactive tool with regard to the present allocation of benefits and costs across the EU. (These had to be worked out to enable the UK rebate mechanism to function i.e. its share of expenditure could not be calculated without calculating the share of every other country. Enshrining the principle known as ‘juste retour’ could be considered, not entirely facetiously, as Thatcher’s contribution to the history of the EU.)
What emerges, if both documents are contrasted, is that (i) GNI net contributions are roughly in line with what one expect, with the exception of the UK (ii) the bulk of the cost of the UK rebate is borne by France, Italy and Spain as Germany negotiated a 75% reduction in its assessed share (!). The Netherlands, Sweden and Austria piggy-backed on this concession and Denmark now wishes to join the action. The Danish PM has put a figure on the concession required and has said that Denmark will veto any agreement that does not give it satisfaction.
Given that the countries that are complaining that their net contributions are excessive are – with the exception of the UK – the major beneficiaries of the present economic imbroglio, one wonders how this will play out. Badly, I suspect, unless Merkel, as the main player, discovers talents for statesmanship which have not hitherto been in evidence.