Financieel Dagblad on Ireland

Yesterday, Het Financieel Dagblad published an interview with Michael O’Leary and me on the future of the Irish economy. I said much else besides, and some colorful language was cut out. For those who cannot read Dutch, here’s what Google Translate made of it:

Ireland has not really learned from the crisis

Reforms in Ireland have not been substantial enough to lift the economy on a higher level and to make more resilient to shocks. Through weak political leadership and an indulgent attitude of the troika of IMF, ECB and European Commission, opportunities have been missed, leaving the country in the long term to continue to perform below par. A repeat of the scenario of a severe economic downturn that Dublin cannot get to the top of on its own, cannot be excluded.

This say two connoisseurs of Irish society, Michael O’Leary, CEO of Ryanair, and Richard Tol, originally a Dutch professor who because of the crisis moved from Dublin to Brighton.

“A crisis is an opportunity for reform, but in Ireland there is only cuts,” says Tol. “Even this very big crisis was no need for structural reforms, where there should have been.” O’Leary agrees with him.

“We had the opportunity to exploit the crisis to reform the labor market and to remove job-growth barriers. “Never waste a good crisis.” But we have missed every opportunity. In Ireland there is not much appetite for real, structural reforms. ”

Rebound effect

Because nothing has changed, Ireland remains a “very inefficient, third-rate economy with a high cost structure,” thinks the CEO of the price fighter in aviation. Professor Tol takes into account an economic acceleration by the rebound effect, but then foresees a new crisis. “If confidence returns, for example in 2015, another period of rapid growth follows.

We might get another ten years growth rates of 5%. But because the structural problems are not addressed, this can produce a similar crisis in 2025 or 2030. Which can be much worse than the current one if the Irish by that time have not sufficiently reduced their debts. ”

Dublin has a long way to go, even if the country is by year-end released from the troika, as is widely expected. Some key figures illustrate this. The government expenditure fell, but are still well above the level of 2005. The debt has grown so much that the IMF warns that it can be unsustainable if there is no a real economic recovery soon. A major problem is the steady increase in the number of homeowners who can no longer bear their mortgage.

Insane

O’Leary does not understanding that Ireland has not faced up to reality the beginning of the crisis. “The government gets  €35 billion in taxes, but spend €45 billion.

This is the first thing that should be reformed. Why are we still wasting perhaps €2 billion by giving everyone in this country child support. I’m a multi-millionaire, but my wife gets four checks each month to support our four children This is insane. ‘

The entrepreneur, who elevated efficiency in his business to a religion, is annoyed by the combination of high wages and strict labor laws that take the dynamic out of the economy, according to him.

“Why should an Irish doctor earn two or three times as much money as a German doctor? That would not be bad if productivity is proportionally higher. But you cannot be treated between 5 pm and 7 am.”

Shut tight

Tol regrets that important sectors of the economy such as legal services, energy and transport in practice are as closed as before the crisis. Furthermore, the 42-year-old professor knows from personal experience how high wages in Ireland are still.

“My net wages dropped by 30% between 2010 to 2012. When I started working in Brighton my salary was matched. I am now the highest paid professor in Brighton.”

That Dublin fails to get itself together, even if a crisis manifests itself as the ‘excuse, O’Leary as well as Tol explain by a chronic lack of expertise and leadership in Irish politics. The electoral system promotes that the government and parliament consist of populists.

Who please their electorate, shrink from painful measures and generally lack the knowledge and experience necessary to steer the country by a crisis. Tol: “The Dáil is full of people who can talk very well. Many have been lawyers or teachers. Expert backbenchers are not there.

No strong opposition

The professor points out that there is no separation of powers. Ministers retain their seats in the Dáil, and are the spokesmen of their own party. Moreover, there is no strong opposition, because the two major parties, Fianna Fáil and Fine Gael, are like two drops of water. What separates them historically is not idealogy, but their position during the Irish Civil War.

The troika also do not mind anymore. “The problem of the Troika,” O’Leary says, “that when the worst of the crisis had passed and the idea was established that the country was saved, focus on reforms disappeared.” According Tol especially the IMF was full good intentions, but the ECB has taken over the control. “They just want their money returned.”

Call for papers: Economic and Social History Society of Ireland conference 2013

The annual Conference of the Economic and Social History Society of Ireland 2013 will take place in NUI Galway, on Friday 22nd and Saturday 23rd November. Cormac Ó Gráda will give the Connell Memorial Lecture. The deadline for paper proposals is 31st July.

Details of the call for papers downloadable from www.eshsi.org

Guest Post from Marios Zachariadis: Fairness and Sustainability for Cyprus

Marios Zachariadis is an economist at the University of Cyprus.  Here is his guest post:

Fairness and Sustainability for Cyprus

The Cypriot economy is being shocked via numerous channels. First, the loss of working capital by Cypriot businesses: 40%-90% of their deposits over 100,000 euro held at the two main banks. The second is a liquidity shock due to the remaining deposits in these banks being frozen for months. Overall, 90%-100% of deposits above 100,000 have either been confiscated or frozen in the two banks. The third channel relates to a significant loss of confidence in the banking system. The last two shock channels are amplified by unprecedented internal and external capital controls forced upon Cyprus. The fourth channel relates to the loss of a good part of a major sector i.e. banking, finance and related services. The fifth relates to the adverse wealth effect on a number of households and professionals who saw most of their wealth in the form of savings disappear overnight. One last adverse shock has also been in place for a while as Cyprus implemented austerity measures several months before the recent agreement for a Memorandum of Understanding (MoU) with the Troika. Moreover, the current rescue plan’s obvious non-sustainability makes it rational for households and firms to expect more austerity, which affects current consumption and investment plans.

The overall likely outcome is a double-digit dip in GDP growth for 2013 with positive growth rates out of reach for several years thereafter. This might explain why the IMF refrained from publishing forecasts for Cyprus in its most recent World Economic outlook as these would either contradict optimistic Troika forecasts in Cyprus MoU or look bad down the road.

What can be done to remedy the situation? It goes without saying that Cyprus needs to implement measures agreed in the MoU in a timely manner, and do more to implement growth-enhancing reforms by fixing structural problems that pre-existed before the arrival of these shocks. But this will not suffice. The burden undertaken by Cypriots is unsustainable. It has become so large due to the indecisiveness of the previous government but also because of the intrinsic unfairness of the solution imposed.

Why is the magnitude of this burden unfair and as a result unsustainable? To begin with, one simply needs to ask the question: Why were the deposits at the branches of the two Cypriot banks in Greece excluded from haircuts? These amounted to about 15 billion euro of deposits as compared to 26 billion in the same two banks in Cyprus (Dixon 2013), which suggests that about a third of the haircut, i.e. up to three billion euro, could have come from depositors of these banks in Greece. One might understand why the banking system in Greece and the Eurozone should be protected in this manner. After all, the will of the ECB and the Commission to avoid any direct contagion risk was evident in their insistence that Cyprus sold its bank branches in Greece, or the Troika would not agree to a bailout. But Cypriot depositors and taxpayers cannot afford to offer insurance that costs them a couple or more billion at such heavy discount.

One can also understand that the Central Bank of Cyprus and the Eurosystem could not just realize a loss by selling inadequate collateral of a bad Cypriot bank (LAIKI) that the ECB appears to have funded via Emergency Liquidity Assistance (ELA) for a long time after it was apparently insolvent, without impairing ECB’s ability to keep doing the same for other Eurozone banks. Xiouros (2013) argues that ELA has claims only against the collateral so what was done to avoid a loss could be illegal. On the other hand, realizing such a loss would amount to illegal monetary financing and would have exposed the ECB, undermining its ability to help troubled banks just a few months before the German elections. Thus, the need to push the envelope by adding the ELA of a bank that was shut down (LAIKI) to the balance sheet of another private bank (BoC). The ELA that was used for liquidity of LAIKI depositors in Greece should not permanently burden another private bank. It would even be preferable to have this loss placed on the government’s shoulders.

In that case, it would become obvious that Cyprus needs debt restructuring, either Private (PSI) or Official Sector Involvement (OSI), which the European Commission is also trying to avoid for political reasons e.g. PSI for Greece supposedly a unique event (Gulati and Buchheit, 2013) and OSI a forbidden word before German elections. It should, however, become clear to Europe that if there is no PSI so as to insure the euro zone from contagion, there will have to be OSI later.

In the absence of a Marshall-type plan in the form of targeted EU transfers of 2-3 billion euro and some form of retroactive application of the Banking Union or PSI/OSI for Cyprus, we are looking at a Great Depression disaster. Cyprus’ hope is that, if anything, by resolving the moral hazard issue this bail-in precedent makes Banking Union more likely. In that case, Cyprus needs and deserves some sort of retroactive implementation of the Banking Union for part of its ELA burden. These numbers should be understood in the context of a country with a GDP of less than 18 billion euro that, driven by its bankers and politicians short-sightedness, has already contributed to Greece’s rescue program a quarter of its GDP (4.5 billion) due to the European political decision for a PSI for Greece in 2011.

References

Dixon Hugo, April 2013, Bad Resolutions, Reuters Breaking Views

Gulati, Mitu and Lee C. Buchheit , March 20 2013, Walking back from Cyprus, VOX EU article

IMF World Economic Outlook, April 2013

Xiouros Costas April 2013, Handling of the Emergency Liquidity Assistance of Laiki Bank in the Bailout Package of Cyprus, SSRN

Where in Donegal?

This document reached me by way of the European Commission. It shows that some people are working hard to convince the Commission that Bogtec is a transnational infrastructure project of European importance (and thus qualifies for subsidies). It also shows that the Spirit of Ireland refuses to die.

There is mention of a glacial valley near Kilcar, Co Donegal. A dam, 1300 meters wide and 120 meters high (in the middle), would create an upper reservoir with a surface of 4 squared kilometers; assuming that the valley is triangular, the reservoir would be 6150 meters long. The sea would be the lower reservoir. Surplus wind power would pump the water from the sea into the reservoir. Releasing the water back into the sea, power would be generated when there’s demand.

I’ve been hiking in Donegal only a few times. Is there a glacial valley near the sea, of the above dimensions, uninhabited, and not full of archaeological treasure?

UPDATE: I’ve had one vote for Glenaddragh River Valley, which is a good way from the sea.

UPDATE2: Another correspondent forwarded this map, discussed by Donegal County Council. The hydro plan was apparently rejected as it failed to meet the requirements of the SEA Directive on procedural grounds.

Government Finance Statistics

The CSO have launched a new series of government finance statistics.  Press release here with links to the releases and datasets here.