Categories EMU Assorted Eurozone links Post author By Kevin O’Rourke Post date April 16, 2014 14 Comments on Assorted Eurozone links Richard Curran and Fintan O’Toole on the implications for Ireland of Greece’s recent bond auction, here and here. Ashoka Mody on Europe’s deepening muddle, here. Related ← CESifo Forum: Articles on Ireland → Survey on Income and Living Conditions 14 replies on “Assorted Eurozone links” Ashoka Mody “Schäuble is at the forefront of Germany’s efforts to lead Europe without having to pay its bills.” To ‘lead’ Europe or to ‘drive’ Europe? It’s said that the Chinese say that when you ride on a tiger you cannot dismount (although I must confess when I have tried some alleged Chinese aphorisms on Chinese, I have mostly got blank stares). Anyway, anyone who survives and dismounts from a tiger or high horse cannot do it with decorum. It’s important to keep in mind that Greece’s default was an agreed default within the euro system. The nearest the Irish came to that was the claimed June 29/30 2012 EU promise that the €64 billion in sovereign support for banks would be mutualised but it wasn’t credible from the outset. Enda Kenny couldn’t name any leader with a chequebook who made the promise and it appears Jean-Claude Juncker, prime minister of Luxembourg, without a chequebook, was part of the post-midnight commitment. Even though like his predecessors, Kenny’s media interview appearances are usually at “door step” level and the few other interviews are subject to conditions, it’s strange that there is a fog about June 29/30 2012 as there is about Sept 29/30 2008. Could a better deal have been achieved? Yes but unlike Hyacinth Bucket (pronounced Bouquet) the character in a BBC comedy series, the politicians and advisers would have had to jettison the effort to keep up appearances and tell the real unvarnished truth. There was the distinction between GDP and GNP before John FitzGerald alerted in 2013 to the distortion that redomiciled foreign companies can cause to the latter metric. This month a year ago, Mario Draghi, ECB president, gave a speech in Amsterdam and on unit labour costs, he said “Ireland has seen an 18 percentage point improvement relative to the euro area average.” The Department of Finance says that Irish unit labour costs are expected to show a rise of 21% relative to the EU average in the period 2008-2015. This huge unit labour cost rise is a fiction. The CSO says that average hourly total labour costs decreased by 3.0% over the four years to Q4 2013. Even in the grim year of 2009, there was a positive news story about Ireland’s exports for international audiences: exports of drugs and medical devices would rise by €3bn in 2009 when trade had plunged elsewhere and as a ratio of total merchandise exports, there was an increase from 51 to 57% and by 2012 the ratio would rise to 60%. In 2009-2012 inclusive, the rise in value was 25% but there was no increase in jobs which had been static for years. Computer services rose by 57% in the same period, dominated by tax-related diversions by Google and Microsoft. This is where effectively the bogus productivity figures have come from. Then in the past year, economists at the Department of Finance and at stockbroker firms have revealed a startling discovery in response to the decline in drugs exports caused by the so-called drug patents cliff: even though drugs alone (excluding medical devices) account for half of merchandise exports, the firms employ only 23,000 and there is a high import content – so no real impact on GDP. As for the accounting entries that magic up almost 50% of services exports, official Ireland is still in denial and the Central Bank has a nice chart in its latest bulletin with flatlining goods exports and arching services into the future. So the moral of this tale is that people do believe in fairytales and Mario Draghi isn’t the only EU official who has bought into the official Irish position. In 2012 alone, just Google and Microsoft accounted for 80% of the tax-related computer services exports while about 25 firms are responsible for the majority of goods exports. Presenting a spin-free honest picture of the reality would of course have increased the chances of a better deal. Even today Noonan’s dance of the seven veils on income tax cuts, shows to Europe how serious he is on getting debt relief. re bond yields; peripheral euro yields have fallen sharply everywhere and it probably reflects a market expectation for QE from the ECB rather than any improvement in the underlying debt dynamics. QE does look more likely but is not a given and it is unclear how it might work. One ECB member, Coeure , has talked openly about buying government bonds as there is a very thin market for private sector bonds, but would the ECB buy proportionately (i.e. 1% of the total QE on Irish debt) or would it have some yield target in mind? As for Greece, most of the buying may have been from hedge funds, looking for a quick turn or QE as an exit. Another debt default there would largely hit official debt holders. @Dan I’m just assuming as most likely they go with ECB capital weightings. Can you imagine the arguments otherwise. Whatever drum the EA is marching to, it is not that described by either Fintan O’Toole or Ashoka Mody. In the first case, the error is the assumption that the business of European monetary integration is some form of morality tale. It isn’t! If the EA cut the Greeks some slack it was not because of their stout defence but because the official lenders saw that the potion was not working. In the case of Mody, he is straying into European institutional territory of which he seems to have little real understanding. The drum to which the EA is marching (at least for the moment!). http://www.ecb.europa.eu/press/key/date/2014/html/sp140410.en.html And an (the?) alternative view as far as Ireland is concerned. http://www.cesifo-group.de/de/ifoHome/publications/docbase/details.html?docId=19110317 It is also fairly obvious at this stage, to the point of being almost incontrovertible, that Ireland’s national accounts are dodgy. http://www.irishtimes.com/business/economy/gdp-is-flawed-just-not-the-way-most-people-think-1.1763098 It is a few months old but this ECB Watchers piece is still relevant. http://ecbwatchers.org/2013/12/11/pres-vsps-and-the-ecb-a-response-to-paul-krugman/ Notable for the fact that Paul Krugman is is criticised for being too generous to the ECB. Fun fact #1: All three chief economists of the ECB have been German born. Fun fact #2: The ECB has failed to meet its inflation targer for six years. Fun fact #3: Eurozone unemployment is 25% higher now than it was two years after the GFC in 2010. Fun fact #4: Despite their utter failure there has still be no significant reform in European Institions. @DOCM In the case of Mody, he is straying into European institutional territory of which he seems to have little real understanding. Given the choice between someone who understood economics well but Eurozone institutions poorly and someone ignorant of economics but a real expert on who’s who in European Union technocracy I know which one most people would choose for policy analysis. Suzanne Lynch of the IT has an excellent summary from the EU coalface of the current situation with regard to the negotiations, and implementation of new policies, relating to euro. http://www.irishtimes.com/news/world/europe/spectre-of-deflation-ramps-up-threat-to-stability-of-euro-zone-1.1764186 The only point that she overlooks is the still outstanding question of the inter-governmental agreement to actually supply the money for the Single Resolution Fund. A sixth draft has become available on the web through an Italian think-tank. http://www.astrid-online.it/Riforma-de/GOVERNANCE/BANKING-UN/Documenti/AGREEMENT-/Intergov_Agreement-on-the-functioning-of-the-SRF-6th-DRAFT-IGC-SRF.pdf The description of the situation as a “deepening muddle” does not seem to be the most accurate description. The other interesting question is the extent to which the Six-pack and Two-Pack regulations are being observed by the member states. Certainly, there is no evidence that the new rules are simply being ignored. The impact in Ireland was, of course, to force the coalition some weeks from an election to remind the electorate that savings of €2 billion have still to be found. @MH “It’s important to keep in mind that Greece’s default was an agreed default within the euro system.” It was “agreed” acceptance of a ‘fait acompli’ presented by the Greeks…we lacked the gumption to deliver a similar message when the time was ripe. Or to use Eamon Gilmore’s analogy – we did little more than have an ice cream strike in winter. In any case i’m not sure what relevance there is in calling out that it was agreed within in the euro systems as if this distinction is what the market has taken into account in 6 times over subscribing to a reasonable rate that O’ Toole refers to. The fundamental point he is making and was made by rational thinking economists at the time is that the markets move on – Noonan and co. are hoping the electorate has equally short memories…and sadly, he is probably right. @DOCM The other interesting question is the extent to which the Six-pack and Two-Pack regulations are being observed by the member states. Yeah, I detect a lot of interest in that. <…tumbleweeds…> @ Kerchav FYI http://www.bloomberg.com/news/2011-06-10/schaeuble-insists-the-private-sector-share-greek-aid-in-clash-with-ecb.html @ Kerchav There is a slight difference in defaulting within the EMU and launching a new currency coincident with defaulting. The Commission’s detailed press release on the Banking Union states, or at least implies, that the Single Resolution Fund has already been agreed! http://europa.eu/rapid/press-release_STATEMENT-14-119_en.htm The edifice is now in place. The open question is whether it will be adequate to meet the challenges ahead. A degree of scepticism is justified as this commentary on the “too big to fail” problem by Martin Wolf underlines. http://www.ft.com/intl/comment/columnists/martin-wolf @ Kerchav/MH FYI http://www.bloomberg.com/news/2014-03-26/germany-s-schaeuble-says-greece-could-be-model-for-ukraine-aid.html The key distinction to be drawn IMHO is between an “outright default” i.e. without any attempt at reaching agreement with creditors or a “managed default”/”orderly restructuring” with their – reluctant – involvement. Inside or outside the euro evidently makes little difference if the economic and financial problems being confronted are similar. Those of Ireland and Greece are not comparable and never have been. Comments are closed.