Colm McCarthy: Let’s write off monetary union and start afresh

Colm can correct me, but I think the title of the article does not capture the substance of the piece.   I don’t think Colm is advocating abandoning the euro, but rather fixing its current inadequate structure, including putting in place an adequate banking union and effective lender of last resort to states.  

From the article:

The broken Eurozone project needs two sets of policy actions. The first, for the long term, is a re-engineered monetary union designed to survive, which means a banking union and a more centralised system of macroeconomic management. The second, and more contentious, is a clean-up operation to restore prospects of economic recovery, especially in the growing list of financially distressed members.

To date, the performance of the Eurozone political leadership has been dismal, inviting unfavourable comparisons to the more decisive actions of the US Treasury and Federal Reserve.

The clean-up operation needs a coherent macroeconomic strategy at European level as well as an acceptance that the debt burdens remaining on several Eurozone members need to be relieved. The macroeconomic strategy should see a relaxation of fiscal consolidation in those countries which retain good access to bond markets, as well as a deliberately expansionary monetary policy from the European Central Bank. Some weakening in the external value of the euro should be seen as a minor concern. If the current growth standstill continues it may ultimately weaken anyway.

It is fashionable in Germany to argue that Europe needs greater political union, permitting a more centralised fiscal policy. If the Eurozone were already a single country, with a normal central bank and a counter-cyclical macroeconomic strategy, it would already be seeking to bolster aggregate demand as the US has been doing. The zone as a whole does not face an imminent inflation threat, does not have a balance of payments deficit and has public debt and deficit ratios no worse than those in the US, the United Kingdom or Japan. But it remains committed to a policy stance that is exacerbating the downturn, particularly in the regions of the Eurozone facing financial distress.

In addition to a relaxation of policy at Eurozone level, a pragmatic approach needs to be taken to the debt-encumbered member states. Greece will have to undertake another debt restructuring, perhaps fairly soon. Several other countries may be unable to carry the burden of debt which has been accumulated. A partial mutualisation of excess debt burdens is the other essential component in the clean-up operation, preferably on a no-fault basis. This will likely happen in a messy and politicised manner anyway. Better to accept that debt burdens in excess of some agreed threshold be addressed, through further haircuts for private creditors in some cases, some monetisation by the ECB and some mutualisation by Eurozone rescue vehicles. Peripheral states in trouble could expect to see a reversal of capital outflows, with a consequent reduction in borrowing costs. If this kind of clean-up operation requires treaty changes, so be it. The Irish Government is understandably wary of changes given the mixed record on getting EU-related referenda passed, but if treaty change is the price of a durable solution it should be considered on its merits.

One place where I might disagree with Colm is where he calls for “further haircuts for private creditors in some cases”.   He is of course right that such haircuts cannot be ruled out; and, in the case of Greece, it is hard to see them being avoided.   But it is a truism to say that it is the fear of such haircuts that leaves a country struggling for creditworthiness.   Where there is a reasonable path through the crisis without such haircuts, the strategy should be to take the possibility off the table to the greatest extent possible.   This does not mean there should not be relief on official debts.   The Sunday Business Post piece “State edges closer to ECB deal on promissory note” (no link available) gives one encouraging note in today’s papers.

71 replies on “Colm McCarthy: Let’s write off monetary union and start afresh”

@John McHale

“But it is a truism to say that it is the fear of such haircuts that leaves a country struggling for creditworthiness”

I suspect we are past the point of worrying whether or not Greece is creditworthy? We are only waiting until the end of the US elections until the whatsit is allowed to hit the fan aren’t we? Nothing allowed to happen before then…

One thing that did catch my eye in the Greek press this morning:

Banks issuing loans on the quiet to fund share buying? Rings a bell somewhere.

I posted this link on the other thread to an insightful commentary by the Brussels correspondent of La Tribune on the broader EU context and, notably, the approach of Merkel.

There was a second item which reports more accurately what she had to say at a recent CDU meeting. She stated – according to the report – that the EA “had to hold its breath” for at least five years. That is quite an undertaking!

One way or another, hers is the decisive voice at the moment and it would be a case of misplaced hubris to think that the commentariat in Ireland will decide the pace of events. This is a matter of fact divorced from the merits or otherwise of her approach.

Her statement to the EP on Wednesday will clearly be a major event. She is meeting Cameron that evening. The battle lines have been drawn cf. the Commission paper on the difficulties, technically, of continuing the UK rebate mechanism cf.

European leaders clearly have some big decisions before them in the lead-in to the next European Council. It would be a help if the debate in Ireland caught up with the discussion.

@ John
As chair of the fiscal committee I assume you have a plan in place in case this does happen. Please tell me you do. I would sleep better

Colm’s finishing comment was “time to write off the botched experiment and getting it right next time”. Not sure whether that means ditch the euro and next time we try let’s get it right, or ditch past policy and fix it going forward. The text suggests the latter, the heading very much the former and presumably Colm approved the heading. Perhaps he might clarify which he meant.

If that Sunday Business Post article is accurate then it would seem that conditionality is one area which will delay any deal..the mechanics of a deal are not that difficult…prolongation and reduction in rates could be worked out fairly quickly. I suspect that our CGT will be a deal blocker ….apparently Apple have a huge export subsidiary somewhere in Cork…

“She may indeed accept that Ireland is a “special case”. But any ultimate settlement for Ireland will come with severe conditions”
And it may not be Germany which seeks to impose severe conditions.

It may be a deal we will have to gracefully decline.

@John McHale
The concluding lines of Colm McCarthy’s article read as follows:

“Thus one of the key benefits of monetary union, the promised equalisation of credit market conditions across the zone, is not being delivered. On that score alone the monetary union project has failed, and it is time to face the task of writing off the botched experiment and getting it right next time. ”

That sounds straightforward to me.

While you are correct in your analysis that the key decisions, or non decisions or no decisions as is more often the case, will be made in Europe with Merkel being the major player, the link you posted confirmed for me that Merkel is simply not up to the task.

The article makes clear that her ‘philosophy’ is not one of any grand design or vision but she is quite happy to contest even the most simple of changes. The whole focus seems to be German elections and the protection of the German position, regardless of the costs borne by other countries.

Her statement to the EP next week, therefore, is unlikely to set out any path out of the crisis. As she herself has said of her general approach to politics, that is neither her forte nor her desire.

Events on the ground will always overtake such an irresponsible approach. Many will take the view that I garner from Colm McCarthy’s article, ie As the key people do not wish to do what is necessary to remedy the euro crisis, then;
“it is time to face the task of writing off the botched experiment and getting it right next time.”

If enough people do that, the euro and possibly the EU is finished, regardless of how astute a domestic politician Merkel is.

@ All



In case anyone missed it on the other thread, the actual text of what the OECD had to say with regard to the “organisational-zoo” supposedly confined to Ireland.

“It is impossible to assess whether or not the size of the agency sector resembles that of other OECD countries. This is due to, not only to the lack of data in Ireland and across OECD countries, but also to the organisational “zoo” constituted by the agency sector across OECD countries that makes it difficult to compare sets of like institutions”.

Germany takes the independence of the ECB seriously.

@ Joseph Ryan

All very true! Now, if only we were in charge!

The general point that I am making is that the debate in Ireland is vacuous unless set continuously in its real rather than piously to be desired or imagined context.

For example, the fact that the “promised equalisation of credit market conditions across the zone” has not materialised is a reality and was unrealistic – and almost certainly undesirable – in the first place. Why the monetary union project has failed “on that score alone” escapes me. Indeed, Draghi dealt with the issue of variation in credit risks in his recent extensive interview with Der Spiegel.


SPIEGEL: Experience teaches us somewhat differently. If you artificially lower interest rates, it makes it easier for governments to become indebted and decreases the pressure for reform.

Draghi: High interest rates are the most significant source of pressure for a government resisting reform, I agree with you there. This is exactly why we insist on adherence to strict conditions. Moreover, we do not want to completely eliminate differences in interest rates between countries. We will only intervene if the differences become excessive.

SPIEGEL: Many experts doubt that you can make a clear distinction in this regard.

Draghi: We would disagree. There are models and indicators available that will help us to make an informed judgement.

SPIEGEL: When you announced your programme, interest rates in Spain, for example, stood at 6.5%. What proportion of this was speculative?

Draghi: I will not tell you that: we have decided not to give exact figures for our programme that we could later be pinned down to. What I can tell you is that a good analysis will provide you with the necessary indications regarding at which point the differences give cause for concern.


In support of McCarthy’s argument on the ‘dismal’ nature of EU Leadership, and moving to the GeoPolitical Level …. the EU is regressing …. basis systems theory suggest that it is imperative to move up to a higher level of integration in order to move forward with coherence.

‘Economic resources are crucial determinants of power, but they are hugely affected by reliability and policy coherence. Soft power – the ability to project values others accept – is arguably as important as the hard military kind. And, finally, nationalism, meaning the ability to accomplish great things together with emotional solidarity, mobilises and empowers leadership.

Measured against these criteria Keohane evaluated the prospects of the US, the EU and China as world leaders over the next 10 to 20 years, the three most plausible candidates for that role. On geography the order is US, China, EU; on demography China, EU, US; on economics US, EU, China; on reliability and coherence US, China, EU; on soft power US, EU, China; and on nationalism US, China, EU.’

Read on for Paul Gillispie’s summary of Robert Keohane’s presentation to the IIEA last week.

You do not get to write, or approve, newspaper headlines just because you wrote the article. Sorry if the text is unclear but what I was trying to say is that Europe needs to get the terms of monetary union right next time, and clean up the mess left by the botched experiment of 1999. The clean-up has turned into a blame-game and a debtor-creditor scrap. Contrast the post-WWII settlement!

I think the truism is that bond markets want as much money back as possible John. Fear of PSI is not the trusim that is making greece uncreditworthy – its the fact that greece is hopelessly in debt.
One could consider that bond markets might equally wish for small PSI sooner than large and forced later, if the small now was conditional on deep governance reforms, when the large later forced would be then too late.

We should of course force official involvement by running, not walking , from the wretched promissory notes. 6 weeks of tax preempted…there is surely no precedent?


Thanks. But the “next time” still leaves me unsure of what you mean. If it involves scrapping the current euro project, I doubt if there will be a next time, at least not for a very long time. But I still doubt that this is what you are getting at, but rather a transition to a fundamentally different set of supporting institutions for the euro. Perhaps one final clarification for us slow learners.


We have been round on this before. Needless to say, a default on the PNs — and thus ELA — would bring forth some “official” response. We will have to agree to disagree on what that is likely to be. Perhaps the ECB would shrug off a near term default by a country with substantial cash reserves, one that is moving back towards market creditworthiness, one continues to pay its public sectors relatively generously, and has a tax share that is low by euro zone standards. Fear of chaos might lead them to overlook that any semblence of discipline in the system would be shot. Or perhaps not . . .

I am now very worried.
There is a
50% chance the Euro will remain completely intact
25% chance Greece only will leave
25% chance that the whole thing will unravel in the next 2 years

These risks persist despite what Colm McCarthy may or may not say about “the next time”.

I now know that no contingency planning has been made whatsoever. This is very worrying.

I understand the point that the OECD was not only referring to Ireland. However, I believe that the crux of the matter to be the “conditionality” of any deal on the PNs.
Germany may well respect the independence of the ECB…provided DR. Merkel agrees with them. No free lunch etc.

As I said above, why would it take such a long time to work out a deal on the PNs?

Link to Corriere della Sera.

The political maop will be unrecognisable within 2 years.

Just in case it is regtionally locked.

L Vote Plummets by 75% as Parties are Humbled
Voter flight from traditional political groups. PD down 250,000; UDC 130,000

Early analyses of the Sicilian regional election focus on the percentage of votes obtained by each party. But given the large number of abstentions, interpretations are based on just half of the potential electorate. It is this that prompts us to look at the outcome also in terms of the absolute numbers of votes secured by the various contenders, an approach that highlights even more starkly how far back the political groups have slid. For example, the percentage lost by Silvio Berlusconi’s People of Freedom (PDL) was already clear but if we compare absolute numbers, it is stunning to note that the PDL has lost a whopping 650,000 votes, three quarters of its previous voter base. Even factoring in votes secured by the “Lombardo presidente” and “Musumeci presidente” lists, the damage is enormous. These are voters who have opted not to turn out or, in many cases, to cast their vote for Beppe Grillo. The collapse reminds us that recent nationwide opinion polls revealed a drastic contraction of voting intentions for the PDL. Inevitably, there will be an impact on the PDL’s already fraught internal relations.

At the same time, as Stefano Ceccanti was quick to point out in an analysis published online, another part of the Centre-right linked to Gianfranco Miccichè has also lost ground, albeit less spectacularly. Meanwhile on the other side of the political fence, the alliance of the Democratic Party (PD) and Christian Democrat UDC took a significant voter haircut, despite emerging the winner (or less of a loser). Even including preferences for candidate lists (Crocetta-Finocchiaro), the PD shed almost 250,000 votes in absolute terms, a highly significant proportion of its electoral base at the previous regional poll. Similarly, the UDC saw 130,000 votes, or almost 40% of its previous total, evaporate. In other words, the Centre-left may have secured the regional authority chair but the result leaves a bittersweet taste because, as Roberto D’Alimonte notes in II Sole 24 Ore newspaper, the alliance failed to garner new votes at a time of great electoral fluidity. Put bluntly, Pierluigi Bersani’s party in Sicily seems to have been unable to convince or mobilise the disaffected. To the contrary, some appear to have moved elsewhere. Various observers had suggested that the PD might lose votes to the far Left after clinching its alliance with the UDC in Sicily but this failed to occur. Instead, the radical Left also bled votes, losing more than half of its electoral base and dropping from 2008’s 131,000 to 59,000 last Sunday.

In other words, a broad swath of the political spectrum was left with fewer votes than before. The only party to buck the trend was Italy of Values (IDV), which gained just under 18,000 votes. As the Istituto Cattaneo has pointed out, it is a disappointing result in the wake of the high hopes prompted by Leoluca Orlando’s success in the municipal elections.

It is clear that the Five Star MoVement (M5S) and the serried ranks of the “abstainers’ party” have benefited from this voting trend. Beppe Grillo’s M5S picked up nearly 240,000 votes, expanding its electorate by a factor of five. Nevertheless, abstainers accounted for a much higher proportion as this time almost 800,000 Sicilians opted not to cast a vote.

Both support for M5S and the surge in abstention rates have been widely interpreted as indicative of protest and disaffection. Voting intention surveys hint that the phenomenon involves not just Sicily but the whole of Italy.

Renato Mannheimer
31 ottobre 2012 | 14:25
English translation by Giles Watson

Where there is a reasonable path through the crisis without such haircuts, the strategy should be to take the possibility off the table to the greatest extent possible.

In other words: privatise the profits, socialise the losses . . . forever.


“I now know that no contingency planning has been made whatsoever. This is very worrying.”

A sure sign of being in denial

@Ernie Ball

… and ever, amen.

Indeed we have been round this before. And yet I await a set of actions that the ECB can undertake if we skip on these wretched notes. Not a single person has given me a set of such actions – instead its “well, they could do, oh god, sure the ECB, well, now, you dont want to mess with them, sure…” sort of stuff.
Its like this
How, exactly shall the ECB tell us to fcuk off? Im serious… What, exactly, will the ECB do to ireland/irish banks if we take these notes and tear them up? Bear in mind the IMF and perhaps the commission would heave a sigh of relief as that would make our real debt much more sustainable.
There is a deplorable lack of precision on the “we must pay” side on the consequences of not so doing.

John, I mean (i) re-design the monetary union for the long haul, while (ii) cleaning up the mess. Abandoning the currency union as a deliberate policy does not look feasible. The re-design is under way to be fair – banking union, better capital standards – the Basle Cttee, BIS and EU Commission have made real progress.

The logjam is (ii), politicised ad-hockery thus far. Munchau this morning in the FT is on the same page.

@ Brian Lucey

“Breaking News: Taoiseach Enda Kenny has juist announced that the government has had enough of this shilly shallying and will be tearing up the PNs. In an accompanying measure which is purely temporary he is cutting all public sector pay and pensions and social protection rates by 50% to prove that the country does not need any outside support.

There has been mixed reaction to the announcemnet. Leading academic Prof Lucey said it was about time we said fcuk to Europe. FG TD Peter Matthews said he had been calling for this for some time. David McWilliams however said it now needed to be followed by a debt amnesty across the state so as to stimulate demand. Pearse Doherty called for the confiscation of all British assets. Meanwhile Irish bond prices have soared as investors dumped Bunds to invest in the newly solvent Irish state.”

BW2 : maybe you might tell us what the ECB might do? As opposed to what you think others might do? Coz, thats the issue. What would the ECB do?

Prof Lucey: Hope you do not object to being the ‘spam’ in a Brian Woods sandwich! 😉

“Bad promises are better broken than kept … … if keeping them is adverse to the public interest.” : [Abraham Lincoln]


Scandinavian countries top the list of world’s most prosperous nations… but U.S. drops out of Legatum’s Prosperity Index top ten for the first time

Scandinavian countries have continued to dominate the top of the global index, which takes measurements from across eight categories: economy, education, entrepreneurship & opportunity, governance, health, personal freedom, safety & security and social capital.

1 – Norway
2 – Denmark
3 – Sweden
4 – Australia
5 – New Zealand
6 – Canada
7 – Finland
8 – Netherlands
9 – Switzerland
10 – Ireland
11 – Luxembourg
12 – U.S.
13 – UK
14 – Germany
15 – Iceland
16 – Austria
17 – Belgium
18 – Hong Kong
19 – Singapore
20 – Taiwan
21 – France
22 – Japan
23 – Spain
24 – Slovenia
25 – Malta
Norway, Denmark and Sweden are ranked first, second and third place respectively.
In Europe, overall prosperity has risen, with the Netherlands, Ireland and Germany climbing the rankings into eighth, tenth and 14th position.

Read more:–U-S-drops-time.html#ixzz2BLs7mxrU
Follow us: @MailOnline on Twitter | DailyMail on Facebook

Good ol; GDP! We can surely afford to ‘park’ those PNs …..

@Brian Woods Snr Says:

Prof Lucey: Hope you do not object to being the ’spam’ in a Brian Woods sandwich! 😉

“Bad promises are better broken than kept … … if keeping them is adverse to the public interest.” : [Abraham Lincoln]

I believe that the psychopathology of modern conservatism (I have yet to get my hands on Corey Robin’s new book “The Reactionary Mind” unfortunately) is finding some of its clearest expression in the behaviour of EU elites and economic thinkers in this crisis.

From Wolfgang Schaeuble’s simultaneous and contradictory pleas for states to obey market discipline and markets to follow state discipline, Ollie Rehn’s attempt to avoid discussions of fairness or practicality through “Pacta sunt servanda” and Merkel’s extraordinary response to the financial sector crisis (decreeing that it was in fact a public sector crisis – and then making that illegal!) and the mealy mouthed response of many of Europe’s economists to the unequivocal theoretical and empirical defeat for austerity led, confidence fairy invoking policies what we have is a continent of political extremists who value adherence to their own confused but rigid rules above the collective good.

As Krugman said the battle will not be won by reason neither Germany, the ECB nor the majority of the EU policy elite place rationality ahead of determination, discipline and self belief.

We live in interesting times.

@ Prof Lucey

I’m a simple guy. To me the ECB must be able to do something if the CBI defaults on 30bn. As to what precise form that something would take I would have thought you were better placed than me. If, however, you have discovered a loop hole in the architecture of the Eurosystem which allows national CBs to default on the ECB with impunity why do you not advocate defaulting on Target2 for some real wins?

@ David O’Donnell

This rankings could be put in the league of Bank of Ireland’s 2006 ‘Wealth of the Nation.’

We were second richest to the poor Japanese!!

Tripe we would call it in Cork.

Gee did Singapore’s wealth fund sink into the South China Sea?

Governance in Ireland?

Coupled with Enda Kenny’s European prize, it just goes to show as WC Fields said some time ago, there’s a sucker born every minute.

@ Brian Woods II

The hurlers in the ditch tend to like simple solutions. Most of them should be taken cum grano salis!

@Brian Woods 2
“To me the ECB must be able to do something if the CBI defaults on 30bn”
Yes, but WHAT. (and it wont be the CBI defaulting on anything btw … it would be the irish government defaulting on the CBI… that plus your comment on T2 suggests you dont know how the ESCB works…not that your alone there).

I still seek, as does Brian Woods 2, that which it is the ECB will do. I sense Lear here, raging that he shall do such things….
Anybody want to guess what it is that the ECB shall do? Or is it so unspeakable as not to be countenanced

@Michael H
And yet, when faced with a gordian knot…. Whats YOUR solution?

I think assuming that the legacy of Anglo will disappear with IBRC is a mistake. It won’t. There’ll be rump of obligations backed by the promissory notes that can be transferred with the promissory notes to a functioning bank. So Anglo can wind down, the PMs can continue into the future to back the obligations.

In this scenario, there’s no need for the PMs to be repaid each year, not for such a high interest rate (maybe). So a long-term low-interest refinancing of the PMs – 50 years at 1/2% for a slightly higher amount might have the same effect on a balance sheet?

I realise that the interest payment is largely circular, since the government makes money back off the ICB, but I can’t help feeling that there is ‘drag’ and anyway, in cash-flow terms, it is money that would be better not flowing…

Prof Lucey,
In answer to your question. If the govt announced I) non payment of the PN II) commitment to honour all other sov bonds III) immediate primary balance thru cuts in public pay, Transfers and a property tax there would be much finger wagging from Frankfurt, burning of jet fuel, requests for meetings, a sharp risk off trade and then nothing else.

That’s a partial answer apart for the impossibility of getting a primary balance via pay cuts Alone. Your essentially saying…nothing would happen.. I kinda agree

@ Prof Lucey

You are of course right that I do not understand the detailed mechanics of the Eurosystem. But I do have a certain balance sheet sense, in fact I have been accused of blowing AIB’s balance sheet, strange since I never worked for AIB. Anyway every asset has a liability. ELA is, as I understand it, an asset of the CBI owed to it by the IBRC (collateralised with PNs). The corresponding liability has to be to the ECB, who else would lend the CBI that sort of money. If the CBI’s assets are blown then so too are its liabilities viz. the ECB. This may not be the precise form of the chain but it has to be the substance.

@ Prof Lucey

I think this is how it works but please correct me if I am wrong. IBRC has to pay German bondholder but it has no cash. It provides PN collateral to the CBI which creates a current account balance for the IBRC backed by the obligation of IBRC to pay it back – ELA. So far the CBI has merely printed money, it is internal to Ireland inc. IBRC now transfers cash from its CBI account to the German bondholder. So the liability of the CBI to IBRC shifts to a liability to a German bank and ultimately as a liability to either the Bundesbank or the ECB, I don’t know which. Bottom line, the ELA asset is substantially backing liabilities to external institutions in the Eurosystem.

Or then again, I could well be having a deposit selling moment.

No bond holders left and it’s all internal to Ireland now. Ecb issue is they don’t want 30b of additional liabilities (money). That’s it. Get over it Mario

@ the Prof

No, no, no. Think Balance Sheet. When a liability goes it is replaced by another liability or by a fall in assets. Bondholders are all gone, but the assets remain (mostly PNs). The liability of IBRC has moved from the bondholders to the CBI. Hence the CBI’s assets have grown and so too must its liabilities. Originally these liabilities were the money that the CBI printed but they have long since moved to liabilities to foreign institutions and ergo in one shape or another to the ECB.

Super Mario

This is behind a paywall atL

The interesting part is David Orrell mathematician and author of Economyths and Truth or Beauty.

Why ‘efficient markets’ are merely wishful thinking Add to …
The Globe and Mail
Published Sunday, Nov. 04 2012, 7:00 PM EST
Last updated Monday, Nov. 05 2012, 7:26 AM EST


Print /
License AA
While most of our attention these days is focused on the tight and tense U.S. presidential election and what the results may portend for Canada’s increasingly cloudy economic prospects, Europe is proving an excellent laboratory for politicians and economists still preaching the benefits of austerity.


COMMENT Jeff Rubin: ‘Oil’s collar on growth will leave us all poorer’
Corporate Europe in pain as Q3 warnings pour in
Europe’s new car market slumps toward 1993 lows

Video: Core euro zone economies struggle in factory downturn

Video: Grim news for Greek recession

Video: Battle brewing over EU budget
Greek Finance Minister Yannis Stournaras revealed last week that public debt will be closer to 190 per cent of GDP next year than the 179 per cent projected just weeks ago. The economy will shrink by another 4.5 per cent; and the deficit isn’t budging from its 5.2 per cent level. Not even an extra two years of grace from its European and IMF minders will enable Athens to come anywhere near its imposed targets. So a splintering government will attempt to push through further public-sector austerity cuts this week. More strikes will ensue; and the slow dance toward default will continue.

Meanwhile, over in Portugal, the government hiked taxes dramatically last week, after finally realizing it could not meet deficit targets set by its overseers through deep cuts alone. The results in Spain have been no better. And the supposed benefits of austerity, including increased confidence and investment, have proved elusive. No wonder a British study concluded that the euro zone’s “fundamentally flawed” austerity drive is only making a dreadful situation worse.

Plenty of smart economists, including a very vocal Paul Krugman, have long preached against this form of economic suicide by a thousand cuts. But austerity advocates argue, as The Economist did recently, that the problem lies with the way the Europeans have gone about plugging the holes in their sinking fiscal ship. “The experience of the past couple of years argues against sudden sharp cuts, and especially against tightening more when the economy turns out weaker than expected,” the magazine intoned. “[T]he main lesson is that austerity hurts more if it is not accompanied by bold monetary loosening.”

What it shows is how hard it can be to kill off a bad idea in the world of economics.

Just ask Canadian mathematician and author David Orrell, whose 2010 book Economyths , a pointed assault on mainstream economic thinking, met a predictably frosty response in traditional economics circles. His latest book, Truth or Beauty , ranges over much broader scientific ground, but reserves room for a further critique of neoclassical economics and such cherished theories as the efficient market hypothesis (EMH). That’s the one that holds prices of stocks and other assets reflect all available information and that the markets as a whole are rational, stable and smarter than any individuals, who can’t possibly hope to outperform them.

EMH stems from our impulse, dating from the ancient Greeks, to see the world in simple, elegant mathematical terms. To this end, economists made various assumptions “in order to basically make the economy mathematically tractable,” Mr. Orrell said in an interview at his midtown Toronto apartment. One of those assumptions was that people would act independently and rationally in their own self-interest. Which explains why a true believer like former Fed chief Alan Greenspan was so shocked when Wall Street bankers failed to do so in the months leading up to the Great Meltdown of 2008.

I wrote three years ago that this shaky theory that had long dominated academic thinking about the markets had finally been buried under an avalanche of uncontrolled greed, bizarre asset valuations, spectacularly burst bubbles, the historic global financial collapse and a wave of other irrational behaviours that the hypothesis couldn’t possibly explain. But I was wrong.

“The idea that we’re still talking about this efficient markets stuff is kind of amazing,” Mr. Orrell said. EMH fans have done some tweaking to the theory and seek to explain the unexplainable by blaming Washington, for example, for blatantly interfering in the workings of the mortgage market.

But Mr. Orrell doesn’t buy the case for the defence. “It’s very hard to portray the recent crashes as efficient in any way.” EMH, he writes in Truth or Beauty, “enjoys no empirical support. Its popularity amongst economic modellers can be explained by the fact that it did exactly what the butterfly effect did for weather modellers: It gave an excuse for prediction error and helped to preserve the idea that models are not flawed.”

So why does EMH still hold so much sway in academic and investment circles, where it remains a supporting pillar for such concepts as passive investing and less regulation?

Think about who benefits, Mr. Orrell suggests. “The fundamental message of mainstream economics is that the price is right.” That provides a defence for stratospheric CEO salaries and widening income inequalities. And if you can argue that the only time natural market efficiency is seriously threatened is when heavy-handed governments meddle in the process, so much the better.

“If you have a theory which says that markets are efficient and everything is rational and it’s all okay, that’s the perfect theory for the 1 per cent.”

Are assuming that in some way the ELA is financed by a loan from the ECB? If we announce we are unilaterally changing the repayment terms as DEV did in the 1930s with the land annuities, then what happens? If nothing happens we have been allowed print money. If the ECB views it as a sovereign default, it refuses to accept Irish collatoral perhaps. Then the CBI steps in a LOLR and we have left the Euro. Then the game moves on to next please.
A year ago, I would have assumed the latter course of action would have happened. However, there has been all manner of money creation by the ECb as to cast doubt on how it would react after finger wagging.

Brian woods II
You need to look at the work by Prof Whelan. Balance sheets don’t really matter for central banks. Really, they don’t.

The ECB didn’t, I think, lend money. The ela as I read it is simply Patrick honohan printing money. The ECB ain’t involved except so far as the money is euros.

@ Gtfaway

Yes I have looked at the work of Prof Whelans and in many respects it scares me more than the outpourings of the cranks. Prof Whelan does indeed seem to argue that CB liabilities are mere fictions, simply walk away from them. I’m a humble soul but that just don’t seem right.

@Brian Lucey

The present executive, quite simply, doesn’t have the balls. What would the ECB do? After a lecture on ‘monetary financing’ from Draghi, and an epistle from DOCM, nothing of ‘real substance’ would happen. At a minimum the State needs to make a Declaration of Intent that it is ‘postponing’ burning three billion a year until a reasonable agreement with ‘our’ EZ partners has been reached on ensuring Ireland’s Debt Sustainability. A tactical move.

@THE 99%

The central theoretical tenet of market liberalism is the efficient (financial) markets hypothesis. In the strong form that is most relevant to policy decisions, the hypothesis states that the prices determined in markets for financial assets such as shares, bonds and their various derivatives are the best possible estimates of the value of those assets.

In the core ideology of market liberalism, the efficient markets hypothesis is combined with the claim that the best way to achieve prosperity for all is to let the rich get richer. This claim is rarely spelt out explicitly by its advocates, so it is best known by its derisive label, the ‘trickle down’ hypothesis.

Taken together, the efficient markets hypothesis and the trickle down hypothesis lead us in the opposite direction to the one envisaged by Keynes. If these hypotheses are true, the mega-fortunes piled up in speculative financial markets are not merely justified: they are essential to achieve and maintain decent living standards for the rest of us. The investments that generate technological progress will, on this view, only be made if they are guided by financial markets driven by the desire to make unimaginable fortunes.

As long as market liberalism rules, there is no reason to expect progress towards a less money-driven society. The global financial crisis and the subsequent long recession have fatally discredited its ideas. Nevertheless, the reflexes and assumptions developed under market liberalism continue to dominate the thinking of politicians and opinion leaders. In my book, Zombie Economics (2010), I describe how these dead, or rather undead, ideas have risen from their graves to do yet more damage. In particular, after a resurgence of interest in Keynes’s macroeconomic theory, the entrenched interests and ideas of the era of market liberalism have regained control, pushing disastrous policies of ‘austerity’ and yet more structural ‘reform’ on free-market lines. Social democratic parties have failed to put up any serious resistance so far. Popular anger at the crisis has been channelled into right-wing tribalist movements such as the Tea Party in the US and Golden Dawn in Greece.

@Michael Hennigan

Illusions are wonderful! Keep up the work.

GOvernance has experienced no real change and the insider upper_echelon fraternity has proved to be incredibly resilient; no peace process with the latter – they haven’t gone away you know! Witness the kid gloves interview with one of the ideological architects of Ireland’s downfall – Michael McDowell on Marian Finucane last saturday morning; he is planning to be next Tanaiste!

‘Contrast the post-WWII settlement!’

Wasn’t the post WW2 settlement based primarily on ‘benevolent’ US hegemony and brutal suppression of internal dissent within Western countries? plus ca change?

@ David O’Donnell

A doyen of the Ancien Régime interviewed by another member of the overpaid elite!

Wonder why it is self-sustaining?

@ brian Lucey (@brianmlucey)

And yet, when faced with a gordian knot…. Whats YOUR solution?

Twitter length scenarios are easy from the sidelines…so here is a longer one:

It’s naive to suggest that Mario Draghi and the ECB would allow its reputation to be shred and just engage in a finger-wagging routine via the media — in effect giving a green light to direct monetary financing by the central banks of EMU member countries (it can be argued that the ECB is already doing x or y — but this would be a direct attack on its authority).

Ireland would be suspended from participation in the new OMT program and the Irish Central Bank would be prohibited from providing local support to banks.

The hot potato would then be passed to the politicians to handle.

Your salary would still have to be paid from borrowed money!

Could we manage without a second bailout well before missing the 2015 budget target ?

Michael H
Well, as the TCD business school returns a handsome excess surplus of income over expenditure, after all allocated overheads and costs,and so on, I think my salary is safe.
How would on what basis we be suspended from the OMT? What’s the putative legal basis for that?

@ brian Lucey (@brianmlucey)

There’s a governing council and its independence is set out by treaty, agreed by Ireland.

That’s legal basis enough for the ECB to take action where an EMU central Bank is ordered by a government to break rules or it cancels guarantees or letters of comfort.

You hardly believe that a court would intervene in the ECB’s operations and order it to buy Irish bonds?

If OMT hadn’t begun before a partial default, then Ireland would be caught by the requirement of conditionality.

@Michael H
The CBI wouldnt be dong anything or being ordered by anyone to do anything. IT would be the unfortunate piggy in the middle. As I have said repeatedly, i dont think the ECB is a suicide cult. Cutting off liquidity would force us out of the euro, the inevitable consequence of which would be an unravelling of same.
@BW two
That you feel uncomfortable about KW analysis says more about your ability to incorporate facts than it does about the accuracy of same. KW is not alone in his insouchance about negative balance sheets in central banks. Here, Mr Brin and his googlefier is your friend. Try it out “negative capital central bank” and pay attention to the words of Dr Reis, the Czechs and indeed the ECB themselves.


The European Central Bank has launched an internal investigation into whether it broke its own rules and lent money to Spanish banks on terms far more generous than those offered to Irish banks.

The ECB inquiry relates to the collateral received in exchange for nearly €17 billion worth of loans.

Spanish banks are reported to have offered collateral that the ECB accepted as being more credit-worthy than it actually was and so offered the Spanish banks a preferential discount – effectively a cheaper loan.

An ECB spokeswoman confirmed the collateral examination following a report in German newspaper Welt am Sonntag yesterday, which revealed the Spanish banks should have received the same discount as Irish banks.

The newspaper said that if they had been, the affected banks could have had to produce up to €16.6bn more in collateral.

Prof L

The ECB might react if we defaulted on the PN. That might force us to “balance” and leave the Euro. Would that be a “bad thing”?

Alternatively, it might blink as you suggest and I supect. Would that be a bad thing?

What is the bad outcome. How many armoured divisions does the ECB control?

@ Prof Lucey

Something really weird here. A small band of people much more versed in these matters than I will ever be, including your good self, seem absolutely convinced that wealth can be created out of nothing by central banks simply exercising their printing machines and incinerators.

I can see that it is very frustrating for you that you can’t get your point across to the Troika, the government, the mandarins in the DoF, your less well endowed colleagues and ordinary simple folk like myself.


Its not a question of “creating wealth”. Try thinking of it this way:

Ireland was permitted to print the money to pay Anglo’s liabilities, but it was required to gather money together in the future and destroy it over time.

There is an argument that Ireland did this through coercion, bravado or stupidity and if it hadn’t done so the costs would have fallen much more widely throughout Europe – not least because that’s where lots of Anglo’s liabilities were.

If Ireland refuses or persuades the EZ that it needn’t gather the funds and destroy them, then the effect is one of dilution of the Euros currently held by everyone else. Its a bit like a scrip dividend.

@ grumpy

That I understand. But Karl Whelan in particular definitely argued (to a Dail committee no less) that writing off the PNs/ELA had no negative impact, as CB’s being underwater don’t matter. Karl was in fact the instigator of the bandwagon for a PN windfall, eagerly taken up by gullable souls like Peter “tear them up” Matthews.

Karl has since corrected his error and the respectable PN campaign has now much more modest ambitions – like lengthening the pay back period. Unfortunately we do have a residual rump of tearers up including Prof L and Pearse Doherty, the latter being forgivable given his nihilstic DNA.

@Michael Hennigan

There’s a governing council and its independence is set out by treaty, agreed by Ireland.

That’s legal basis enough for the ECB to take action where an EMU central Bank is ordered by a government to break rules or it cancels guarantees or letters of comfort.

So, to outline that argument in full.

(a) The Governing council of the ECB is independent (except of neoliberal dogma, of course).
(b) The ECB council is therefore obliged to take action when its will is thwarted.
(c) The action it would take would be much, much worse for Ireland than a 25 billion Euro bill for IBRC.
(d) This horrible punishment would also have to not damage price stability or the stability of the Eurozone financial sector – the ECB’s only agreed mandate.

It makes no sense, each point is more absurd than the next, and all the points are absurd.

Brian Lucey’s point is that the ECB have walked themselves into a corner. They can not punish Ireland for not playing along with the scheme to save the Eurozone’s financial sector without bringing down the Euro.

There is therefore a real tension between the ECB showing Ireland who really runs the Eurozone and the ECB having a Eurozone to run, really.

Enough self abasement, enough bogus neoclassical economic analysis, enough blaming the state for a huge market failure.

IBRC is toast.

I believe that the English central bank was effectively bust during the World War One , after taking the losses of British banks on to its balance sheet. This didn’t , of course, affect its ability to produce £ sterling .

Well out of my depth here. but perhaps money isn’t exactly the same thing as wealth . It’s a question of putting a nations resource to their best use with money being the necessary lubricant and supply constraints the limiting factor. Or at least that’s what I picked up from browsing MMT sites!

@ Ciaran

No doubt that CBs can print money and destroy it, which is not the same as creating/destroying wealth. I know that because when I was a lad I could buy a pint for a half crown (c. 15c in today’s money).

But printing/destroying money can transfer wealth and in the case under discussion it seems to me on purely common sense grounds that this would be a transfer of wealth from the rest of the EZ to Ireland. Maybe the ECB is powerless to stop such a smash and grab but how anybody can argue that we would get away with it unscathed beggars belief.

Brian Woods 2
Iv pointed out before, and you choose to ignore it, that Peter Matthews was well before most of us on tearing up te notes.
When I was a lad i could get a gobstopper for a farthing. Your point? Central Banks create money by fiat. You dont like that, fine. But stop disbelieving it.
Tear up these notes and the money remains.

Im not informed enough to have a fixed opinion on the whole PN but Im also not sure whats to be lost by at least experimenting with different approaches.
The notion that the ECB would collapse the Irish economy[and quite possibly itself] doesnt seem probable.

Brian woods 11

You clearly don’t have a bogs about money. What do you think it is except bits of paper (or electrons)? It’s not some mystical stuff. It’s an accounting entry in central banks and that’s it.

@ Prof Lucey

Can I understand your position please. It seems to be either one of the following two:

Tear up the PNs because ELA as an asset of the CBI is irrelevant, won’t harm anyone.


Tear up the PNs. Let them dare try and defy us, we will bring the whole house of cards down.

Brian Woods 2
Both . it will harm nobody and if they do throw shapes we have more power (samson like, admittedly) than they…

I like gobstoppers . But they dont last.

@BW2. BrianL

Richard Koo wades in – though no reference to gobstoppers.

“If politicians continue to implement policies that cannot work, a problem is likely to arise. As one example, they have urged the BOJ to buy up more assets while ignoring what might happen if a decline in the price of those assets left the Bank with a hole in its balance sheet. They need to ask themselves whether people would continue to trust the currency of a country whose central bank had become technically insolvent as a result of bad loans.

Some economists have declared there is no need to worry about such a scenario because trust in a currency has nothing to do with the central bank’s solvency. But in the long history of humanity, currencies not backed by gold or other precious metals have been accepted only since 1971, when President Nixon shocked the world by removing the linkage between the dollar and gold. It has yet to be proved in the four decades since then that trust in the currency issued by a central bank has nothing to do with that bank’s financial state.

The Japanese public continues to trust and use the yen in spite of a national debt amounting to 240% of GDP because the BOJ has behaved in a way deserving of their trust. Once lost, such trust can never be regained.”

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