The Monti moment?

Timothy Garton Ash may be on to something. 2010 was clearly a turning point, when the Eurozone decided to engage in generalized pro-cyclical austerity — whether they did this because of the dodgy ideas that were floating around at the time, or simply because conservative politicians were more adept at using the crisis to further their long term goals (in their case, to shrink the state) than Europe’s useless left is something historians can debate in the future.

Garton Ash suggests that 2012 may also have been a turning point, or rather a turning point that never was: with Hollande and Monti newly installed, there was a clear demand for a more symmetric adjustment policy from pro-European Southern leaders, and an opportunity for Germany to respond favourably– after all, Monti was their man. That response never came. All we got was a June summit declaration on banking union on which there has subsequently been much backtracking. There was nothing on making short run macroeconomic adjustment less asymmetric. And now the German government is busily making matters even worse on the fiscal front.

I don’t see any way that the Eurozone can avoid a major political crisis. If the current policy mix continues unabated for the foreseeable future, then the real economy in the southern periphery will continue to worsen — unless of course something miraculously turns up, which is a possibility which we can however safely discount. Since this situation will ultimately prove politically unsustainable, the ‘steady as she goes’ scenario implies an eventual political crisis that could be quite nasty, at some unknowable date in the future — a year, or two years, or even — God help us — five or ten years from now.

But can we envisage a shift in the short run macroeconomic policy mix — looser monetary policy, more debt restructuring, a countervailing core fiscal stimulus channelled either through Germany or some EU body like the EIB — and moves towards an appropriate Eurozone architecture — a real banking union, which will require at least some element of fiscal union, and ideally some other elements of fiscal union as well — which is brought about in the absence of crisis? We have all seen how OMT has bred complacency and allowed German politicians to wriggle off the hooks on which they had been impaled last June. 2012 was a pretty good year to force change from that point of view as well; another way in which the year was a turning point that never was.

The problem of course is that a political crisis serious enough to force major reform may also lead to the collapse of the Eurozone: otherwise it won’t succeed in forcing major reform. Germany’s leaders can prove me wrong, by heeding Garton Ash’s advice and seizing their second chance. But I am afraid that they will not do so.

Habemus Mortgage Arrears Plan

Today the Irish government and Central Bank together announced a new set of plans to tackle the mortgage arrears crisis. The new plan reverses two policy decisions from the recent past that are now acknowledged to be flawed: the 2009 Land Conveyancing Act, and the Financial Regulator’s 2011 Code of Conduct on Mortgage Arrears. The plan also imposes ambitious targets on all Irish domestic banks, first, to offer each mortgage holder in arrears a specific proposal for resolving their arrears problem, and second (during 2014) to ensure that a majority of these individual plans are implemented or suitably modified.

The targets seem fairly aggressive, with over 55,000 individual arrears resolution plans to be offered by December of this year. It is not clear when the new process can begin since the legislative changes to the 2009 Land Conveyancing Act may not be ready for several months (today they were promised to be completed by the summer recess of the Dail).

Key documents:

Irish Central Bank press announcement:

Mortgage arrears resolution targets:

Consultation on changes to the Code of Conduct on Mortgage Arrears:

New from Department of Finance

12-3-2013 Appearance of Secretary General, Mr John Moran before the Public Accounts Committee on 7th March 2013
12-3-2013 Publication of the Mercer Review of Remuneration Practices and Frameworks at the Covered Institutions
12-3-2013 Presentation on Mercer Review of Remuneration Practices and Frameworks at the Covered Institutions
12-3-2013 Mercer Review of Remuneration Practices and Frameworks at the Covered Institutions

The Challenge of Debt Reduction during Fiscal Consolidation

The IMF has a useful new paper on the possibility of self-defeating austerity.    Paul Krugman responds here.   The paper shows that fiscal adjustments will bring the debt to GDP ratio down over time relative to a no-adjustment baseline, although the ratio will rise in the short run when the multiplier is greater than one.   For the Irish case, this phenomenon was pointed out in the April 2012 Fiscal Assessment Report from the Irish Fiscal Advisory Council (see Box C, p. 45).   See also posts here and here.    The IMF paper also has an interesting suggestion for setting and monitoring debt targets in cyclically adjusted terms. 

Mortgage arrears: A slowing of the worsening?

The latest arrears data are out (pdf), and the rate of increase has slowed markedly at either ‘end’ of the arrears process. I think this dynamic is worth exploring.

Could this slowing of the worsening represent a sort of ‘lump’ of boom-related arrears, relatively fixed in quantum, that policy makers have to deal with? Or, are we merely seeing a slowdown before another ramping up of the arrears process?

From the release:

The figures for Q4 show a continuation of the divergent trends in early arrears and longer-term arrears. There was a quarter-on-quarter decline of 1.3 per cent in the number of early arrears cases during the fourth quarter of the year. The number of PDH mortgage accounts in arrears of less than 90 days was 49,363 at end-December, or 6.2 per cent of the total stock. However, the number of accounts in arrears of over 360 days increased by 9.1 per cent during Q4. At end-December 2012, 51,352 PDH accounts, or 6.5 per cent of the total stock, were in arrears of over 360 days. Just under half of these were in arrears of more than 720 days. The outstanding balance on these PDH accounts in arrears over 720 days was    €4.8 billion at end-December, equivalent to 4.3 per cent of the total outstanding balance on all PDH mortgage accounts.

Methinks they do protest too much

It isn’t Paul Krugman’s fault that the European Commission has been busily defending a macroeconomic policy mix that is doing tremendous damage to the European periphery: the EC only has itself to blame on this one. And so the latest outraged tweets emerging from the Brussels bubble are a little hard to take.

One of the tragedies of the interwar period is that the good guys — liberal internationalists — tended to support a macroeconomic policy mix that was destructive, as a result of their support for the gold standard. In so doing they helped undermine the case for liberal internationalism. It would be helpful if the cocooned elites in Brussels remembered that they are, de facto, the public face of the European project, and that when they defend the indefensible they are in their turn undermining that project.

Ireland v Pat Swords

It has been several years since I first came across Pat Swords. Pat demanded access to wind energy modeling work that he thought the ESRI had done but not published. There were many layers to our reply. The ESRI is not covered by Freedom of Information legislation. At the time, Ireland had not yet ratified the Aarhus Convention on Access to Environmental Information, so that did not apply either (but see below). Although it would have been appropriate for the ESRI to do a detailed study of the pros and cons of subsidizing wind energy, we had not. And no, we were not aware of someone else having done such a study either. There is no ex ante evaluation of wind energy subsidies in Ireland, and no ex post evaluation either. (And lest people protest, I am aware of a number of partial studies, and a number of not-independent ones.)

Pat lost interest in the ESRI, but not in wind policy. He asked every institution in Ireland he could think of “why do we subsidize wind?” Some replied in the vein of “because we do, now go away”. Others did not respond. So Pat asked the European Commission, with the same result. Although we do generously subsidize wind power, no official was able to satisfactorily answer why.

So Pat went to the United Nations. It first ruled that, because the European Union has ratified the Aarhus Convention and because wind policy is dictated by Brussels, Ireland’s wind policy is bound by the Aarhus Convention – a treaty Ireland had not ratified at the time.

The Aarhus Convention is not at all about wind. It is about public policy. The Aarhus Compliance Committee ruled that Ireland had failed to give its residents a proper say in the National Renewable Energy Action Plan (NREAP). Two failures were identified. First, there was insufficient information to inform a reasoned decision. Second, there was insufficient time given to deliberate and, if need be, protest.

The Committee did not say whether wind power is good or bad. It did say that decisions on wind power are dodgy.

This is a remarkable result in and of itself. The Irish government cannot justify policy decisions with a few half-baked arguments and ram it through the Dail. It often does, but there is now a precedent to call an end to such practice.

The story does not end here. Pat took the UN ruling to the High Court and asked for a judicial review of the NREAP. The judge agreed that there is prima facie evidence that things are not kosher and called a hearing, which is due to reconvene on March 13.

The government’s defense is that Pat’s protest comes far too late, ignoring that all his earlier protests were put aside and ignoring the UN ruling that insufficient time was granted in the first place. The government also argues that the EU has accepted the NREAP, ignoring that the UN ruled that the European Commission was just as much in the wrong as the Irish government.

Inexcusably, the government asked the court to be granted legal costs if they win. If he loses, Pat may have to pay the government’s lawyers.

Such bullying tactics may soon come to an end through another lawsuit, but they have not yet. It is immoral, though, that the mighty government seeks to throttle a judicial review by threatening to bankrupt a citizen who exercises his democratic right.

The government’s behaviour suggests that it knows it cannot defend its case for subsidies for wind power. Carbon dioxide emissions from power generation are indeed already adequately regulated by the EU Emissions Trading System. There is no reason to put subsidies on top. Many Irish households and companies would probably welcome cheaper electricity.

Pat comments on this case here.

EU Unemployment

The latest set of unemployment figures have been published by Eurostat.  A day after the Commission President said (or at least as it was drafted for him to say):

I think we can say that the Irish economy is now turning the corner. The latest positive figures on employment confirm that when there is determination, the programmes can work and indeed Ireland is already on positive territory when it comes to growth.

the unemployment news-release from Eurostat says:

The highest increases were registered in Greece (20.8% to 27.0% between November 2011 and November 2012), Cyprus (9.9% to 14.7%), Portugal (14.7% to 17.6%) and Spain (23.6% to 26.2%).

and has this graph:

Euroarea inflation is expected to fall to 1.8% in February.

[Aside: Anyone have any idea why Eurostat give priority and headline status in their releases to the EZ17 figures rather than the EU27 figures?]