Balanced budget tax cuts

One could also argue that (i) politics is the art of the possible (ii) the euro is a political undertaking and (iii) Draghi is going to the limit of what its central bank can do under the present agreed rules.

While he denies that he was involved in the construction of any kind of grand bargain (a position queries by Gavyn Davies) there can be little doubt about the fact that he is sketching out a credible road map which a gaggle of inadequate European politicians have proved incapable of doing.

On taxes, he also said the following;

“Is our monetary stimulus going to be effective without structural reforms? Last time I gave an example: we can provide as much monetary stimulus as we want, as much availability of credit as we want. But if the person who has planned to use this credit for a new business has to wait eight months before he or she can open this new business, and then once he does it she has to pay lots of taxes, this person will not apply for credit. So the presence of structural reforms, the enactment of such reforms, is important for the effectiveness of monetary policy. And, by the way, also for fiscal – for some fiscal policies for sure – especially for tax cuts.”

http://www.ecb.europa.eu/press/pressconf/2014/html/is140904.en.html

The politics of the euro are anchored in national politics. It could hardly be otherwise cf. Derek Scally in today’s IT

http://www.irishtimes.com/business/economy/germany-and-france-in-austerity-vs-stimulus-stand-off-1.1918115

Germany is already engaged in public spending on construction projects from underground transit to office buildings, hospitals, intercity railways….
The German manufacturing sector has ceased to be an assured source of jobs and cash as wages in the US decline and China overpowers both North America and Europe. The German gov’t did not sit on its hands while gazing at its navel, it ramped up public spending. With the cost of money at less than 1% it would not be wise to pass up what is the opportunity of 500 years, soon to end as the US chickens out and interest rates ramp up.

Ireland of course cannot differentiate the difference between an operating budget and a capital budget. The Tiger income was frittered away on Cell Phones, Tablets, bars, restaurants, weekends abroad, vacations involving sex, sand sun and warm weather. Boozing it up in Temple bar was out, for a few months Edinburgh was one of the in places to be hung over. I won’t get into what went up noses.

Is the Irish gov’t putting forward its position that we and the rest of the PIIGSF do not have a supply problem, we have a demand problem. Further financialisation of stagnant economies is not the solution, public spending on capital projects is needed to jump start demand. This has to be done directly by gov’t not dribbled down through banks that cannot find sound collateral to lend against.

A vote buying orgy by the Irish gov’t has to be punished severely at the polls.

Explanation no.3, no question, with an additional support that seeing as Europe is not the same political-fiscal union that either the US or UK (Scotty-Indies notwithstanding) is, that more restrictive fiscal rules (ie balanced budget) have at least some merit in order to maintain some form of political harmony.

The ECB is interesting in that it is neither as restricted as its hawks suggest, nor as free to act as its dove would also argue. Generally it threads a path down the middle of political-economic reality, with it now free-of-centre under Draghi as opposed to restricted-of-centre (and verging on outright hawkish in 2011, with disastrous consequences) under the unfortunate Trichet regime. History may well view Draghi as the man who saved the Euro if we make it another 15-20 years in place.

In lieu of a thread on ABS purchases etc, can everyone have a read of this super piece by Adam Posen, delivered to the ECB back in May, in the purpose and impact of ABS purchases in the Eurozone. First few paragraphs particularly strong on the headline backdrop

@ KOR

Going outside my pay grade here but was not Draghi merely saying that for those on balanced budgets, repositioning tax and expenditure can still provide financial stimulus. Seems sensible to me.

Perhaps you are interpreting his remarks from too parochial a standpoint. Of course if Ireland went immediately for a balanced budget that would be contractionary no mater what the tax/spend split or what structural reforms are implemented.

Draghi’s comments reflect exasperation at at some of the more ridiculous aspects of practices in parts of the EZ. Its a bit like the photocopying allowances and cheque presentation allowances that featured in the CP negotiations – they may be minor but are a real wind-up for the other side, in this case the Germanic core.

Probably reflects the political reality that certain things have to be conceded by his home country and others before there is a likelihood of general buy-in on fiscal stimulus, otherwise that would just cement things the Germans regard as unsustainable.

I thought the comment about current expenditure was odd without more specifics, and not obviously politically feasible. The politics within the ECB CG and on the streets of Italy are not very similar.

@Dan

Its an Alesina I haven’t waded through yet…

Here is an article flogging the wrong medicine when it says Draghi is giving the banks room to lend to SMEs’. Again, until there is demand created the SMEs’ lack collateral to lend against.
http://www.theglobeandmail.com/report-on-business/rob-commentary/rob-insight/draghi-passes-the-baton-to-eu-leaders/article20354389/#dashboard/follows/

Very good points. Of course central bank independence is only sacrosanct when policy actions are hawkish.

A couple of questions:

There has been an intellectual battle going on the EZ for the last number of years, between people that understand the economics of financial and debt crises on the one hand and the Germans, Rehn and Vichy-Trichet on the other. Is it really a good idea for Draghi (as well as economists closer to home) to indulge the moralist superstitions of the Germans in this way? Wouldn’t it be better to try to defeat the hard money dogma? Is everyone really that worried that German will just leave the EZ as a result?

Also, a question regarding
“Another reason to think that monetary union without political union is a bad idea”,
Would it really be a good idea for small countries like Ireland to enter into a political union dominated by Germany, with its awful policy record throughout the crisis?

Finally:
Can anyone imagine what would be happening around now if we had an ECB President Weidmannm, or similar? That day will surely come and we in Ireland will have absolutely no say in it.

Breaking newz:

Huge excitement in talmud/biblical/koranic studies at the mo. A lost page of the Book of Job has been found inscripted on a cave in torabora. Its two paragraphs are devoted entirely to the heinous crme of ‘monetary financing’. Pragmatic scholars have declined to make the content known as it would almost certainly fall into the hands of monetary terrorists. tbc

p.s.
Blind Biddy & Paddy Zhukov are having a quiet nightin in Novorossiya!

@ Joseph Ryan

I think that we may be at cross purposes. Everything that you say may well be correct. But the statement that the euro is first and foremost a political undertaking also remains correct. As Article 3.4 TEU states “The Union shall establish an economic and monetary Union whose currency is the euro”. While the countries of the EU obviously thought, and may still think, that there is economic advantage to having a single currency, the primary impetus in establishing it was clearly political. (The euro is also often seen as implying that some countries have agreed to it an others have not. This is simply incorrect. Two countries – the UK and Denmark – have a formal opt-out from the obligation to adopt it).

The point that I am attempting too make is that the crisis must ultimately also be dealt with at a political level and not just in terms of economic advantage (which lies overwhelmingly with Germany and the other creditor countries). The “curious incident” to which I referred above is the muted reaction from Berlin and Frankfurt to the actions taken by the ECB under Draghi’s inspiration. Whether it is an indication of a fundamental shift in position remains to be seen.

Derek Scally put it well IMHO.

“Frustration with France can’t mask serious worries in Germany about its oldest European partner. But Berlin is unsure how to give Paris a hand without the French trying to take the whole the arm.”

That uncertainty applies to more than just the French!

@docm

But why would you anticipate reaction from Germany? The interest rate reduction looked a bit panicky given his prior statements but it was very small and really tinkering at the margin. Everything else was a version of pre flagged stuff.

@docm

Ah yes, the “they learned not to tangle with me” school of diplomacy.

“This initiative, which could yield annual savings of some €375 million, comes more than two years after European leaders promised to compensate the Government for rescuing the banks at the height of the financial crisis.”

er: “European leaders promised to compensate the Government for rescuing the banks”

I think that is what is known as an urban myth. The wording of that promise would be…?

fyi here is another Irish Times link:

http://www.irishtimes.com/business/economy/ecb-resists-irish-plan-to-repay-imf-bailout-loans-early-1.1918250

@ Joseph Ryan.

I agree with you wrt peoples attitudes and spending. I find it a bit odd that ‘structural reforms’ are held up as a medium term panacea. When a lot of what the term ‘structural reforms’ refer to is more labour market ‘flexibility’ i.e. less rights for employees.

I mean consider you average private sector or new public sector contract employee in Dublin. Probably in his/her 30s. Should be spending. If lucky he/she is working 1, 2 or maybe 5 year contracts. Has a DC pension, if very lucky. Is likely a migrant from elsewhere on the island or outside it. Will easily have to work like this till he/she is 67 (if they can get another contract after 50). Rent rising very fast in a country with very poor tenant rights. If they have decided to have 1 or 2 children they are exposed to very high childcare costs (with no grandparents nearby).

I can’t imagine he/she is going to be interested in spending money or taking on credit too easily.

Again, I’m no economist but surely people spend more when they feel safe and secure? It also seems obvious to me that people won’t feel safe and secure doing contract work living in poorly protected rental accommodation with rising rents.

@BEB

Many thanks for that fascinating Posen link. He claims, however:

‘The euro area’s macroeconomic challenge is not just that we are in a low and declining inflation state. It certainly should not be defined as just trying to calibrate monetary policy in terms of how much liquidation versus how much moral hazard we will induce. It is that we have moved from one state of blissful ignorance, moral hazard and credit boom in combination, to an already protracted state of huge risk aversion and dysfunctional financial markets.’

‘So if anything, what the ECB faces is not a literal deflationary cycle but a dangerous sticky state of nonfinancial businesses and investors unwilling to move out a long yield curve or out of near cash except in small ways’

That does not describe the state of financial markets. As the Doug Nolan posts I have previously linked confirm, the volume of speculative activity and yield chasing was never greater. What has happened is that Central Banks have backstopped the gambles, and guaranteed the returns of the big players, while the SME sector hangs out to dry.

This has all happened before. I followed Posen’s reference towards Bernanke’s 1983 paper on the non-monetary aspects of the Great Depression, and the breakdown in credit intermediation. The paper, which is generally readable for a non-economist, shows that the small guy got hit disproportionately, and that matters did not resolve without massive state intervention.

‘As this quote suggests, the idea that the low yields on Treasury or blue—chip corporation liabilities during this time signalled a general state of “easy money” is mistaken; money was easy for a few safe borrowers but difficult for everyone else.’

‘In any case, the large government intervention is prima facie evidence that by this time the public had lost confidence in the self—correcting powers of the financial structure.’

‘Summarizing the reading of all of the evidence by us and by other students of the period, it seems safe to say that the return of the private financial system to normal conditions after March 1933 was not rapid; and that the financial recovery would have been more difficult without extensive government intervention and assistance.’

http://www.nber.org/papers/w1054

Posen says:

‘It is not as though we are in a situation where we have the paradigmatic local credit officer, the Sparkasse manager from 1953 who is there checking in on his business buddy in a particular township.’

SME credit allocation is driven by algorithms these days. Given the extent of financialisation, share buybacks, and general chicanery which characterises today’s markets, it seems unlike that the ABS beer will ever reach the SMEs. Insofar as it does, they will be pawns in some asset manipulation game.
DOCM never tires of reminding us of the obstacles to coherent government action. The ECB may be a lot of things but it ain’t a government.

@ DOCM

That’s certainly a big chunk of the problem. Sovereign power needs financial power and vice versa.

http://press.princeton.edu/titles/10177.http://press.princeton.edu/titles/10177.html

@DOCM
Yes it does. It’s a good, but pretty lengthy, read. Without states to ensure debt collection, there can be no banking, and without banks and their credit facilities, there can be no states.

That fits with Bobbit’s Shield of Achilles, which adds the military dimension. One only has to look at Syria or Ukraine to see that physical force, propaganda and war is a perennial feature of the economic and political landscape. ISIS is a previously unimaginable blend of the ancient and modern, and a huge challenge for regional and global players.

Fragile by design includes a comparative study of banking busts between the US, where banks were until the 1980s limited in size and regulated at state level, and Canada where banks were larger, fewer, and subject to centralised control.

They show that many historic US banking busts were caused by the combination of populist politics and imprudent, speculative banking, resulting in capture of state institutions, and in the expropriation of Joe and Jane Public.

They also show some very interesting links between the US megabanks and the kind of community-development housing policies which brought Clinton, Obama and Biden to national power. The subprime bust was a rerun of previous state level busts, only this time with vastly greater expropriation and global impact.

What happened in Ireland and Spain fits very well with their thesis that populist politicians and crooked bankers conspire to defraud the state and many citizens. That could never happen unless the various self-regulating professional groups servicing the exercise are prepared to throw away all standards of ethics. It happened, and it’s still happening, IMHO.

Given the fragmented nature of European democracy, it’s hard to see how the necessary European political response can be mounted.