The Future of EMU

The European Commission sponsored a project on the future of EMU over the last few months: this Economic Brief by Robert Kuenzel and Eric Ruscher provides an overview. Some of the papers are now available in the European Economy Economic Papers series (including my own paper “Capital Flows in the Euro Area”):

Guest Post: The Payments Molehill

This guest post is written by Ronnie O’Toole, who is Project Manager for the National Payments Plan in the Central Bank

While the focus of policymakers continues to be fiscal and monetary policy, the need for further micro-economic reforms was highlighted by Richard Tol in the recent Het Financieel Dagblad article. Richard identified legal services, energy and transport as some of the ‘molehills’ that when added together can help tackle the national competitiveness ‘mountain’. The payments industry should be added to this list.

Quite simply, making a payment costs money. A recent ECB study estimates that the cost of payments among EU countries is spread within a range of 0.61%-1.43% of GDP, based on a common methodology. The most efficient countries are intensive users of electronic payments such as debit cards and EFT, while the least efficient remain dependent on paper-based payments such as cash and cheques. There are also non-financial costs linked to a high culture and cheque usage. Cash as a bearer instrument will always pose a physical security threat which is not as prevalent in other forms of payment crime such as card skimming. Further, there is a clear association between cash usage and tax avoidance, with studies showing that around one-third of all cash used in Scandinavia is in the shadow economy.

Ireland is one of the most inefficient users of payments in Europe. We withdraw more from an ATM in a month than a Dane does in a year, and are one of the few countries remaining who still use cheques. The National Payments Plan (NPP) was developed as a response, and launched last Wednesday by Stefan Gerlach in the Central Bank.

The challenge of promoting electronic payments is to a significant extent one of technology lock-in. This occurs when a particular technology is dominant because of scale economies, not because of its inherent qualities. You may want to use no cheques, and prefer e-banking. However If I send you payment by cheque you won’t decline it. What’s more, since I don’t give you my bank account number you can’t pay me electronically.

Technology lock-in can be overcome if a co-ordinator signals a change in behaviour. For cheques the NPP envisages the Government playing this role, ending all B2G and G2B payment by cheque from next year. This will be a powerful signal – all businesses have at least some payment transactions with Government.
Price incentives are also likely to be critical. As my paper in the last Central Bank Quarterly Bulletin showed, the banking sector is currently typified by a huge cross-subsidisation of cash/cheques by electronic payments. Only 46% of all cash related costs are covered by fees, with the shortfall being made up on the highly profitable card side of the business. The fees banks earn relating to card payments are two-fold – not just the consumer fees we all pay, but also the ‘swipe’ charges the merchant must pay.

The way we pay Social Welfare is in sharp contrast with practice on the continent. In Ireland around half of all social transfers are paid over in cash from post offices, while paying into a bank account is the norm elsewhere. This antiquated practice has led to Ireland retaining a high rate of financial exclusion. According to the 2011 CSO SILC data 17% of Irish households don’t have a current account, compared to less than 1% in most other northern European countries. This creates an unnecessary barrier to the world of work which operates largely with electronic payments. It also closes off options for people such as the ability to pay online or to access an appropriate level of credit from formal sources rather than moneylenders. Not only do cash payments result in this negative societal outcome, it is also more expensive for the public service to provide than the electronic alternative – a clear lose-lose situation.

Behavioural economics also has a role in promoting migration – can we ‘nudge’ people to use electronic payments? For example, if we want to lower the average ATM withdrawal then only smaller amounts should be presented as the default options on ATMs, and preferably on the right hand side. Smaller denominations in ATMs can also play a role. Further, when you are down to the last 5 cheques, the insert on the chequebook shouldn’t read “Don’t do anything, we’ll send you a new cheque book even if you don’t want one” (I’m paraphrasing) but instead “If you want a replacement cheque book then ring this number, though we won’t send you one if we don’t hear from you”.

While behavioural change using existing technologies represents the thrust of the NPP, there are also new technologies emerging that can greatly assist. Contactless debit cards are currently being rolled out by the banks, which will greatly speed up the time to serve in retail outlets. Further P2P payments using mobile telephones can act as a useful alternative in a number of circumstances to cash and cheques.
However, the NPP didn’t (and shouldn’t) pick winners when it comes to payments. The world of a single European market for payments (SEPA) is almost upon us, which could greatly increase the level of competition and choice in electronic payments. Already there are many firms based in Ireland – both indigenous and multinational – that are very successful in this space.

Research shows that different electronic forms of payments are ‘friends’ – countries that have adopted one form of electronic payment are far more likely to try out new innovations when they arise. For us, that means that we need to reduce our cash and cheque usage if we want to join the innovation revolution that is transforming payments globally.

Reminder: Finance Conference Announcement

2013 FMC2 Finance Conference

May 1, 2013, Dublin, Ireland

The Financial Mathematics and Computation Cluster (FMC2) is pleased to announce that the 2013 FMC2 Finance Conference will be held in Dublin on May 1, 2013.

Papers will cover the areas of real estate risk, asset pricing, trading and portfolio performance.  The speakers include Andrew Karolyi, Matt Spiegel and René Stulz, The FMC Scientific Advisory Board (see below for membership) will be present at the conference.


08.30 – 8.50 Registration (tea and coffee)

08.50 – 9.00        Douglas Breeden (Duke) Conference Opening

09.00 – 13.00 Talks

09.00 – 09.55      G. Andrew Karolyi (Cornell), The Role of Investability Restrictions on Size, Value, and Momentum in International Stock Returns

09.55 – 10.50      Semyon Malamud (Swiss Finance Institute) Decentralized Exchange

10.50 – 11.10 Break (tea and coffee)

11.10 – 12.05      Matthew Spiegel (Yale) Human Capital and the Structure of the Mutual Fund Industry

12.05 – 13.00      René Stulz (Ohio State) Why did financial institutions sell RMBS at fire sale prices during the financial crisis?

13.00 – 13.05      Michael Brennan (UCLA) Conference Closing

13.05 – 13.30 Lunch and networking

REGISTRATION: Registration for the conference is free.  To book a place at this conference please complete this form

CONFERENCE ORGANISERS: Chair: John Cotter (University College Dublin);

Vice-Chairs: Anthony Brabazon (UCD), Gregory Connor (NUIM), David Edelman (UCD), Paolo Guasoni (DCU), Michael O’ Neill (UCD);

FMC2 Scientific Advisory Board: Douglas Breeden (Duke), Michael Brennan (UCLA), Maureen O’ Hara (Cornell), John McConnell (Purdue), Matthew Spiegel (Yale), René Stulz (Ohio State), Hassan Tehranian (Boston College).

Taxation Trends in the EU

Eurostat have published a news release with some summary tables of taxation trends in the EU.  The data are taken from the 2013 Statistical Book on the same topic.  The section on Ireland in the book opens with the following summary.

At 28.9 % in 2011, the total tax-to-GDP ratio in Ireland is the sixth lowest in the Union and the second lowest in the euro area. In recent years this ratio gradually decreased from a 2006 high of 32.1 %, but has increased again in 2011, apparently on foot of budgetary measures aimed at raising tax receipts.

The taxation structure is characterised by a strong reliance on taxes rather than social contributions. Direct and indirect taxation make up 43.4 % and 39.4 % of the total revenue in 2011 respectively, whereas the social contributions raise only 17.2 % of total tax revenue. The share of social contributions is the second lowest in the EU. The structure of taxation differs considerably from the typical structure of the EU-27, where each item contributes roughly a third of the total. As in the majority of Member States, the largest share of indirect taxes is constituted by VAT receipts, which provide 54.1 % of total indirect taxes (53.3 % for the EU-27). The structure of direct taxation is similar to that found in the EU-27. The shares of personal income taxes and corporate income taxes are in line with the EU-27 average and represent 9.2 % and 2.4 % of GDP. Social contributions represent a meagre 5 % of GDP (second lowest in the Union after Denmark), compared to an EU-27 average of 12.7 %. Employers’ and employees’ contributions are at 3.5 % and 1.3 % of GDP, respectively.

Ireland is one of the most fiscally centralised countries in Europe; local government has only low revenues (3.5 % of tax revenues). The social security fund receives just 16.4 % of tax revenues (EU-27 37.3%), while the vast majority (79.2 %) of tax revenue accrues to central government. This ratio is exceeded only by Malta and the UK.