The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis

“Another myth the book seeks to shatter is that the blanket bank guarantee issued in September 2008 was the moment when Dublin gambled its future on banks and lost. In reality, the government had no viable alternative by this stage, according to the authors. They are probably right.”

I humbly disagree with this piece of revisionism whose latent intent is probably to distance the upper_echelons from the consequences of their reckless actions.
“Group_think” is also a simplistic device to ‘collectivize’ to the citizenry at large such reckless actions by same upper_echelons

the book is not currently stateside,looks terrific,a friend is bringing it over,all best with it-can the publishers not release a us kindle version ?

No. “Group Think” should not be a euphemism for a open intent to enrich yourself at the expense of the greater public. It is not, “Group Think” to stick your maw in the public trough and turn a blind eye to any and all consequences. It is conscious fraud, one which our entire civic class is guilty of.

No. Donal Donovan and Antoin Murphy are wrong. The State had a choice. It could have chosen to let the banks fall. There would have been a big splash, a lot of people would have ended up losing money they invested poorly, there would have been a big hit on the economy.

But we would have been out of that by now. Even the Great Depression was mostly over after 5 years.

But no. A criminal political class decided to give a publically funded bailut to a criminal banking class, to continue to keep a criminal developer and business class in the style to which it had become accustomed. Their reward was the continuance of obscene public sector salaries and pensions. Ireland’s future was pawned to pay the pensions of politicans, civil servants, professionals and and trade union leaders, and to keep the profits of our gombeen merchants going for two or three years extra.

Donal Donovan and Antoin Murphy are wrong. The government had a choice: Side with criminals, or side with the Irish nation. It chose the criminals. The result is a bankrupt state, with a ruined economy, a body politic corrupted beyond redemption, and emigration levels not seen since the Great Famine: A state which no longer represents the Irish nation. This is the choice that the government, and our amoral civic class, consciously and deliberatly made.

€35. I can go straight to doheny nesbits and get it from the horse’s mouth, all whilst slurping 6 or 7 creamy pints. You Irish stitch me up.

@rf

but if we’re back to ‘clientilism’ as an all encompassing explanation..

and in an Irish context “opposition to clientelism” translates roughly to a “preference for a less representative electoral system”.

Life would then be much simpler for the civil war parties then and Irish people could exercise their democratic preference for either the bankers and barristers axis or the builders and solicitors alliance each election time.

It’s easy to be wise after the event!

In recent weeks, the US Senate hearing on Apple’s extensive use of Ireland as a tax haven, has suddenly triggered attention in Ireland to the possible downsides of facilitating extensive corporate tax avoidance for a sector that stalled as a jobs engine 13 years ago.

Until May, the Irish establishment, including the traditional media, batted away any dissent that would question the official line that for example a surge in services exports reflected ‘competitiveness,’ not for example Google diverting almost 50% of its global revenues to Ireland that became Irish exports.

The Department of Finance hired economists following the bust but little had changed.

C’est la vie and during the bubble, with so many raking in money from it, dissent of course wasn’t welcome.

The lucre was spread widely; newspapers published 60-page property advertising supplements and reported on rent-a-crowd groups at property launches that fanned the fever; academic economists seldom challenged the property propaganda from bank economists and when The Economist warned of the risk of a crash, there was always one on RTE, the state broadcaster, batting away the concerns in an interview – usually with a wealthy presenter who was invested in rising bank shares.

Post hoc rationalisations apart, the story of the bank guarantee appears to be about saving Anglo Irish Bank, which was the banking arm of the dominant political party. It desperately needed cash to dress up its balance sheet and the guarantee was issued on Sept 30, 2008 – Anglo’s year end. That morning it got a loan of over €4bn from another bank that was booked as a deposit.

There is a simpler explanation than groupthink – going with the flow as it usually pays dividends. Whistleblowers are usually despised even by the ethical and in Ireland, the older men who ran things during the bubble and do so today, didn’t get where they are by being iconoclasts.

The role of dissent is important; how it is drowned out in a small conservative society and given that the role of economists is examined, presumably on they giving an intellectual gloss for those who believed or thought it a good yarn, that a permanent prosperity had been found, I wonder if the authors give any focus to their own roles during the hysteria?

If a tenured academic or a retiree with a good pension for life remained quiet, then dissent would inevitably be left to a small few – as it was.

Antoin Murphy came to public prominence in the 1980s when he discovered a black hole – not in the sun – but in the national accounts that was related to MNC profit repatriations. A decade later, he didn’t appear to have much to say publicly about the bigger black hole during the bubble.

Donal Donovan left the IMF in 2005 and the following year was the craziest year of the bubble.

I didn’t hear of him until after the crash. I don’t claim to have papal infallibility – so he may well have been publicly warning little emperors about the risks of successive annual credit growth of close to 30% or not.

Donal Donovan is a member of the Irish Fiscal Advisory Council, a post-crash creation that has no power but a bully pulpit.

It has fitted well into the structure as hoped for by its conservative creators.

You say that Ireland is “conservative” and that the actions taken benefited their “conservative” creators. I see nothing conservative about the mad property speculation of the 2000’s, nor in the radical bailout of the banking sector. I see reckless, incompetent extremism, on par with any bolshevik policy.

These “conservative” leaders are simply a criminal ancien régime. The way they respond to public criticism is indicative of this.

Extract Frank Daly’s speech to the Society of Chartered Surveyors April 2011 The Valuation Error

“The crisis in which Ireland now finds itself has, as its source, a banking implosion which was driven ultimately by a property market bubble. It would be remiss of me to appear in front of a gathering of construction and property professionals such as this without raising the question of whether, at least collectively, you could have been more vigilant in drawing attention to the enormous systemic risk which was being created. Many of you must have wondered about the sustainability of the ever-escalating upward price spiral that was developing by the middle of the last decide, a spiral driven by cheap money and by a coterie of bankers and market participants who appeared to lack a basic understanding of the dynamics of a properly-functioning market. You must have questioned whether a fourfold increase in commercial and residential property prices in the decade after 1997 could possibly have been justified given its ever-increasing divergence from the trend of economic growth over the same period.

I expect that the valuation professionals amongst you will claim that your job is to provide the best estimate of the market price of a particular property at a particular point in time. However, there is a widespread external view that your responsibilities are more extensive than that. This applies also to other professions such as accounting and auditing which have been similarly criticised for adopting a narrow interpretation of their responsibilities during the evolution of the banking and property bubbles. At a time when many lay people with no great knowledge of the property business were becoming increasingly alarmed at the disconnection between the prices being paid for properties and the intrinsic long-term economic value of those properties, could the two professional bodies not have signalled some concern at what was taking place?

I expect that I am saying nothing which has not been said by many individual members of the Society over recent years. Given your evident determination to cultivate and maintain the highest professional standards, I would suggest, as an outsider, that a critique of the performance of the profession during the evolution of the property price bubble would be a cathartic exercise for the new Society to initiate and support. The credibility of your profession would be enhanced if you could show that steps were being taken to address the mistakes of the last decade.”
Below is the elementary property valuation error that bankrupted Ireland
http://www.independent.ie/opinion/letters/bubble-values-3034584.html

The guarantee wasn’t necessarily seen as a problem in 2010 …

http://www.politics.ie/forum/economy/129549-irelands-financial-crisis-almost-resolved-says-lenihan-advisor-alan-ahearne.html

The Irish Times – Wednesday, May 12, 2010

Crisis almost resolved, says Lenihan’s adviser

HARRY McGEE Political Correspondent
IRELAND IS in the ultimate phase in the resolution of its financial crisis, the chief adviser to the Minister for Finance has contended.
In two presentations last night, economist Dr Alan Ahearne said he expected growth to return to the economy even sooner than the forecasts of the second half of the year. He predicted that job creation will also return, beginning in 2011.
He said there would be a net job creation of 20,000 next year and 45,000 per annum in succeeding years. Dr Ahearne gave his assessment of the economic situation to the Fianna Fáil parliamentary party and also to the Dublin branch of the NUI Galway alumni association. He is on secondment from NUIG to the department. A specialist in banking crises, Dr Ahearne said the National Asset Management Agency (Nama) had got its valuation of the loans of the five covered financial institutions right. “Nama has determined the price for the first tranche of loans, after rigorous loan-by-loan analysis,” he wrote in his presentation. “There is a 50 per cent average discount [which shows] aggressive valuations. Nama has forced the banks to acknowledge reality and recognise their losses.”

Antoin Murphy long ago wrote another bewk about John Law. John Law was a man who rose to high policy positions in early 18th century France and believed that he had found the ultimate monetary arrangement providing France with a secure currency backed by can’t miss property development in Louisiana — which then encompassed the entire mid-section of the future USA.

In fact, Louisiana turned out to the ultimate ghost estate and it all ended in tears.

The application to our current dilemma is left to the reader.

@Inequitable Austerity

Of course the euro is as popular as ever. No one wants to get paid in punts again.

Yer classic example of false consciousness.

People say to themselves “The Euro is the only stable thing in a chronically unstable country.” whereas the facts are that the country is chronically unstable substantially because of the Euro.

In response to a few comments I would just like to mention that the book by Antoin Murphy and myself has a whole chapter dealing just with the guarantee decision, including what we hope is a fairly thorough assessment of all the alternatives, including what Merrill Lynch may have recommended. The broad conclusions reached by the authors- which of course many may not share- were not arrived at at all lightly. We hope that commentators will have the chance to read this detailed discussion ( I’m told the book is to be published around the end of this week) .

@Donal

Dont forget to invite all your Irish Economy friends to the launch–the good, the bad and the ugly.

@ Frank MacMurphy

The book costs £35 i.e. Sterling. You can have 10 pints!

I agree with you as to the quality of the economic advice available in the hostelry that you mention.

@ Ernie Ball

A relevant extract for ease of reference.

“Instead of reining in the bubble, governmental policy accentuated it through a procyclical fiscal policy and regulatory and tax changes that made real estate development even more attractive. That is, Irish policy makers, rather than leaning against the considerable forces of the credit
expansion, introduced measures that added to the virulence of the cycle, giving the Celtic Tiger a few more years of intense growth. First, fiscal policy became extremely procyclical. Government expenditures doubled in real terms, with an annual growth rate of 6 percent between 1995 and 2007. Taxes were repeatedly lowered during the boom, particularly tax incentives for the real estate sector (Honohan, 2010).

The income tax was cut several times, until Ireland reached a stunning income tax and employee contribution average rate of 6.7 percent of gross wage earnings for a single-earning married couple with two children (see figure 5, panel C). In the housing sector, stamp duties (a sales tax on homes) were lowered in 2001, 2002, 2003, 2005, and 2007, while the ceiling on income tax deductibility of mortgage interest was increased in 2000, 2003, and 2008.26 Tax concessions were granted for urban renewal, multi-story car parks, student accommodations, nursing homes, hotels, and holiday camps. Finally, the special incentive tax rate for developers between 2000 and 2007 sought to free up land for development by taxing the proceeds at 20 percent rather than at the higher 42 percent that prevailed before, with an estimated loss of revenue of 800 million Euros (Byrne, 2012).

Second, several major legislative changes limited the regulatory oversight of financial institutions. The 2003 act that established the Central Bank and Financial Services Authority of Ireland (CBFSAI) divided supervisory responsibilities between the newly created Irish Financial Services Regulatory Authority (IFSRA) and the Central Bank of Ireland. This reorganization contributed to the lax banking supervision that characterized this period and which forced the (re)establishment of a single fully integrated regulatory institution in June 2009. Some informed parties such as Bertie Ahern, Ireland’s former prime minister, have gone as far as identifying this regulatory overhaul as the main culprit in the crisis (Brown, 2009). This new regulatory framework perniciously interacted with a particular development in the Irish banking sector: the emergence of Anglo Irish Bank. 27 If the Irish economy did well during the early years of the Euro, Anglo did even better. Its balance sheet grew by a factor of 14 between 1999 and 2007, transforming it into a systemic risk for Ireland: At its peak Ango Irish’s balance sheet was 57 percent of Irish GDP (figure 5, panel D). This phenomenal expansion was rooted in a business model that emphasized speed in loan approval and a disregard of bank rules. It was
common that a customer would apply to Anglo for a loan of several million Euros for a property development project on a Monday and receive approval by the end of the week (Carswell 2011). Anglo’s strategy of relationship lending led to a double concentration in its loan portfolio: a few
large borrowers and, in a single sector, property development. urthermore, Anglo’s minuscule branch network meant that the loan expansion had to be funded by the international wholesale markets. But the real impact of Anglo Irish Bank was to change the whole Irish banking sector as other banks reacted by loosening standards to match Anglo in profitability and avoid losing customers. As the Nyberg report states, the problems at Anglo Irish were in plain sight for the regulators, but bank management and boards could not recall a meaningful engagement on prudential issues with
the IRSRA. The failure of the Irish banking system was not related to financial innovations or regulatory arbitrage but to a failure to follow up on supervisory oversight on credit concentration risk and fragile funding (Whelan, 2010). It was low-quality governance.”

It was indeed. And who voted it into existence? And seems set to do so again.

Didnt take long for the usual suspects to prive that like so much else the true monsters are….public servants…
Bloody nurses. Always ruining the economy. ..

@ DOCM I am inclined to think that you don’t know too many of these people. The only thing they have taken on the chin is the USC. They have got their increments they still have their job security regardless of whether they sign up to these agreements or not. They have thousands of publicists in CSO, DoF, Irish CB and can always rely 110% on the ESRI not to mention the 135K PR specialists and media compilers and aggregators extracting cuttings from newspapers every day to see if they are winning the propaganda war.

Finally, money has increased a good deal in value since the beginning of this crisis depending on what you want to do and as we enter a new phase is going to buy even more. Furniture, property, food, building work are all much cheaper now than they were 4 years ago. I wish I could say the same about ESB, Board Gais, Local authority business rates, accountancy, legal and medical services. I hold the view that the country is still insolvent. Only recently we had Dermot Desmond telling us that we must either default or inflate our way out of our crisis. Was he just being polite, because he knows we cannot inflate as we have no national currency.

@ Brian Lucey “the usual suspects”? Is Professor Barrett a usual suspect also? Just because you are paranoid about the “usual suspects” does not mean that the usual suspects are not correct in their analysis.

Let me tell you the protocol for dealing with them, which you have almost, but not quite obeyed. 1. Never engage with them. 2. Never acknowledge them. 3. Never enter into discourse with them because you will only take a beating and lend further credence to their argument. The silent treatment is best practice.

Thank you Robert Browne and DOCM for making my point for me.

Let’s examine these propositions:

1) “The country is broke.” Since the people making these claims are deeply fond of analogies with ordinary households, let me explain this in their preferred manner. Is a household “broke” when its outgoings exceed its incoming but, at the same time, it has a stack of cheques that it simply chooses not to lodge? Not to mention a goldmine in the back garden (cough, AppleGoogle, cough)? What this claim amounts to is this: it is OK to hit public sector workers as often and as hard as you like, but it is not OK to ask similar sacrifices (or, really, any sacrifice at all) of those working in the private sector.

So let me turn it around on you: given that the country is, as you claim, in utterly dire straits that are tantamount to an emergency and that draconian measures are required, what would be wrong with raising income taxes such that the public sector pays the whatever demanded in Croke Park II but in the form of increased taxation and therefore the private sector would pay it too? Or are reductions in income only acceptable for your favourite scapegoats because they spare you?

2) DOCM’s object lesson in what happened during the Celtic Tiger years seems to be focused on tax cuts during those years. Yet, strangely, he is not calling for tax increases. No, the sole focus is public sector pay.

3) Nothing either of you have said contradicts in the least my contention that the initial sentences were a non-sequitur. Indeed, your vehemence merely confirms that this is a touchy subject for you. It is an absurdity to try to claim that the bank bailout in any way helped the public sector. Unless, that is, you’re in the lazy habit of conflating everyone against whom you have an ideological parti pris. Or maybe it’s not ideological and just rank self-interest: “yeah, everyone who isn’t me did it.”

4) Robert Browne does a great job of trying to maintain that 15% is not 15%. Unfortunately for him, it is. Ask some of the public sector people on here how much their pay is down since 2008.

It is time to stop this lazy (and ideological) war on the public sector, who did not cause the crisis (no matter what the Independent has been hammering for the last 5 years) and have already sacrificed more than any other category of people in Ireland toward its resolution. That last claim is an incontrovertible fact that, unfortunately, the ideologues on this board will never acknowledge.

@ ernie

‘It is time to stop this lazy (and ideological) war on the public sector, who did not cause the crisis (no matter what the Independent has been hammering for the last 5 years) and have already sacrificed more than any other category of people in Ireland toward its resolution. That last claim is an incontrovertible fact that, unfortunately, the ideologues on this board will never acknowledge’

I don’t like the Indo line either, but hundreds of thousands of people in the private sector have lost their jobs. Just like that. Sorry we have to let you go.
There are huge numbers of young and not so young who can’t get anything and are leaving the country.

Lots of parents are commuting to God knows where for work, and seeing their kids grow up without them. People are developing addictions and depression, falling out with their spouses, and even killing themselves in some cases, because they cannot get meaningful, decent work. The state has no solutions, and is in many ways part of the problem.

While I think Robert Browne has departed a little from his own high standards of analysis, his frustration is completely understandable. As Michael H puts it, the complacency at official level is remarkable. I am not so sure it is all stoicism, as DOCM says, among the general public. Plenty of folk are keeping the head down and hoping not to get hit harder.

There is surely lots of sacrifice and suffering in both private and public sectors. To say that there is something wrong with the structure of employment is not the same thing as blaming public servants. It would be interesting to hear your views on the way the state handles its private contractors, who are state beneficiaries, but not state employees.

@paul quigley

You completely miss my point. Let me say it again: “the public sector . . . have already sacrificed more than any other category of people in Ireland toward its resolution” [note the emphasis]. We aren’t talking about sacrifice in general or suffering. We are talking about this, eminently political, question: who should make sacrifices (i.e., who should pay) given the economy’s dire straits? Unemployment, and the fact of any individual’s unemployment is a tragedy but it is not in any way a sacrifice toward the resolution of the problem. It is part of the problem that requires sacrifices by others to be resolved. This means that, given the crisis the country is (allegedly) in, private sector workers who are in employment cannot claim to have sacrificed by proxy because someone else was made redundant. Thus far, the required sacrifices (again: those that contribute to resolving the country’s fiscal problem) have been made almost entirely by the public sector while the employed private sector has contributed almost nothing. In this context, the only fair way to call for sacrifice is to call for all to contribute in line with their abilities. And the way to do that is through the (progressive) taxation system.

@DOCM

You write: “My last sentence in my first post was intended to make the basic point that ALL in permanent pensionable employment – both public and private – are continuing to insist on maintaining a standard of living at the expense of others not in that happy situation, notably the unemployed young.”

Perhaps. But only the public sector are being required to make sacrifices. All evidence is that most who are employed in the private sector have not endured pay cuts or even pay freezes (which, of course, wouldn’t help the fiscal problem) but they also haven’t been asked to contribute substantially through the taxation system, which would help with the fiscal crisis. And if, as you say, you are in favor of abolishing distinctions between public and private sectors, then clearly the income taxation system is the way to ensure that all sacrifice commensurate with their abilities.

As for the “no redundancies” nonsense, please explain why redundancies in the private sector are a tragedy to be bewailed while the absence of compulsory redundancies in the public sector is supposed to be some sort of scandal. Either stop the crocodile tears for the former or lobby for the private sector to have increased protections like those in the public sector (which, by the way, are not ironclad and only apply to permanent positions). Anything else is just hypocrisy.

I would like to make 2 points:

1. Public wages in Ireland

The IMK link, Michael Hennigan gives in his finfact article is from an Institute that is close to the unions and it is on the boeckler.de web page of the German Unions foundation. It is not some “neo-liberal” union basher site, to address Shay preemptively :- )

The numbers I write here are a population weighted average of these 4 countries as a good proxy of what I see as comparable.

The private sector wages of Ireland (91%) are comparable to Germany (95%), Finland (94%), AND FRANCE (108%), given the location disadvantage of Finland, and the 75% productivity of the west in eastern Germany(relative 20% impact), and a somewhat higher tax impact in France, getting within an eternal nagging distance of relative 3% :- ).

It will not be the 20% public sector (number gut feeling, it does not matter for the completely negligible weight of 0.2%) of the 1% Irish population (divided by EU27) tip of the tail, that wags the EU dog, in terms of who adjusts to whom.

Here it is the industry unions (Industriegewerkschaft) who go first and set the frame for tariff negotiations of all others.

The public sector are not the ruling class of government officers, but public SERVANTS to the MASTER productive private sector, on which produce and taxes derived from it, the rest of society is fed.

And that means that based on those year 2010 of the Union study, Irish public servants were overpaid by 30%.

@ Francis
Germany’s not perfect. Low paid miserable people not in the humour for making babies leads to population decline.
Always scores low on happiness indices too.
Moneys not just for counting you know….

@ ernie ball

‘Thus far, the required sacrifices (again: those that contribute to resolving the country’s fiscal problem) have been made almost entirely by the public sector while the employed private sector has contributed almost nothing.’

Are you sure of the facts on that ? I would guess that a company that is laying people off is very likely also to have cut bonuses, overtime and benefits for remaining workers.

@Paul Quigley

Give DOCM a bit of credit for the effort that goes in.

As in “Say what you like about the damage the European Commission’s actions subsequent to the global financial crisis has caused to the the European Union, they deserve marks for effort.”?

Or perhaps “Lorenzo Bini-Smaghi may have been wrong about every policy issue but he was indefatigably wrong and always so nicely turned out.”?

Brian Cowan may have helped sink the country but he put in the hours let me tell you.

Merton and Scholes may have lost their investors 5 billion and nearly collapsed the financial markets but they at least had the courage to put others people moneys where their mouths were. And so on.

Results matter. Intent matters to an extent. Sincerity, self belief and effort mean next to nothing.

This is a uneven political struggle against a dominant and dangerous right wing consensus and not a search for truth.

Speaking of:

http://noahpinionblog.blogspot.ie/2013/06/what-is-derp-answer-is-technical.html?showComment=1370410903336

@ Shay Begorrah

“Believe in those who search for truth. Doubt those who claim to have found it” — André Gide (1869 -1951), Nobel Laureate in Literature 1947.

Moving on, as they say in polite society, francis puts his finger on an essential point i.e. a country can only afford the public services the productive sector of the economy can support.

Here’s another essential point: the so-called “productive sector” cannot do much of anything without healthcare, education, a system of laws enforced by police, fire protection, etc.

Never mind this absurdity: healthcare, when delivered privately is somehow magically “productive.” When delivered by the public sector, well, then it’s just the pointless to-ing and fro-ing of a bunch of worthless parasites.

Or this one: the widget manufacturer who pollutes the river who pollutes the river is “productive.” The environmental officer who cleans it up is not.

More here.

My conclusion: all talk about who is “productive” (or, as francis puts it in a revealing Teutonic upper case moment, who are the MASTERS) is really just arbitrary, stipulative and self-serving.

2. „crowding out“

That was what I wanted to write about first today, followup from yesterday, for explaining this to Shay, and Michael wage link just came very handy, for the argumentation.

When you look at what kind of new business could be started in Ireland (or elsewhere)

You have about 5 Mio people.
About 1 -1.5 % of this is graduating per year.
About 5 – 10 % of those have high qualification in a suitable subject, like Science or Engineering.
About 10 – 20% have real creativity to come up with new ideas.
About 10 – 20 % have a sense for business
About 4 – 8% have some family wealth to rely on

And you are down to 1 single Tony Owen to about 2 dozens with the higher numbers.

These numbers are of course somewhat arbitrary, and there is substantial correlation between the various factors, so it is not that extreme, but it illustrates the point.

But these people do not grow on trees, handing 50% of the population papers with a Masters title does not really help with that, if there are not enough people with some real productive companies around (not lawyer practices, financial services, real estate administration, import/export, small niche business shops …) there are no role models for that. And typically you need 3 or a few more like minded people to create a startup (input from Tony Owen very welcome!)

All (reasonable) people value security to a certain degree, especially in hard and uncertain times.

Most people also want to found a family, have babies, built/ buy a house and then having a safe job in public service becomes very important.

Typically you go through about 2 – 4 years of loss making startup, and banks will not lend, but the 3F: family, friends, and fools.

Government subsidies come most the times with strings attached, and suddenly the people spent substantial time and resources to adapt to them, report, justify, fudge the numbers ….

In Germany the typical green voter also doesn’t want to take any risk (not even owning some stock, grrrrr), but tax the successful fraction of entrepreneurs to the hilt, while ridiculing those who failed, often by no real fault of his own. 90% of business fail over 10 years, and I would attribute the 2/3 majority to factors not really foreseeable or personal weaknesses.
Shay, name calling (neo liberal), insinuation (shill), this is done very quickly and shortly, and doesn’t require much thought. To put things into perspective, to source numbers, to understand mechanisms, that requires some time and space.

And then for the most folks it is the very reasonable choice to take a safe government job, when it is so generously paid. Don’t get me wrong, Government support structures are important, public R&D creates skilled employees for the private sector, but ultimately it is only the produce of the private enterprises, which creates saleable products and national income.
You don’t need spoilt rich brats for that, who braggeteer with the startup of the 423th web site for pet food, or financial services, which are mostly just some fancy sales front plate, and other “creative” stuff, not risk engineering like Merton, but people who take calculated risks in new real material product development. For whom entrepreneurship is just a camouflage for partying anytime they want.

I do not see any justification why German workers should spent one cent on paying for the mortgages of reckless financial shenanigans in Ireland, via the euphemism banking union. You took the risk, you profited during the good times, and now you pay your debt. You know where and how deep to cut your extremely overpaid public sector, to balance your budget.

It was Ireland, who played Merton/Scholes, not Germany.

Germany as a society took substantial risk in pushing photovoltaics, to the tune of some 200 b Euro, so far, and it is very questionable / unlikely, that this pays off, but this is our business, and must not result in bankrupting competitive aluminum smelters and stuff like through excessively unfair energy costs.

The central point I wanted to make is, that

a) wages have to line up properly with regard to skills, risk, investment in education, and

b) this is derived top down from the world market exposure of the entrepreneurs, trickling down the private sector employee, public sector employee, to the local lower wage sector, and is not pushed up by a wet string from some fancies about minimum wages, some bureaucrats feel people are entitled to be.

Maybe you look at countries like Slovakia, Bulgaria to understand this.

Ernie,

I know you won’t agree with me, but the Civil Service are paid from the money taken from people who work privately (i.e. not for the government). This is tax.

The Civil Service do not pay tax. Not really.
Yes, there is a fiction, and we say they do, but it is an accounting trick really.

It is like a teenage son who says he’ll buy the pot of tea for granny. But it’s with the money he was given by his parents. We know who really paid for granny’s tea.

The same is true for almost all of the public “service”.

And they are still over-paid. Compare the pay to the average of the 1st 15 members of the E.U. (before former Warsaw Pact countries joined in 2004), and they are still over-paid. But it is wrong to say they are “generously paid”, because using the word ‘generously’ implies some choice on the part of the people who are being depleted of the money. And they don’t (& didn’t) agree to it.

There was also a very dodgy self-serving argument when getting the huge pay increases originally. They said they must do it to attract the “brightest and the best”.
Well, by the same logic, we should now have extra reductions in public sector pay, below that of the private sector, so that we can get the “brightest and the best” into the private sector where they can use their alleged great talents to generate wealth & jobs for the country. The country needs the great public sector brains in the private sector now.
And they could then generate so much wealth that they could afford to pay 35 or 40% of their salary into Pension AVC’s, and thereby catch up a bit with public sector pensions.

Ernie,

Germany is no master, we earn our money by SERVING our global customers, and it took some German public employee BEAMTE, who felt traditionally like the ruling class also for some long time, to adapt to the reality, that they are support structure.

I am not aware that Germany has anywhere a monopoly, like MS OFFICE, we must always compete on price and quality. People can buy a Mercedes or a Lexus.

I actually became more aware of today, that it is nearly always, when things go severely wrong, that it is a parasitic public sector, turning dishonest and then downright criminal, when the targets don’t turn up, classic soviet GOSPLAN tonnage ideology, Potemkin villages, like http://www.irishtimes.com/news/recession-out-of-the-picture-as-fermanagh-puts-on-a-brave-face-for-g8-leaders-1.1409112.

– In Greece the bloated and hugely inefficient public sector, with the railway paying more interest than having revenue,

– the US TIAA-CREF guy one or two days ago, who felt that his wonderful public pension fund (even better than CALPERS) should be entitled to tax cheating of one of his major holdings.

– the India licence raj system, with the endless corruption of often formerly military officers.

– Tammany Hall

– one year ago I followed up on some Spiegel article of some Stockton police officer, who claimed that they are unable to prosecute more than the most severe crimes. It turned out that they were 40% overstaffed (relative to counties I know in more detail), corrected since that : -) and by a factor of 2 overpaid to German police, which fired less bullets as a nation in a year, than some guy in that department into one innocent suspect.

@ francis

I would be in general agreement except with regard to your last point on the issue of coordination of wage arrangements across Europe. This is not an ideological position but a conclusion that the euro cannot survive in the absence of it. The social tensions that will result will not be overcome otherwise.

The debate on the conditions impacting posted workers i.e. those sent by a company in one member state to carry out a service in another country is a case in point. It is no accident that the three most contentious ECJ legal cases arose in Sweden, Finland and Germany.

http://www.eurofound.europa.eu/areas/industrialrelations/dictionary/definitions/postedworkers.htm

The Swedish unions bankrupted a Latvian building firm in the case involving Sweden. German meat processors undercutting Belgian competitors through the absence of regulation with regard to the use of migrant labour promises to be another contentious case.

This cannot continue!

@ ernie ball

That Jonathan Rowe link is on the money. It also meshes with what Francis said some threads previous when I asked him about the aspirations of today’s German workers. I venture to state that most of DOCM’s posts have been compatible also, in that s/he emphasises the issue of responsible governance. We all sign up to it, but the devil is in the detail.

This is an excellent board, which I have followed for five very interesting years. I think we have all got a bit of the elephant, and I would favour a public/private, German/Irish ceasefire at this point. Co-existence is the goal surely.

https://en.wikipedia.org/wiki/Blind_men_and_an_elephant

@ Paul Quigley

Just to make clear where I stand, I consider any attempt at categorisation of Western democracies into saints and sinners, economic or otherwise, to be an absurdity. It would not matter were it not for the fact that such an attempt has been a major plank of the approach of the Merkel/Schaeuble duo culminating in the ridiculous remark by the latter that other countries were envious of German success. Nation states do not do emotions in their relations with each other.

There is a discernible change of tone in their current approach. And about time!

However, the “I will do it myself approach” of Schaeuble in the matter of lending directly to SMEs in Portugal and Spain, to avoid the uncomfortable choices associated with creating a banking union, is still another example of misjudging both the mood and the economic reality in the rest of Europe. Italian banks are estimated, for example, to have cut €20 billion in funding to Italian SMEs.

@ francis

Sorry for your trouble. It’s a worrying sitiuation.

@ DOCM

‘ Nation states do not do emotions in their relations with each other’

I agree that say responsible, democratic governments ought to have enough respect for other democracies that they do not allow economic arguments to descend into nationalism. As you often point out, one of the central purposes of the EC was to prevent further wars between France and Germany.

Arrighi’s ‘Long Twentieth Century’ gives a very good sense of the relationship between finance, trade and military conquest. Mercantilism is a kind of war by other means, in that it is system which uses trade to gather gold and treasure domestically. It has led in the past to beggar-thy-neighbour competitive devaluations, depression and war.

There is a very considerable psychoanalytic literature on the role of emotion in nationalism. Irish and Germans know where that leads. There is no room for national stereotypes, except in genuine fun and where everyone knows that is the case. But there are political leaders and parties which are happy to resurrect the ‘absurd’ stuff, and there are people desperate enough to vote for them.

That’s the problem when politicians play the nationalist ‘moral high ground’ card at home, because it can only lead to their counterparts doing the same. The net effect is to reduce co-operation, and confuse the public about the economic, social and other problems which have to be resolved.

http://en.wikipedia.org/wiki/Psychoanalysis

@ Paul Quigley

That is, of course, the enormous danger. The penny has dropped first with the German electorate rather than Merkel and Schaeuble who are simply reacting, as has been the case hitherto, rather than leading.

You may note that I laid stress on the concept “Western democracies”. The wording of the Lisbon Treaty on the defence of democratic values is very strong. It needs to be!

You mentioned mercantilism, a concept with which francis had some difficulty. It is a rather ill-defined concept as its practice has changed over the centuries. The one remnant from the past that is still current that I can think of is the US insistence that US produced goods be carried on US registered ships. I do not know if it is still in place.

A modern summary description might be “an underlying policy assumption that the main market for any particular product must lie beyond domestic consumption”. It may be the path of the future. It already is for smaller economies of necessity. But can it work for all major economies simultaneously?

@PQ & DOCM

OK OK How about the Top Spinners’ Suite at the Ritz? Breakfast included & Sky Unlimited.

Brian Lucey refers to the low corporate tax regime as our ‘business model’. It has certainly come to dominate our economic profile, and has been critical to the construction of of ‘Ireland Inc’. As Michael Hennigan regularly reminds us, the model is steadily being emptied of real economy, and thus employment, content. It has served its profiit shelter purpose for the MNCs, and it has primarily benefited served the domestic elites who service it. There is still substantial employment, but the anticipated linkages to the domestic economy are much less than anticipated.

One way or another the low corpo tax arrangement is going to be wound up, and it seems to me that we are swimming naked. Absent the sorts of financial flows generated by FDI, Ireland is going to look and feel like a much poorer place. The consumer debt model of economic ‘development’ is as broken as the banks that promoted it.

Michael H has thoroughly demolished the ‘knowledge economy’ myth’, and much of the vaunted third level investment may turn out to have been as ill-advised and ill- managed as our construction boom. The tightening of domestic credit conditions is very likely to represent a New Normal, and its hard to see how future governrments will be able to evade heavy external constraints. The legacy of Ireland Inc is going to be as tough a problem as the legacy of landlordism.

The various contributions, and links above, are most interesting. Leo Panitch (h/t rf) has a very interesting and broad take on the various ways in which employers, workers and states have managed their interactions in Europe. While there seems to be agreement on the facts of Irish taxation, as set out by Brion Lucey, what the ordinary citizen experiences is a deepening regime of financial burdens, of which only some are payable to the state, and shrinking benefits. The middle class is being hammered, and not just in Ireland.

We have had many very useful contributions in relation to energy pricing, and its relationship to the workings of the ESB. The power relationships involved include both trade unions and private entities with stakes of various kinds in the monopoly. The same is true for professional services to the state and to the public. Digging out that tangled nest seems well beyond the compass of any conceivable govenment, and the Troika seems to happy for it to remain untouched.

Energy costs are a tax on business, but the UORR takes the biscuit, as John Corcoran points out It is ironical, and truly Irish, that business must go to wall because their landlords have to be protected, and that a good proportion of the same landlords represent the pension funds of workers. This is another tangled web which governement prefers not to address.

These various arrangements have all resulted from democratic choices. While we all make choices, we do not always get to choose the circumstances in which the decisions have to be made. Joe Lee Ireland 1912-85 gives a nice flavour of the serial crises, and the tough realpolitik, which was entailed in forming and managing our state. We are again living in interesting times.

As Pierre Bourdieu might put it, the state is a creation of the jurists, a sometimes oppressive agency, but also a repository and a guradian of the freedoms which have been hacked out so painfully over the centuries. When the corporate interests of the jurists, and the servants of the state, take precedence over the general good, the state has been usurped.

Reclaming it means looking at of our powerful institutions, our supposedly benign and neutral guardians, and identifying the conflicts of interest and the golden circles. Without a cleaning of the stables, sovereignty is just a Game of Thrones, and as the US Supreme Court Justice put it back in 1914, ’sunlight is the best disinfectant’.

Quis custodiet custodiantes ?

@ john gallaher

Interesting comment! It is similar in many respects to commentary in Ireland where the search for the outside factors that triggered the collapse of the Celtic Tiger continues. The fact that most were homegrown is only slowly being admitted.

That the major creditor countries involved would try to get their irons, i.e. their banks, out of the fire is hardly a surprise.

Another curious element is the authority assigned to various international institutions when they are no more than bureaucracies summing up the minimum level of agreement of the countries that constitute their membership; often represented by the same officials (the Bundesbank, as it happens, in the case of Germany at the IMF ahead of the finance minister).

The really interesting question is why the report was written. It can hardly have been expected to stay secret. The IMF would not have been involved at all were it not for the acquiescence (active support?) of the US. Has paitience with the Euro Area i.e. Germany run out? Devoting 60% of the available resources of the IMF to the next richest region on the planet after the US is hardly a tenable position in the long run.

@john

we seemed to have reached some peak flood here, but again the readings are above the worst government prognosis, and there is more brutal rain announced for sunday/monday, and that means we will have at least 10 more days of crisis, not to even speak of starting cleaning up.

Volunteers are so far just fabulous, but when will they wear out?

While Irelands suffers of too much of “Think Big”, Portugal seems to be a very different kind :

http://www.theatlantic.com/business/archive/2013/06/the-mystery-of-why-portugal-is-so-doomed/276371/

An interesting article on France, a rare case of me being in tune with the Spiegel : – ) :

http://www.spiegel.de/international/europe/economic-decline-in-france-the-failed-leadership-of-hollande-a-903732.html

@ Francis
Apart from a brief period when it was lead by an Italian and perhaps the 1890s France has always been a major under-achiever.
It’s not Hollande – it’s France. They fail at almost everything.

@DOCM

Interesting comment! It is similar in many respects to commentary in Ireland where the search for the outside factors that triggered the collapse of the Celtic Tiger continues. The fact that most were homegrown is only slowly being admitted.

Damn those who will not admit they are wrong – I for one accept my part in the European sovereign debt crisis and the preceding global financial crisis that it caused.

What national character flaw caused us to take us so long in realizing how we were responsible for the global financial crisis, the architecture of European Monetary Union, German economic policy and the interest rate setting of the ECB in the years 2002 to 2007? Why was it so hard for the Irish public service to acknowledge the role it played in poisoning the global financial markets with CDOed mortgage backed securities? Did we not realize that if Ireland had implemented more market reforms there might not have been any market failure at all! The mind boggles at the self deception we engaged in.

Still, common sense is beginning to prevail among Ireland’s remaining (and, it must be said, on average considerably older and more placid) citizens. I think most ordinary people accept that without the enlightened discipline of the Troika Ireland could have a serious unemployment problems and be exposed to further losses in its banking sector.

We can at least be thankful that every serious person who is not unEuropean in their approach to economics admits that without the Trojan efforts of the various institutions of the EU there might be no signs of recovery at any point in the future.

Oddly the thing that makes me most upset now is that my bad leg prevents me joining the many Irish people going abroad to prosecute our long running war against East Asia (and Paul Krugman (and econometrics (and history))).

@ JG/francis

Portugal’s problem is also to a very considerable extent that of Ireland insofar as the impact of the credit crunch – that is closing small business across the country – is concerned. The performance by the ECB, therefore, leaves one puzzled, what Draghi had to say yesterday being almost “crisis, what crisis?”.

Maybe this has something to do with it.

http://www.irishtimes.com/business/economy/europe/trade-figures-suggest-german-economy-gaining-strength-1.1420473

The issue of stalled SME bank lending is not just a problem for the Euro Area as this article by Martin Wolf on the situation in the UK underlines.

http://www.ft.com/intl/cms/s/0/dff3364a-cddb-11e2-a13e-00144feab7de.html#axzz2VW4rKoMs

Germany providing direct backstop funding to Spain and Portugal may help but how does this fix the problem in Italy?

@DOCM did not catch yesterday’s press conf. It’s normally streamed live.
But I did get a chance read this speech from Sunday night at the IMF.

“This important improvement largely reflects the removal of unwarranted fears of a systemic collapse of monetary union that was previously priced-in by markets. Today, the euro area is therefore a more stable and resilient place to invest in than it was a year ago.
And not a single euro of government bonds has been purchased under the OMT programme.”
http://www.ecb.int/press/key/date/2013/html/sp130603.en.html

Quick update for the authors,the book is not out yet in states,hardcover or kindle edition…at 65 bucks its a few martinis too !
But I did send a request to the publishers for a kindle version-it’s a click on Amazon over here,all best with the book.

@ All

A perceptive comment by Charlemagne of the Economist.

http://www.economist.com/news/europe/21579047-franco-german-partnership-has-spluttered-back-life-time-may-not-necessarily-be

The overall strategy, assuming the two heavyweight countries have actually agreed one, still boils down to too little and probably too late.

@ francis

Whatever the reason motivating the bilateral actions by Schaeuble, I still cannot figure out the reasons for Draghi’s sang froid. The figures from S & P for Italy are a cut of €44 billion in SME lending and a loss of 500,000 jobs (!).

What is afflicting not just the periphery but the UK (and other countries shortly?) is a good old-fashioned credit crunch. It is not just the lack of working capital but the collapse of mutual business confidence which is wiping out small business across these countries. Participants in any particular business chain will only deal in cash. The customer may have to put up the full amount for the delivery of a so-called “big ticket” item because the manufacturer at the other end of the chain, whether domestically or abroad, will also only deal in cash.

Good business practice in Germany, coupled with ready access to credit, is giving an additional advantage to German companies. The problem has also not afflicted – yet – France. Maybe this is the explanation for the apparent understanding achieved!

@ francis

Can you send the KfW folks to Italy (and maybe Ireland)? Maybe it is the best solution!

The EIB is an institution of the 27 countries of the EU and is very careful with regard to its sovereign rating and is supported in this by the vast majority of member states, especially those most supposed to benefit from its activities i.e. the poorest.

France and Germany got the Commission President, and the Commissioners, they wanted. The European Council has just decided – very quietly – to stick with the present system i.e. one commissioner per member state, soon to be 28 with the entry of Croatia, rather than reduce the number, a possibility provided by the Lisbon Treaty.

It is not an executive body but a football team. But there is no point in blaming the result on the officials of the Commission.

@ Francis
We do not want a German Europe.
Germany is failing. You do not have enough young people to support your old. Your birth rate is very low and as this article suggests immigrants may come but with a great degree of reluctance.

I think Germany doesn’t need a German Europe either. A shared European vision is needed for all. And that includes looking at issues such as the minimum wage.

@ Francis
I was addressing demographics which are very bad in Germany. It’s a valid point.

“And I don’t think we really need advice from people who screwed up their countries.”
With your country’s history do you really want to go there?

@ Francis
Sometimes I have to wonder.
My children and their children will be paying for the mistakes of a few greedy bankers and a great deal of incompetence shared by banks across the EU and across the world.
Part of the debacle was caused by German banks lending too much money to the periphery.

Look, it is perfectly reasonable to hold you to account for what your country did 70 years ago if you expect my children and their children to be held to account for something they had no act or part in.

Germany has problems. One of its problems is a mindset that allows oversimplification of problems into pure black and white. It also has a mindset that allows it to be indifferent to the suffering of others. It also justifies or discounts the suffering of others based on some moral premise. There are parallels between the ghettoisation of the periphery and the ghettoisations of the 30’s.

The point of brining history up is that the mindset that lead germany to destroy Europe twice in 40 years is still alive and well and merrily leading Germany to its destruction for a third time in 100 years.

German banks played a big part in the current crisis. Germany plays a big part in failed austerity. Germany is not capable of forming non-coercive unions with anybody. Germany is failing

Colm McC comments on the book

http://www.independent.ie/opinion/analysis/colm-mccarthy-dont-look-back-in-anger-but-warnings-were-there-29331074.html

@Colm McCarthy

“Donovan and Murphy write: “. . . it is difficult to see how a comprehensive guarantee of some sort covering all domestic institutions could have been avoided.”

It is not difficult at all. Countries unable to borrow in the sovereign bond market to support bust banks do not attempt to do so, and fail if they try. The thesis being advanced here is that the blanket bank guarantee was inevitable in all states of knowledge about bank insolvency.

Counter-factual history is a diverting parlour game at best, but this is a pretty implausible contribution.” (C. McCarthy)

+1 ‘ugly’ implausible due to its probable latent intent!

francis,

I think you had greater worries on 5th June with the rising water levels, and so may not have read my earlier contribution at 7:27pm (here) that day.

June 5th, 2013 at 7:27 pm

“francis,

Re [your earlier comment] : “I do not see any justification why German workers should spent one cent….You took the risk, you profited during ….”

You do not know what happened!

“Germans do not understand their banks’ role in the Euro Crisis, say the Irish”
http://www.spiegel.de/international/europe/ireland-still-faces-problems-in-overcoming-debt-crisis-a-836758.html

Some people have written:
“German money should belong to Germans.” (1)

which is true, but therefore:
“German private bank-loans should belong to German private banks”,

whether the loans make a profit or a loss.

And this is what we’re talking about here.

Ireland (the Government & the Irish people) did NOT get this money!

You wrote: “solving its debt crisis” – but this ignores that it was the debt of Foreign banks (including German) that Ireland was forced to (continue to) guarantee that is central to this crisis!

You should understand that Ireland (the government & the people) DID NOT receive this money. This is unlike the situation in Greece, Spain, Italy etc., where the sovereign did actually get the money.

In the discussion about money owed to bond-holders people use the phrase “if Ireland can’t or won’t pay it back”.

It is incorrect to use the word ‘back’.

What is being considered is whether to ‘pay it’, or not, but as we, the Irish citizens, never received this money in the first place it is wrong to talk about paying it ‘back’.

In fact not only did Irish taxpayers not receive the money, the fact that FOREIGN banks lent the money irresponsibly meant that the vast majority of Irish people were disadvantaged by massively inflated house prices. Sensible people never wanted this money to flood into Ireland in this way in the first place.

Foreign PRIVATE risk-taking banks lent money to PRIVATE banks in Ireland. Later when these PRIVATE banks were going bust, in an attempt to stop a contagious disaster throughout Ireland and Europe, the Irish government said they’d try to guarantee this private debt (but the Irish citizens weren’t asked and certainly did not agree to it).
Professor Honohan and others said that Ireland prevented an event worse than the Lehman’s collapse in Europe. When it was obvious that the little Irish citizen couldn’t possibly pay this huge debt belonging to private risk-takers, and were not going to renew the guarantee, Europe (ECB etc.,with major German influence) stepped in and insisted that there should be no ‘frightening the horses’, and haven’t yet let the debt be given back to those whom it belongs to.

As one U.S. commentator asked (1): “Why should the Irish people be forced to bail out the Germans who loaned the Irish banks the money in the first place? Shouldn’t the German bondholders who took the risks be required to take a major haircut? Isn’t that how capitalism works?”

(1) New York Times article responses:

http://dealbook.nytimes.com/2011/10/14/a-call-for-a-write-down-on-irish-debt/?hpw “

@ All

FYI

http://www.independent.ie/opinion/letters/bank-guarantee-not-big-mistake-29348208.html

Colm responds to Donal and Antoin’ s letter in the Sunday Independent on Bloomsday last;

http://www.independent.ie/opinion/columnists/colm-mccarthy/there-is-no-certainty-the-markets-will-fund-our-future-borrowing-29365721.html

Dear Donal and Antoin

I read the above book which I enjoyed. You may have accidently omitted an important feature of the Irish commercial property market. Ireland has unique commercial property lease law,which no other country in the eurozone or the world has,namely ratchet upward-only rent reviews tied to the longest leases in the world with no exit strategies.. Carrisbrook House Ballsbridge is empty with the Irish taxpayer on the hook for over two million per year on a sixty five year ratchet upward-only rent review lease and no exit strategies. In almost all other eurozone countries lease lengths for commercial and residential properties are the same –three to five years long with rents reviewed annually with reference to the CPI.

If Ireland had had regular eurozone commercial property lease law,it would have been almost impossible to have had a commercial property bubble. It was organised by the corrupt Irish politicians for their bagmen paymasters. All Haughey’s bagmen are sovereign landlords. I am curious why you never raised this important fact. The politicians must be very happy with you and your book. Sad.