Blanchard and Leigh: Fiscal Consolidation: At What Speed?

Olivier Blanchard and Daniel Leigh provide a good account of the trade-off facing policy makers in identifying the optimal speed of fiscal adjustment.   See also Chapter 2 of the IMF’s recent Fiscal Monitor.   Reasons for slower adjustment include time-varying multipliers, the danger of “stall speed” where adverse feedback loops kick in at low or negative growth rates, and hysteresis effects from fiscal contractions that are worse when the economy is already in recession.   The main reason for faster adjustment is the danger of falling into a bad equilibrium with high interest rates and high expectations of default, especially where it is difficult to credibly commit to future adjustments.  

Simon Wren-Lewis gives a sceptical response here.  Paul Krugman responds here, here and here.  

The debate focuses mainly on the trade-off for a country such as the UK that retains its own independent monetary policy.   In contrast to the uncertainty that surrounds such empirical questions as the size of fiscal multipliers or the causal link from debt to growth, recent experience in Ireland and elsewhere shows that the risk of falling into a “bad equilibrium” is not hypothetical for a high-debt country within EMU.   For fragile EMU members, an additional factor is the existence of a conditional lender of last resort, where one of the conditions for support could be a forced restructuring of privately held debt (PSI).   (I make an initial stab at integrating a conditional LOLR into a model with possible multiple equilibria here)

79 replies on “Blanchard and Leigh: Fiscal Consolidation: At What Speed?”

Some of the debt is going to have to be cancelled. At what speed?

It’s a bit like ivy on trees, really. Apparently ivy can live on dead trees as well.

Thanks for this. I’d be interested in reading that model mentioned at the end. But the google docs link for me doesn’t work ( I see at end it has edit?usp=sharing ) even if I could get it through the firewall (many professional ones block doc sharing sites).

“Give me a one-handed economist,” no wonder, a frustrated President Harry Truman demanded. “All my economists say, ‘on the one hand…on the other’.”

Issues missing from the current analysis are that politicians and senior civil servants are in a conflict of interest situation.

Why have too much personal sacrifice when an ungrateful electorate is likely to kick you out at the next election.

When the politicians appoint representatives to negotiate with trade unions, the representatives’ personal self interest is represented by the unions.

The economic advisers even maybe having external jobs for life, may also be conflicted.

When the late Brian Lenihan booked into the Mater Hospital for health tests after announcing public sector pay cuts in the Budget in early Dec 2009, top tier civil servants put together a case that self-assessed bonuses were part of salary.

A strong leadership could equally have argued that they were lucky to have availed of a joke of a system during an out-of-control-boom, and then given them a resounding PFO.

Who represents people without wealth and the support of collective power?

Minister Richard Bruton’s argument that a pension is a property right protected by the Constitution is a self-interested excuse not to go after bankers’ pensions funded from bogus profits but it’s ok to seize funds from private pensions.

There is also the argument that in an emergency, it’s best to take swift action early rather than have a multi-year drip-drip process.

Very few countries would of course be equitable in administering cuts and Ireland is not among them.

So here again we have an issue where it could be said is that it depends.

In 2010, the IMF wisdom was to support George Osborne’s approach in the UK; the prevailing winds have changed after 3 years.

Were they wrong then and right now?


“There is also the argument that in an emergency, it’s best to take swift action early rather than have a multi-year drip-drip process.”

In most cases that works but the EZ crisis is a game par excellence and not everyone observes the same rules.

This VoxEU article is complimentary to the IMF Fiscal Monitor of three weeks ago. Blanchard & Leigh reformulate the same problems, and updates the analysis, in an easy to read and short article (professional but accessible to all, and without the ideological mumbo jumbo from a recent post “Three things all serious people know are true”, also published on this blog last Friday .. giving rise to what Blanchard & Leigh here call “shouting matches” and must appear puerile to them).


As noted in the VoxEU article, the IMF has been pushing the “the call for credible, medium-term, fiscal consolidation plans” for some years now. I don’t think any professional macroeconomist disagrees with the essence of that message, be that a Krugman or a Taylor. And like Blanchard and Leigh say, it is going to happen one way or another; the question is rather how.

If politicians want to make monetary and fiscal expansion appear coherent, that needs reforms that will help build growth and confidence (e.g. sharp cuts in current and future pension payouts in excess of the average wage). But voters continue to obstruct reform, while politicians on the whole prefer to wander along paths of least resistance (as Michael Hennigan above says). Deficit reduction measures in most countries these past few years have been the result of mainly tax hikes (often temporary),. That was a was poor compromises as vested interests stonewalled deeper change, leading to little or no forceful action on public contingent liabilities (Croke Park debacle latest example in Ireland) (even one government last year cut the retirement age, at a small initial cost, but a huge one in a few years if maintained).
Unfortunately the Blanchard & Leigh article stands as little chance of being acted on, than earlier IMF exhortations to action. So the latest IMF Fiscal Monitor had four references to “financial repression”, envisaging several alternatives to reasoned, positive sum game, deficit reduction. None are likely to better enhance long term welfare, and all are subject to large (and possibly sudden) dangers (I imagine the McHale modelling of “bad equilibrium” is just one such instance).
Maybe we could have some good historical perspective from the likes of Prof O’Rourke as on whether such “financial repression” led to a higher degree of welfare in the 30s than the alternatives (with some incidents too in the 1950s and even one in 1992, all worthy of analysis by an economic historian with a strong interest in macroeconomics).


As for Ireland, it is in a league of its own, in terms of the size of its deficit relative to public revenues, the openness of its economy (i.e. the capacity for the large public spending to leak abroad, something the IMF never mentions and I’d guess the McHale model doesn’t address (still can’t access it)) and the aspirations of its public to maintain current living standards. Hard to model!

“The crack in the intellectual consensus on public and private austerity is the beginning of a more realistic (US) national debate about debt. But such debt relief policies are a long way from being enacted. The sheer political power of creditors and the momentum of the austerity campaign suggest that more damage to the economy may be done before any large change takes place.”


Apologies for the difficulties in accessing the Google doc. An earlier version of the paper is more easily accessible here:

Your point is well taken on the affect of the openness of the Irish economy on multipliers is well taken, but I think the difference is sometimes exaggerated when people look at the circa 80 percent share of imports in GDP. See here for some further thoughts on that point:

The recent Fiscal Assessment Report from the fiscal council has a discussion of the multiplier debate in Chapter 4 (Assessment of the Fiscal Stance):

I think a speed of around 14% unemployment and 40,000 emigrants per year is probably fast enough. Whoever is in charge should really be breathalysed.

So if we increased the fiscal stimulus from say 7% of GDP to 10% of GDP what impact would it have on emigration and unemployment? Who would actually give us the cash to carry out this Irish version of a Keynesian experiment?

The present near farcical exchanges going on between the leaders of the trade union movement and (junior) ministers of the government with regard to the stand-off on Croke Park II simply serves to underline the enormous gap between the academic debate and the political reality.

The one consolation is that it seems even wider in a number of other countries, notably France whose leaders seem unable to make up their minds as to whether the extra slack cut them by the Commission is a lifeline or a rope to hang themselves with. With government expenditure at the now extraordinary level of 57%, this seems the shifted ballast most likely to sink the euro, not what is going on in Ireland.

I don’t suppose an ABC primer of economics would be of any use?

You must have productive output that other folk are willing to buy. You must be able to produce this level and quality of output ‘better’ than anyone else who might be able to produce the same thing. You must have sufficient margin to give you a surplus, part of which you re-invest in upgrading and updating, part of which you set aside for an emergency. Your financial institutions must serve you, not you serving them!

Are we there yet? Or are we regressing in the opposite direction? D-land seems to have this sorted, but the rest of the EU? Hubris on deck as the water laps ever higher and shifts the centre of gravity toward the tipping point. After that its quite sudden.


“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

— Ernest Hemingway, American author and journalist, Nobel Prize laureate (1899-1961), The Sun Also Rises, Simon and Schuster, 1926.

In fact, the situation is more clear cut than that. Ireland is simply too small, the parties involved know each other too well, and the amount of data now available too large, for any party to succeed in persuading the Irish public that two plus two equals five.

@ john mchale

‘In contrast to the uncertainty that surrounds such empirical questions as the size of fiscal multipliers or the causal link from debt to growth, recent experience in Ireland and elsewhere shows that the risk of falling into a “bad equilibrium” is not hypothetical for a high-debt country within EMU. For fragile EMU members, an additional factor is the existence of a conditional lender of last resort, where one of the conditions for support could be a forced restructuring of privately held debt (PSI). ‘

I take that to mean that bank deposits are not secure in this jurisdiction. Pari passu and all that. Given the trends in SME and residential mortgage debt, it is hard not to concur. As so often in history, the meeting of economic theory and practice is liable to be painful.

On a topic somewhat related to fiscal consolidation;

Why would there be a fall of 10% in the M3 money supply from March 2012 to Feb 2013, from 187bn to 167bn.

Most of the fall appears to be in the M3 component and within the M3 component to relate to an increase in debt securities of up to two years.

I have no idea what this stuff means, but a fall of 10% in M3, does not seem to equate with economic growth that Ireland had in 2012, or are the two unrelated?

The ECB record ‘growth in money supply’ as being about 3%, yet in Ireland it is negative 10%.

Would somebody with a knowledge of central bank / money supply issues care to comment.
I have heard of the term ‘jobless growth’, to whose benefit ‘jobless growth’ is, I can only imagine.
But I have not yet heard of ‘bobless growth’. Can somebody help me out here.


‘In fact, the situation is more clear cut than that. Ireland is simply too small, the parties involved know each other too well, and the amount of data now available too large, for any party to succeed in persuading the Irish public that two plus two equals five’

Don’t underestimate the national talent for theatre. Two plus two can be sieved in a lot of ways.

Martin Wolf has been very informative over the course of the crisis
Here’s a good summary of why growth is so important

The manageability of public debt depends on

-“The primary fiscal deficit (before interest);

– the “snowball” – the relationship between the interest rate and prospective growth;

– and the impact on public debt of “stock-flow” adjustments – the need to bail out banks or “debt deflation” (jumps in the burden of debt due to falling domestic prices or currency devaluations, when debt is denominated in foreign currency).

It is in the nature of crises that they make all three of these far worse.”

@ Paul Quigley

One of the few, if not the only, benefits of the current crisis is that the situation you describe may have changed cf.

The days when a minister for finance could stand up in the Dáil and proudly claim that he had “taken a further x thousands out of the tax net” are over. The principle that all able-bodied adults not in full-time education should be assessed for tax, whether they end being liable or not, may not be too far away. It is the essential plank in building an economy on the successful Scandinavian model. This, incidentally, is more a way of doing things than anything else but based on two fundamental ideas (i) equity of treatment for all citizens (health care, pensions, education etc.) and (ii) a rigourous evidence-based approach to decision-making.

I think Ireland has a good chance of making it simply because of the ability of the administration to collect taxes, whatever about the debate on the level they should be set at. It is the Achilles’ heel, if you will pardon the expression, of the Greeks as the IMF has just pointed out, I gather, in its most recent review.


“a rigourous (sic) evidence-based approach to decision-making.”

Such an approach in the Greek case would show that the Troika policy has failed.


Europe is heading for a depression. Austerity didn’t bring growth.
Digs against the Greeks are very unsporting as well. The Troika is managing the country now.

In other news, I was looking at the PCAR stress assumptions for Irish Life and Perm back in 2011

“Stress” growth for 2013 was 1.4%. “Stress ” unemployment was 15.6%. Did they allow for emigration? IMF sez real unemployment rate materially higher than 14% due to emigration. All those taxpayers thar lear. What does it mean for house prices and Honohans’s cash stuffing?

En somme, this recession is going to run and run and if there is no growth those PCAR stress assumptions are going to look fanciful.

@ DOCM: “The burden of austerity has also not been equally shared in Ireland if not in a manner as blatant as that in Greece.”

Correct. Asymmetry of personal resources – or something approaching that. Are the Irish sheeple (the de-fleeced ones!) Arkelof’s ‘lemons’?

I visited some ‘town centres’ over the long weekend. The contrast between the inner urbs and the outer urbs is frightening. Alive and bustling v moribund and sparse.

– and I did appreciate that quote.

Here we go with this ‘growth, growth. growth’ chant again. What will it take to get folk to understand that growth as we knew it cannot occur again – other than with a significant expansion of new credit, hence more debt? And all debt is simply my future income consumed today. So to-morrow I will of necessity be able to consume less. Less consumption is un-growth. This supposes that my disposable income remains stable – no new charges or taxes. If the verse is the case I’m up sh*t creek. Is this logic so very difficult to understand?

My observation: Ireland is regressing economically. Our standard of livings must decline if the current fiscal policies are maintained. It cannot be otherwise. Its simple arithmetic!

@ BW

Growth – it depends on what you measure, dunnit? Maybe if debt had been taken into account during da boom there would not have been so much growth.
There is no question that things can be done better. And that can help.

‘I think Ireland has a good chance of making it simply because of the ability of the administration to collect taxes….’

The Greek state is deeply in thrall to vested internal and external interests, but there are other, less obviously corrupt, states which are in deep trouble like Ireland.

We have centralised and consolidated the administrative system which was bequeathed to us by the British. Taxes are generally paid and most civil servants operate without graft, but all that can generate is an insidious decline in living standards, as BWSnr points out.

As the increased taxes bite, more government spending is required to keep demand, and SMEs, off the rocks. As you can see, (h/t our Russian colleague) this problem is not confined to Ireland.

The more pressure which the Troika and the EZ elites apply, the more the local pols and public servants will band together off stage. Everything will be structured so as to generate the appearance of fiscal rectitude, but after thirty years of strokes and consumer values, few in authority (and fewer still in opposition) have any real faith in the integrity of the system. It’s been a long time since the likes of Joseph Brennan ran Merrion St.

“Deposits of over €100,000 are likely to be hit in the event of future European bank collapses, according to a proposal put forward by the Irish presidency of the European Council ahead of a key meeting of finance ministers next week.”

The above heading of an article in the Irish Times today is instructive. Seems a sure fire way to drive deposits away from Eurozone banks. The proposal entails changing existing rules re parri .. with depositors the last to suffer.
Bringing it forward to 2015 should also help. Can’t see any Irish bank raising any money in the bond markets if this goes through.
Have they all a death wish?

Why not institute maximum wage policies. Wouldn’t that act as a fiscal consolidator? All that surplus cash would have to find a home somewhere.

@ PQ

“If the private sector runs a financial surplus (an excess of income over spending), there has to be either a fiscal deficit or a current account surplus (or both). The bigger the private surplus, the bigger the fiscal deficit or current account surplus must be. If, in reverse, fiscal deficits are to fall, the private sector must spend more relative to income or the current account must improve. Evidently, this needs to happen with higher spending, not lower incomes, particularly after a deep recession.”

It’s logical, innit.

Here is an interesting exchange from the telegraph live crisis blog..
“Jeroen Dijsselbloem also insists Cyprus brought its current grief on itself, telling MPs that the country’s problems were not caused by Europe, but by a “badly run financial sector”.

The Eurogroup president also declared that the final Cyprus rescue package is “the best possible way” to tackle the situation.

Another MEP asks Dijsselbloem whether he actually believes the debt sustainability report drawn up for Cyprus, given the huge damage done to its banking sector.

After an “ah” and an “ummm”, Dijsselbloem replied that he relies on the EC and IMF’s economic forecasts.”

So he doesn’t believe it!

Austerity isn’t built on delusions. The plutocrats know what they are doing.
It’s economists who predict growth through shrinking who are nuts.

@ Seafóid: Yep, yep and yep! ECON 101 does not allow for the annual increase in debt (due to new credit) to be deducted from G*P. Its simply ignored! I can only assume that the econs who are assuming the debt away are also assuming that personal and corporate incomes will increase (at a min) pari pasu with the new debt. That’s a very iffy 3rd assumption indeed!

As I am tired of saying – and you folk must be well sick of reading it, – its the math that is against you. Debt increases geometrically. Aggregate economic output (and by extension most wages and salaries) can only increase arithmetically. In the short-term you can finesse this, but after that it rapidly becomes intractable. Which is where we are now. 😎

The only (and irrational) exit is to writedown or writeoff all debts – no matter of what complexion. This would have some very bad outcomes indeed and would necessitate a completely new banking system for this country; the banks would again be our servants not our masters. Then our legislators would have to have a constitutional referendum to insert an article which will prevent any administration from passing a deficit budget for day-to-day spending.

@ PQ

I do not agree and for one of the reasons that you mention but which I overlooked i.e. we have, generally speaking, a public administration free of graft.

Coincidentally, there were a series of articles in the Sindo which in all likelihood were overlooked given the amount of dross our biggest circulation newspaper contains (a connection?).

Take your pick!

As usual, both contributors come with contributions of a very high quality and the truth probably lies somewhere in the middle.

Here is a scary story …..
““The first thing that the ECB will have to do when they take on their supervisory task is to have an asset-quality review of the main banks that will be under their supervision and I think very soon after that all the other banks in Europe as well because there is still the risk of contamination between banks,” Mr Dijsselbloem said.
“The outcome of that asset quality review we don’t know yet, but it might be worrying. It might be worrying for some banks in some countries. We don’t exactly know. What I do know is that when we do have an outcome that is worrying, we need to have the instruments to deal with the problems.”

Reading Dieselboom’s comments again…I think he is correct. Is he trying to push Schauble forward. Wolfgang seemed to relent a little today by saying we need to proceed with banking union within the existing treaties.

Another comment from the Dutchman..
“Mr Dijsselbloem warned that unless the eurozone agreed common deposit guarantees, meaning that there would collectively guaranteed insurance for bank savers, then an EU banking union might fail with catastrophic consequences.
“That will be the final building block of the banking union, a necessary block,” he said. “We need to have the instruments to deal with the problems, because just exposing problems in banks and not having an answer would be very dangerous.”

Is this a danger for Irish banks?
“Yves Mersch, an ECB executive board member, confirmed that the new supervisor would check bank balance sheets to reveal any concealed dangers in the quality of assets before taking charge.
“Before we start working, we need to know what is on the balance sheet of these banks,” he said.”

@ Flj

The dance of the seven veils comes to mind. The treaties rule out the EU taking on responsibility for the debts of other countries. They do not rule out countries acting together for their mutual benefit with regard to the management of a monetary union. Germany’s opinion as to the need for treaty change is just that; an opinion and of the same value as any other country’s opinion.

Schaeuble’s approach is disingenuous. He is saying that failure to agree a treaty change – a hurdle decided by Germany – will lead to a “second best” solution!

He also trots out the usual line about pay rates in Germany being decided solely by the “social partners”. If this is really the case, the German exchequer might suitably refrain from any role in funding short-term working when the downturn in the German economy, which now seems inevitable, begins to bite.

“The ECB has said if depositors are protected consistently across the euro zone, including guarantees for small accounts and preference for uninsured depositors over other types of unsecured creditors, further measures aren’t needed for now.

The current EU deposit-guarantee proposal “provides a harmonized framework and should help shore up confidence in national schemes,” said ECB Vice President Vitor Constancio in a March speech. “This means that a single European scheme is not an essential component of banking union in the short term.”
From businessinsider

This thing looks like a disaster in the making. Do they ever learn.


re Here is a scary story …..DijsselBloem
““The first thing that the ECB will have to do when they take on their supervisory task is to have an asset-quality review of the main banks ………. It might be worrying for some banks in some countries. We don’t exactly know. What I do know is that when we do have an outcome that is worrying, we need to have the instruments to deal with the problems.”

The really scary thing is that he has not got a clue of either the extent of the problem or how to fix it.

Neither does the president of the Dutch Central bank, Klaas Knot, or indeed the two professors that wrote the FT article linked below.

In the midst of a bank plague, in essence, what they propose is a medical examination of all banks, consigning those they consider in ill health to the extermination room, and soviet style, sending the bill to the citizens of the country unlucky enough or stupid enough to have allowed them to operate.

The only way out of the quagmire is mandatory recapitalization of all European banks, in proportion to their existing equity. The recap should be done from a leveraged ESM, or the ECB with printed money. The investment will return reasonable money in time and if they don’t, well ‘there be dragons’ in any case.

Interminable stress tests, recaps by already bankrupt states, or further robbing depositors, will turn a crisis into utter chaos.
It seems odd that nobody in power realises that, or is it that the banks and financial industry have captured politics to a point where politicians are willing to destroy everything in efforts to placate and reimburse them for losses already incurred.

@Joseph Ryan
“Interminable stress tests, recaps by already bankrupt states, or further robbing depositors, will turn a crisis into utter chaos.”

I’m afraid you are right. If we get to September (German elections) without a further crisis we will be lucky. After then only the Gods know. It is well known by now where the dodgy banks are situated. If one of the too big to bailout states hits the buffers then it’s all over.

In the meantime Barrosso is suffering from delusions…

If your post reflects underlying official thinking and concerns, you must already be seeing increasing signs of the downward negative spiral. Worryingly, the reference to potential appropriation of private funds (deposits, private pension funds, etc) doesn’t auger well for Ireland.

What’s clear is that it is far easier to destroy business /economic activity than it is to create it. Once business infrastructure is deleted, loss of momentum inevitably follows. Anyone who has ever run a business knows that forward moment (growth) is essential to survival. Current policy which favors admin (public service) and the like simply reinforces the negative. Kicking the can and believing that liquidity provision will in itself hold back the tide is just wrong. The undying issues (mainly the lack of solvency) continue (to deteriorate). Recent market ‘positives’ for Ireland is a mainly a function of market trading and arbitrage rather than any real improvement in the fundamentals. Another truism is that you have to spend a penny (wisely) to make a buck. Stopping spending /cutting in a downturn, without proportionate replacement or preparation-for-future investment just won’t work. Is that not obvious to you even at this point? Or do you still think that things can be “stabilized” (in the absence of meaningful growth)? Dream on if the latter.

European banking union will likely be a good thing but its patron will be Ms Prudence. A recovery will not bring a return to easy credit.

The local situation is not good and while over 600 jobs were saved at B&Q, the 10% given to clear the dues to external suppliers, will be part of other losses.

Paul W makes a pertinent point about business creation that armchair observers can miss. Besides, Ireland already has half the EU number of SMEs per 1,000 inhabitants. The number of SME manufacturing firms is also very low.

The charade that the fake services export boom provides for the elite may not last.

Last year I said that then new Fiscal Advisory Council risked being an intellectual ornament and so it has come to pass. If John McHale is annoyed about that observation, I would welcome it. He will have no impact unless he is seen as a turbulent priest by the lords of Merrion Street.

In fact the protection that the euro provides to the policy-making elite, entrenches the status quo.

But for tax-related accounting transactions at US multinationals, the economy shrank in 2012. The IFAC is then asked to judge forecasts built on a fairytale.

A senior official of the bailout proconsulate has told me that the CSO has been asked to disaggregate the national accounts data to in effect to provide a better picture of the real economy.

Richard Bruton, enterprise and jobs minister, the biggest ministerial failure of the class of 2011 and fashioned from the same waxworks’ mould as his recent predecessors, is stuck in a time warp.

Most indigenous private sector employment is in traditional areas while Bruton wants foreign executives to get a big personal tax brake. When is enough enough?

Last week when the announcement of the new Glanbia dairy facility was made, the government resorted to a practice of its predecessor; dress up the number of jobs involved by including a number of indirect jobs plucked from the air.

Last year, IDA Ireland in its 2011 annual report decided for the first time not to provide a breakdown of jobs by full-time permanent, contract/temporary and part-time status. Wonder why?

It has the data but is reluctant to issue it. It says it doesn’t know how many new jobs involve subsidies for new foreign hires?

Internal trade could well provide a greater return than trying to build trade with India from a decimal point.

@ Michael H

‘Internal trade could well provide a greater return than trying to build trade with India from a decimal point


That is one of the Dork’s central arguments. Back in the 80s, people on tractors were still able to go for a few pints.

@ Michael H

‘A senior official of the bailout proconsulate has told me that the CSO has been asked to disaggregate the national accounts data to in effect to provide a better picture of the real economy’

Ireland is probably one of the worst cases of financialisation on the planet. The last thing that the local PTB, and their overseas associates, want is an analysis of the real economy. It would have terrible effects on ‘property values’, ‘confidence’ and the carefully staged ‘return to the markets’.

Riverdance, with its drummer Ministers, is still the only show in town

The following is relevant, courtesy of Eurointelligence:

‘Jeroen Dijsselbloem, meanwhile, said that a single EU-wide deposit insurance system would be the final step of a banking union, Borsenzeitung reports, remarking that not a single German politician with responsibility for finance would share. Dijsselbloem was clear that he spoke about the very distant future. This was not a priority project.

We would like to warn readers not to fall for headlines, not even ours. The term “banking union” has different meanings. The banking union under discussion in Brussels is not going to be a US-type system where a federal agency – the FDIC – backed by the US taxpayer, is in charge of bank resolution and deposit insurance. What we are talking about in the EU is a system in which there is no joint deposit insurance, but where bank resolution rules are harmonised, with a small joint fund of less than €80bn at the ESM (set against the €500bn-€1 trillion in capital that is needed to recapitalise the banking system). These are all steps towards an eventual banking union, which in 10 or 20 years may well have a similar potency as the US system, but this banking union is most irrelevant for this particular crisis’

Depositors look out below.

@ Paul W: “Stopping spending /cutting in a downturn, without proportionate replacement or preparation-for-future investment just won’t work.”


“Is that not obvious to you (JMcH) even at this point?”

Pertinent question. If the answer is Yes – then, … … If, No – then, … … OK ,which reply do I consider to be less worse? I reckon you will not get a reply.

There is no interest in truth telling any more. Its somewhat ‘inconvenient’. Obfuscate, rumour monger, spin half-truths and just tell outright lies. The current economic and financial disinformation campaign makes the former KGB’s attempts look like amateur stuff. Only the unfortunate sheeple are fooled – so far!

@ MH-ff: “European banking union will likely be a good thing but its patron will be Ms Prudence.”

Er, Ms Prudence? Surely you mean Nanny Whip!

If you have some time I recommend reading the Blanchard/Leigh ECB and Vox papers side by side. It is an interesting example of the private speech of elites versus the public one.

To me the ECB paper had a touch of the reverse Mark Antony about it (“I come here not to bury austerity, but to praise it.”) – it was the facts (This is definitely not the right time to be implementing this policy set.) versus the popular* assumptions (Surely at some point it will have been after the time to do it!). A ringing endorsement of the ECB/German position it was not, an attempt at ass covering it most definitely was.

The Vox paper has a similar structure but to me it seemed padded to give the impression of there being some rough equivalence in benefits between the crash austerity position and the less self destructive options. It was meant to stiffen the resolve of the public, while giving the policy makers time to clamber out of the contractionary hole they have been digging with less loss of face.

The word “pain” is also “doing a lot of work” in these papers – the pain of cutting output during a recession is of a different quality to the “pain” of cutting output by the same amount where the level of unemployment is much lower. The pain now is actual suffering for real people (mostly unimportant people obviously), the “pain” in future is reduced living standards.

Am I right? Am I? I am right.

* Popular in Germany, popular on the neoliberal right, popular in the financial sector. Not popular in the more traditional sense.

@ Fiatluxjnr, et al


Scene: A barren landscape. A tree. No green shoots visible.

[Barrosso and Rheno. Once fine suits now battered and bashed.]

Rheno: Nothing to be done.


Barosso: Rheno?

Rheno: Yes, Barro?

Barosso: We were respectable once.

Rheno: Hand in hand at the top of the Berlaymont building.

Barosso: Rehno?

Rheno: Don’t ask about my blog. Please, not again.

Barosso: Can we have a recovery, Rheno?

Rheno: Oh yes. But we can’t.

Barosso: Why not?

Rheno: We’re waiting for Angela.

Barosso: I see Snr Drachet has left his hat. I wonder if it fits.

Rheno: He wants to know if it fits!

Barosso: I have heard complaints that it is too tight. And also too loose. It hurts.

Rheno: Ask him yourself. Here he comes.

Barosso: Christ, no.

[Enter Snr Drachet, blind. He is lead by the much trampled upon, Alesina on a string.]

Drachet: What a beautiful day! What land! My the air is like… is like… champagne. This is all very agreeable.

Barosso: Snr Drachet! Snr Drachet!

Drachet: You smell like a man who has slept in a ditch.

Barosso: Snr Drachet, we were wondering. Can we have a proper Central Bank, with a banking union?

Drachet: Of course, of course, plus a fiscal and economic union. Nothing simpler.

Rehno: Because you see, I’ve been thinking and talking…

Drachet: But not to the vulgar deKrugman fellow.

Rehno: Oh, er, no.

Barrosso: Who?

Rehno: It’s just that we’d like it to stop being so miserable, what with large parts of the land on fire.

Drachet: Nonsense. It’s all beautiful.

Rehno: We were wondering – could you make your hat a little looser? Looser sir?!

Drachet: My hat, you have it? But if it was looser, it would still be too tight for others. You must understand, only the correct decisions have been taken and taken impeccably. Impeccably! Which is to say without sin. Here, let my servant Alesino explain.

Barrosso: God let him not.

Drachet: Poke him with a stick Rehno. Provoke him.

Alesina: [Being poked] Considering the work of Hayek, Hayek, Hayek, hic, excuse me, Hayek…. and the rational decisions of many men behaving rationally… considering these I say and the countries, the countries the countries of Europa. When slashed I say, it has been clearly demonstrated I say, that not as per qua, qua, qua Keynes, but as in the work of Ardagna and Ferrit, that to slash is to… I begin again. Confident I say that I am confident that there will be confidence, and so the worse things are now, the more confident I say that they will be better. And so confident in the slashing and the burning of the purging, I say, that the purgacient, available at Hickeys, will liquidize and burn in liquid fire and bring such horror, I say, that we may only begin then to be confident that the future will be better, thus the more horror the better to begin again. I begin again.

[Barosso and Rehno wrestle him to the ground and beat him into silnce. Appalled. Drachet looks skaken].

Drachet: That fellow deKrugman has battered him with many blows to the head and torso. You should have heard him once, address the finest Finance Ministers of Europe. He could speak beautifully then.

Rehno: Snr Drachet. If the hat can do no more. When can we have these beautiful things? This banking union and fiscal union and people not throwingh stones at us? When sir?

Drachet: When, just as soon as it is decided.

Barrosso: I’ve decided. Let’s do it.

Drachet: Oh but we can’t.

Rehno: Why not?

Drachet: We’re waiting for Angela.


Angela in the waiting room . A farce.

Angela enters, singing «Veronika, der Lenz ist da, die Mädchen singen Tralala, die ganze Welt ist wie verhext, Veronika, der Spargel wächst.»

Veronika, munching on an asparagus : “But the European economy does not grow. Not at all. ”

Angela : tralalalala

Veronika : Quarter 3 milady. Wait until those non farm payroll numbers come in and the bankers come back from holidays and realise 2013 is a write off ”

Angela- Sure can’t they eat asparagus , tralala. Or work hard like Uli Hoeness. Not like those Greeks who don’t pay their taxes.

Enter stage left the portly figure of Mr Hoeness pursued by a selection of Bayern Munich fans and the editorial staff of Bild as well as the Bavarian tax master

@Gavin Kostik

I wonder where Alesina’s politics really lie:

The reading list for the class in Political Economics he gives (gave?) with Andrei Shleifer has more Hayek than is healthy (no amount of the mystic of the market is too little)

Then again he has worked with Rodrik on a paper that is pretty right on.

Perhaps he just had one really bad paper, and as with R&R it was what reactionaries wanted to hear.

@ Shay Begorragh

I have him down as desperately hanging on. If only the fools had done exactly what he said.

“There Is Good And Bad Austerity, And Italy Chose Bad”



Early resolution is preferable to economically costly and politically unsustainable additional austerity and pointless concessional funding. The inherent disruption is minimised through early, co-ordinated and simultaneous debt restructuring of banks, households and sovereigns, of sufficient size to convince markets there will not be an early repeat of the exercise. Losses would be less than those created by further delay. Easy, really.

“”The Cypriot case has been a salutary reminder of the importance of establishing banking union as swiftly as possible,” Asmussen said in introductory remarks for an exchange of views with the Economic and Monetary Affairs Committee of the European Parliament on financial assistance to Cyprus.”

As Asmussen acted as one of the inner group of the EZ and as Schaeuble’s interpreter/lackey that evening in Cyprus Mark 1, the only salutary reminder to me is of Asmussen’s culpability in that debacle.

Like most ‘solutions’ in this crisis, if banking union does arrive, it will arrive too late, and even then as an emasculated compromise.

@ Frank Galton

Easy? Like an exit of Greece from the euro? Buiter does not have much of a record in the prediction business.

However, in his instance, I think he stands a much better chance of being correct, especially when he writes the following.

“If countries under pressure to reduce their deficits wish to spread the pain of austerity over a longer period, they will either have to convince the markets to fund them or ask the troika of international lenders for additional concessional funding. For most countries, the level of austerity will be higher this year than last, but less than it would have been without the retreat by the European Commission and International Monetary Fund from their past support of excessively pro-cyclical austerity.”

His contribution. when combined with the recent work by Martin Wolf (including his blog), the long slow slog (2 to 3 years?) back to equilibrium among European economies seems almost like a certainty.

@Frank Galton/ DOCM

I find the Buiter article quite unimpressive, worthy of being challenged on the basis of its reasoning.

He seems to completely endorse deleveraging by both State, banks and consumers, without which deleveraging he states there will be no recovery. Even with deleveraging he is sceptical of recovery unless he gets ‘supply side reforms’.
This is, as I understand it, the Reinhard and Rogoff analyis on steroids.

As a simple onlooker, I cannot understand how demand can be stabilised or increased by everybody paying down debts as fast as they can. Imho, banks should not be allowed to deleverage their balance sheets. Banks should be required to stabilise their loan books, but not reduce them. By allowing, indeed encouraging and mandating, banks to deleverage, the policy makers are engaging in a policy of rapid demand reduction.’
That is the last thing that is needed right now.
It may be a good policy for Citibank, but it is a disaster for demand and employment.


Buiter does not have much of a record in the prediction business.

Rather like the economic forecasts of the ECB and European Commission then, except of course they get to set the policy that they then fail to predict the disastrous outcome of.

We all know that European Union policy making is in the grip of unaccountable neoliberal incompetents, one can forgive Buiter for imagining that Greece would face up to it. Sadly he reckoned without the class solidarity of EU politicians and owners of capital of course but Syriza may surprise us all yet.

I wonder, when patience finally snaps with the current EU elite and their regional water carriers, what their fate will be? Bini-Smaghi may not be only person who has to make himself scarce.

@ Joseph Ryan

My interest in this article is neither in William Buiter nor Citibank but whether it provides any insight into the likely course of events. I think it does. Others may be of a different opinion. Time will tell!

@ BW Snr

“Is that not obvious to you (JMcH) even at this point?”

Pertinent question. If the answer is Yes – then, … … If, No – then, … … OK ,which reply do I consider to be less worse? I reckon you will not get a reply. ”

I am not expecting an answer. You correctly allude to the dilemma faced by those who are tasked with dealing with the present situation, notwithstanding that they have little control of the outcome anymore. In that, I have some sympathy for JMcH and Official Ireland in this context (less sanguine about the detail and policy errors). There are no good choices as we have been saying for some time now. It’s a no win type situation.

However, what really galls me is the spin and lack of honesty by those who are so tasked with the economy’s management. MH’s comment “The IFAC is then asked to judge forecasts built on a fairytale.” clearly illustrates the “charade”. No doubt the likes of JMcH think that they have no choice but to do so, but that is wrong-headed also and opens him /them to repuitational “intellectual deficit”. We need far more “honesty” and hence clarity, as illustrated by Fiona Muldoon’s recent revelation re 50% distressed SME loans. Did the world fall apart when she said that? No. Did it make things easier. No, the facts remain. However, it did begin to give a sense of just how much bigger the problems are than is being admitted officially. It also therefore gives a sense of the scale of the required solutions. That clarity is the path to a better, more workable place.

@ Joseph Ryan. I am in favour of unconditional writedowns and writeoffs of all classes of debts. This leads to a very bad outcome. Sharp and significant fall in standard of livings. Demand will be zeroed – except for necessaries. There will be NO recovery. Just that most folk will be able to afford a roof over their heads, enough food to eat and some energy. This IS what will happen if we fail to tackle the private debt mess. So which is it to be? Fast or slow?

The Permagrowth economic paradigm which spawned and supported the FIRE economy is faltering just as it faltered 50 years ago with the PC economy. Parts will survive, but there is a desperate shortage of lifeboats. And the rescue craft look very dodgy indeed.

@ Paul W: Thoughtful reply. Thanks.

Funny how the truth is more acceptable than the lie. So why lie to us? It surely breeds contempt and exposes the speaker as a fraud. The truth can only be spoken once. A lie has many lives.

Since Buiter seems to be putting general debt writedowns on the table, this seems related to what Gavin will be discussing Saturday morning on Newstalk as he mentioned on a previous thread.

@ BW Snr
The lies also rob democracy (reduced social equity, equality before the law, etc, etc.). The intellectual /academic (little effect) analysis by John and others re the speed of economic adjustment pales into insignificance really in light of this and is “void of merit” except for those who wish to continue with the lies.
I agree with MH therefore when he says “Fiscal Advisory Council risked being an intellectual ornament and so it has come to pass. If John McHale is annoyed about that observation, I would welcome it.” John’s and the Fiscal Council’s input has been very disappointing…to me anyway.

@ Frank Galton

I think it’s okay to say that on the Sarah Carey show the panel is planned to include Philip Lane and Colm McCarthy.

I reckon I’ll be talking more about how ideas spread, if they make any difference and where is Europe now in the austerity debate. But you never know.

Ali-fecking-lujah, Krugman (in J McH’s 3rd link, Osborne’s ghosts..) finally ‘gets’ MMT. Here:

“Remember, Britain has its own currency, which means that it can’t run out of cash. Furthermore, the short-term interest rate is set by the Bank of England. And the long-term rate, to a first approximation, is a weighted average of expected future short-term rates. Unless markets believe that Britain is going to default — which it isn’t, and they won’t — this is more or less an arbitrage condition that ties down the long run rate no matter what happens to confidence. Or to be a bit more precise, it’s hard to see what would drive up long rates except a belief that the BoE will raise short rates; and why would it do that unless it sees economic recovery in prospect?”


Which, even when the pretence is made that such a currency issuer must borrow in order to spend, means that the most fundamental facility – the finance – for counter cyclical policy, is unconstrained (in a downturn/situation of under utilised capacity).

And if ‘markets’ do not want to avail of the risk free, interest bearing deposit facilities – ie ‘bonds’ – then the issuer of currency can ‘keyboard’ all the funds a government needs for stimulus, free, gratis.

If John McHale really wanted to do anything but cheer lead & excuse the disastrous & wasteful mess in the Euro zone (how much output lost over 5 years of pro cyclical policy?!!), then he would do something to ensure that at least the same counter cyclical tools are available to the Eurozone, as are, in reality available to sovereign currency countries. (Even whilst for ideological & vested interest reasons their political leaders may still refuse to avail of them.)

Specifically, after 5 years of ‘rearranging the deckchairs’ (of which debating ‘fast or slow’ fiscal consolidation is a classic example) in an utterly flawed common currency framework, there is no ‘financial’ reason why we should still be suffering (increasing) mass unemployment. with likely another decade or worse to come.

John McHale & his ilk are monumental failures, just as much, if not more than politicians, bankers & the other members of the top few percent, for whom their is little or no personal ‘crisis’. Failures, that is, for the rest of us.

Equally pathetic is parochial approach typical of many Irish economists – arguing the toss over what Ireland itself can or cannot do. We are conjoined in a ruinous currency union – it is only at that level that macro solutions can be applied.

Out of interest there mike . Surely the external sector is all real constraint on UK spending .Surely they can’t continue to run massive trade deficits for ever?

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