Paul De Grauwe argues that the LTRO operation is a poor substitute for direct ECB intervention in the sovereign debt market in this FT article.
Year: 2012
In comments on Philip’s Sunday Business Post article, Bryan G raises a number of important points about what actually changes as a result of the Fiscal Compact. I think an important role for this forum is to discuss what the Compact actually does, so thanks to Bryan for focusing on the question. For one thing, it may reveal areas where clarifications from the Commission are required so informed decisions can be made.
Bryan G identifies what he sees as the major consequences of the Compact:
(a) requiring rapid convergence to MTO [Medium-Term Budgetary Objective]
(b) limiting the scope for temporary deviations due to exceptional circumstances
(c) requirement for an automatic correction mechanism
(d) requirement for Member States that have been made subject to the excessive deficit procedure to put in place budgetary and economic partnership programmes
(e) the ex ante reporting of public debt issuance plans.
(f) defining the scope and procedures for Euro Summit meetings
Points (d) and (e) are the subject of the proposed two-pack. Point (f) seems uncontroversial. I think Bryan G is right that point (c) is a — indeed I would say the — critical element of the Compact, and relates to the requirement to put a correction mechanism into “binding and permanent” national law. From my reading of the proposed Compact and the revised Stability and Growth Pact (SGP), I do not see the case for (a) and (b) being real innovations.
Central Bank economists have released two new technical papers on the Irish banking sector:
Modelling the corporate deposits of Irish financial institutions: 2009 – 2010
The financial crisis and the pricing of interest rates in the Irish mortgage market: 2003-2011
The article below was published in today’s Sunday Business Post.
The Irish electorate will soon be asked to express its opinion on the new EU Fiscal Compact Treaty. Although the treaty document is quite short, its content is quite abstract and addresses issues that have been mainly debated so far within a fairly small technocratic circle of economists. So, what are the economics of the fiscal compact?
The economic logic behind the treaty is that a deep commitment to fiscal sustainability provides a key anchor for macroeconomic policy. If the domestic population and international investors are confident that a government will maintain public debt at a level that does not pose default risk, sovereign debt will be considered a “safe asset’’. In turn, this avoids the incorporation of risk premia into the sovereign bond yield, which is an important saving to the government in terms of its debt-servicing bill. Furthermore, a low sovereign yield lowers the funding costs faced by the banking system, in view of the close financial connections between banks and the government.
The ECB provides some suggestions to improve the detailed processes that lie behind the Fiscal Compact in this opinion.