The EBA Stress Tests: What’s the News Value?

The Irish banks, AIB and Bank of Ireland, show up poorly on the stress test of 51 European banks (33 in the Eurozone) released Friday night. The methodology is explained on the EBA website. Briefly, there has not been a review of each bank by a team of EBA inspectors as is implied by some of the media coverage – RTE’s bulletin referred to an ‘examination’. It is a mechanical exercise based on the ‘static’ 2015 balance sheet, as published, with no adjustment for the plausibility of provisions but also with no credit for retained earnings post 2015. The ‘stress’ is essentially a GDP downturn from 2016 through 2018 resulting in a depletion of capital adequacy as against the end-2015 balance sheet number.

The scale of the depletion reflects the extent of the assumed downturn. The essential reason for the sharper loss of capital adequacy for the Irish banks is that the downturn assumed for Ireland is greater. Against a baseline, the cumulative adverse GDP shock for the main Eurozone countries included is as follows:

Belgium -7.6
Germany -6.6
Ireland -10.4
Spain -6.7
France -5.6
Italy -5.9
Lux -8.2
Neth -8.4
Austria -7.6
Finland -8.3

The adverse shock assumed for Ireland is the largest and 3.2% above the average for the others shown. There are some other factors but the EBA release makes it clear that these numbers are the main driver of the projected capital depletion. The basis for the large Irish shock is a calibration against the experience over 2008 to 2011 when the downturn in Ireland was more severe than elsewhere.

The EBA may have sacrificed plausibility to uniformity of treatment – the exercise is in any event an input into a further phase called SREP, the supervisory review and evaluation process, rather than a definitive assessment of bank capital adequacy. The Irish banks, and numerous others, may of course need to generate or raise more capital but the relative worsening in their position flows from the assumptions employed and not from any ‘news’ uncovered by the EBA sleuths.

That 26% growth rate: two weeks on

The recent publication by the CSO of the 2015 National Income and Expenditure Accounts generated a lot of reaction.  There is no doubt that a 26.3 per cent real GDP growth is bizarre but it was not farcical, false or based on fairy tales.

Many commentators went out of their way to highlight that the figures did not characterise what was happening “on the ground” in the Irish economy.  But this seems like a bit of a strawman.  Instead of being told what the figures were we were been scolded over what they weren’t.  No one said the economy was growing at 26 per cent.  Arguments against using GDP in an Irish context have made for the past quarter of a century.  Even as recently as March, when the first growth estimates for 2015 were provided, there were plenty of people who pointed that the underlying growth rate of the economy was probably around half of the 7.8 per cent growth rate in real GDP shown at that time.

But a 26.3 per cent real GDP growth rate is very very unusual.  And one that deserves understanding rather than dismissal.  However, the discussion of the figures has generated more heat than light.  At the briefing it seems three items were identified as having oversized effects on the national accounts’ aggregates. These were:

  • aircraft leasing
  • inversions and corporate restructurings, and
  • asset transfers to Ireland

Continue reading “That 26% growth rate: two weeks on”

New Release: The Central Bank Quarterly Bulletin 2016

The central bank have just released their 2016 quarterly bulletin. Box A on Page 11 discusses the farce of the 26.5 per cent growth.


“These developments reflect the statistical ‘on-shoring’ of economic activity associated with a level shift in the size of the Irish capital stock arising from corporate restructuring and balancing sheet reclassification in the multinational sector and also growth in aircraft leasing activity”.

Screen Shot 2016-07-27 at 13.39.06

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This is no time to go wobbly, EEA edition

There is a depressing amount of wishful thinking going on in the UK right now: for a recent example see here. When Iceland’s banking system collapsed, that was a real emergency requiring capital controls: the sort of eventuality envisaged by the now-famous Article 112 of the Agreement on the European Economic Area. It isn’t at all clear to me that the rest of the EEA will view the argument that “there are too many of your lot in our country, so let us keep them out” in the same light. There is also a big difference between triggering an emergency clause in a contract, when an emergency arises which was unexpected when the agreement was signed, and saying from day one that you want to opt out of a key part of an agreement. And the have-your-cake-and-eat-it brigade also fail to mention that, in addition to Article 112, there is Article 114, which states that

If a safeguard measure taken by a Contracting Party creates an imbalance between the rights and obligations under this Agreement, any other Contracting Party may towards that Contracting Party take such proportionate rebalancing measures as are strictly necessary to remedy the imbalance. Priority shall be given to such measures as will least disturb the functioning of the EEA.

It seems to me that England cannot afford wishful thinking right now, and that those who wish her well need to be crystal clear about the choice it faces, so that there is no mis-understanding on the English side.

I recently published an article on the subject, aimed above all at former Remainers, here. That was a heavily-edited-for-newspapers version of something I originally wrote for this site. Since I use this blog in part as a reminder to myself of what I have written, I reproduce the original blog post below the fold, links and all.

An astonishing dereliction of responsibility

Continue reading “This is no time to go wobbly, EEA edition”

Reformed central bank regulators criticised for being, uh, ‘awake at the wheel’

Three people bid for a house, each using a mix of savings and borrowings; the highest bidder wins. Now suppose each had been prepared to spend more, and each bidder’s bank had extended an additional €100,000 of credit. Nothing changes in the aggregate – one house is bought and sold – except that the buyer has an additional €100,000 of debt (and the seller an additional €100,000 of cash.)

How is that a better overall outcome?

When supply is constrained, credit limits are needed (from a central bank, or internally to the banks themselves) to prevent lending driving up house prices and household debt as borrowers compete against one another for a fixed supply of accommodation. Under boom-time conditions, prices rise to levels Ireland saw ten years ago. Any sensible regulator would seek to put a stop to such a spiral, and should expect to receive the support of politicians, the media and a responsible industry.

But the Irish Central Bank’s mortgage lending controls seem to leave it standing almost alone, criticised by the building industry, the banks, politicians and journalists for being – what? – ‘awake at the wheel’? These controls protect buyers from over-paying. Yet the Central Bank is pictured as punishing the consumers it is protecting. (‘Only the rich can now afford housing’ says the newspaper headlines, but without credit limits only the over-indebted could.)

This is remarkable on many counts.

The Crash is not over, but already many seem to have tired of financial regulation. Denounced for failing to act in the boom, the Bank is now denounced for limiting wasteful bidding wars. Meanwhile, largely uncriticised and indeed not much commented on, local authorities construct elaborate and costly planning rules that increase housing costs. That’s without considering what Colm McCarthy calls (in today’s Sunday Indo) the ‘elephant in the room’: the planning and zoning restrictions that create an artificial housing shortage in the first place. Curiously, we criticise regulations that protect us and not the regulations that harm us.

The media present the lending rules as adjustable but house prices as fixed. The opposite should be the goal of policy. If today’s prices and lending limits require a level of savings impossible for most intending house-buyers to achieve, this means house prices are too high not that regulatory rules are too tough. Do we want everything else to be cheap but the most substantial purchase – housing – to be dear? Perhaps we do; Aidan Regan has recently argued on this blog broadly along these lines. When the number of house owners dwarfs the number of marginal buyers, the intergenerational political economy gets very ugly.

To tackle the housing shortage we should leave bank regulators to do their job, and deal with the policy obstacles that cause so few houses to be built. Don’t tackle one problem by creating a second. And don’t fuss over bank regulation to avoid looking at underlying planning, zoning, intergenerational and NIMBY problems.

A scarcity of accommodation is not solved by lending limits. But house prices are lower, mortgages smaller, banks safer, and taxpayers sleep more peacefully; admittedly miscellaneous middlemen may earn lower fees and journalists have to search elsewhere for a story.

Credit limits protect house buyers when there are more buyers than the kinds of houses they want to buy.

Thinking a little about indexation

The Minister for Social Protection wants to index many social protection payments to a cost of living index as an anti-poverty measure. This makes sense on the face of it, as long as that cost of living index is going up, and as long as the level of benefits fall when the cost of living falls. It’s also worth thinking about the virtues of indexation, as this was one of the main criticisms IFAC had of the fiscal space calculations during the last election.

Let’s say you index benefits to the consumer price measure of inflation.

Here’s what happened to that reading over the longer run.

Screen Shot 2016-07-22 at 11.29.28Just messing about with the idea a little more, imagine we ‘begin’ the Irish economy in year 1 with a CPI reading of 100, and grant benefits of €100. Then we can add in (say) the last 20 years of real CPI data from 1995 to 2015 to get a sense of what would have happened to benefits in a year-on-year basis as a result.

The line is the increase in benefits as a result of the indexation, and the bars are the changes in euros to the benefits as a result of the cost of living increase or decrease, measured on the right hand axis. The excel sheet I used to knock this up is here.


Hopefully you can see two things. First, the measure is highly pro cyclical. Precisely when we want benefits to decrease a bit, because the economy is growing strongly, they go up, and when we want benefits to increase a bit to cover the cost of living during a crash, they go down. Second, in recent years inflation has either stagnated, or fallen, so you wouldn’t see a huge increase or decrease in benefits either way. Now you could smooth out some of these effects out with a moving average of, say, 3 years, but this little exercise shows, I think, that it’s worth looking carefully at indexation proposals.

(Updated with thanks to commenter Tony_Eire.)

The housing crisis is all about the politics of debt.

Everyone agrees Ireland has a huge housing crisis. The housing “market”, if one can call it that, is completely dysfunctional. There is a massive shortage of supply, particularly in Dublin, and growing demand. Competitive firms are losing mobile workers by the day. Homelessness is on the rise. Rents are sky rocketing. Dublin house prices are back to silly-levels. The price-quality dynamic is totally out of kilter. Yet there is absolutely no reason why housing “supply” should be restricted.

There are literally thousands of empty properties around Dublin, loads of green and brown field sites, and tons of opportunities for housing development. Dublin is not San Francisco, where there is literally no where to build. The problem is that the banks are not lending. The government is intervening in a belated and piecemeal way. The fundamental question, therefore, is why? This is where economics meets politics. Constrained supply means rising prices. Rising prices makes it possible to manage the debt dynamics of the state. Supply is being restricted. It’s not a coincidence. It’s an outcome of incentives.

Yesterday’s “rebuilding Ireland” report is obviously welcome. However, all the policy focus on social housing and homelessness, whilst important, completely misses the core problem, which is that the banks control the market. The banks control the supply of mortgages and the supply of loans for development. In a housing market, if you control mortgages, property and builders, then you control the outcomes. It’s not in their interest to see a rise in supply. A rise in supply would reduce prices and expose the underlying debt dynamics of the bank’s balance sheets.

This is the real structural constraint facing government.

The banks don’t want anyone to sell under the asset (house) price to ensure that they can maintain their debt problem. If they can’t manage their mortgage debts, then the taxpayer has to step in and bail them out again, which clearly the government does not want to do. The structural problem underpinning the housing crisis is the bank-state nexus.

If NAMA or the banks fire sell housing assets to solve the housing crisis, then all those under performing loans/mortgages will be exposed. The debt dynamics of the banks will be exposed. The government will be exposed. Then the ECB is exposed.  It’s a house of cards and the only thing holding everything together are rising rental and house prices. Those renting (and those who don’t own mortgages) are ultimately picking up the bill for the last crisis, of which they had no part.

Hence, the structural constraint underpinning the housing crisis is a convergence in the incentive structure to maintain sky-high rents and rising house prices. It’s not in the interest of the Department of Finance, the banks, NAMA, and mortgage holders to see a rise in supply and a potential fall in prices. This is not to suggest that all these actors are sitting around a table conspiring to restrict supply. But all these actors are clearly aware that rising house prices means lower debt and more wealth. The politics of debt is about the politics of housing capital.

The real policy solution is radical intervention to fire sale the assets.

Compel the banks to lend for real development. Compel builders to borrow. The objective should be to bring down rental prices and house prices. Let the banks take the hit, then let them pass it on to the government, then let the government pass it on to the ECB. In the end, Ireland will be back to where it started: in a one-to-one negotiation with the European monetary system. Except this time, the Irish government should say to the ECB, tough shit, you pay. Our public policy priority is ensuring proper housing for our citizens as a social right.

This policy response is obviously dreamland. But you get the point.

This blog entry is based on two research papers I am working on: “Housing Capital is Back” and “House of cards: the real politics of the Irish housing crisis”. Most of the data to empirically corroborate the claims I have made can be found either at the Central Bank (the “Financial Summary” statistics pack), and/or in the Ratings Agencies of the Irish banks.

Property development

Ataturk’s Ministers visit Sarajevo

The events of the last few days in Turkey brought back to mind this powerful snippet from Anglo-Irish writer Rebecca West’s account of her travels in Yugoslavia in the 1930s. Nothing to do with economics, and little related to present realities, but a passage that some might appreciate….

“There are thirty thousand Moslems in Sarajevo, and I think most of them were there. And they were rapt, hallucinated, intoxicated with an old loyalty, and doubtless ready to know the intoxication of an old hatred.

We came to the halt at the right moment, as the train slid in and stopped. There was a little cheering, and the flags were waved, but it is not much fun cheering somebody inside the tin box of a railway carriage. The crowd waited to make sure. The Moslem Mayor of Sarajevo and his party went forward and greeted the tall and jolly Mr. Spaho, the Minister of Transport, and the Yugoslavian Minister of War, General Marits, a giant who wore his strength packed round him in solid masses like a bull. He looked as Göring would like to look. There were faint polite cheers for them; but the great cheers the crowd had had in its hearts for days were never given. For Mr. Spaho and the General were followed, so far as the expectations of the crowd were concerned, by nobody. The two little men in bowlers and trim suits, very dapper and well-shaven, might have been Frenchmen darkened in the colonial service. It took some time for the crowd to realise that they were in fact Ismet Ineunue, the Turkish Prime Minister, and Kazim Ozalip, his War Minister.

Even after the recognition had been established the cheers were not given. No great degree of disguise concealed the disfavour with which these two men in bowler hats looked on the thousands they saw before them, all wearing the fez and veil which their leader the Ataturk made it a crime to wear in Turkey. Their faces were blank yet not unexpressive. So might Englishmen look if, in some corner of the Empire, they had to meet as brothers the inhabitants of a colony that had been miraculously preserved from the action of time and had therefore kept to their road.

The Moslem Mayor read them an address of welcome, of which, naturally, they did not understand one word. This was bound in any case to be a difficult love affair to conduct, for they knew no Serbian and the Sarajevans knew no Turkish. They had to wait until General Marits had translated it into French; while they were waiting I saw one of them fix his eye on a distant building, wince, and look in the opposite direction. Some past-loving soul had delved in the attics and found the green flag with the crescent, the flag of the old Ottoman Empire, which these men and their leader regarded as the badge of a plague that had been like to destroy their people. The General’s translation over, they responded in French better than his, only a little sweeter and more birdlike than the French of France, and stood still, their eyes on the nearest roof, high enough to save them the sight of this monstrous retrograde profusion of fezes and veils, of red pates and black muzzles, while the General put back into Serbian their all too reasonable remarks. They had told the Moslems of Sarajevo, it seemed, that they felt the utmost enthusiasm for the Yugoslavian idea, and had pointed out that if the South Slavs did not form a unified state the will of the great powers could sweep over the Balkan Peninsula as it chose. They said not one word of the ancient tie that linked the Bosnian Moslems to the Turks, nor had they made any reference to Islam.

There were civil obeisances, and the two men got into an automobile and drove towards the town. The people did not cheer them. Only those within sight of the railway platform were aware that they were the Turkish Ministers, and even among those were many who could not believe their eyes, who thought that there must have been some breakdown of the arrangements…

We had seen the end of a story that had taken five hundred years to tell. We had seen the final collapse of the old Ottoman Empire. Under our eyes it had heeled over and fallen to the ground like a lay figure slipping off a chair. But that tragedy was already accomplished. The Ottoman Empire had ceased to suffer long ago. There was a more poignant grief before us. Suppose that such an unconquerable woman as may be compared to the Slav in Bosnia was at last conquered this time, and sent for help to her old lover, and that there answered the call a man bearing her lover’s name, who was, however, not her lover but his son, and looked on her with cold eyes, seeing her only as the occasion of a shameful passage in his family history: none of us would be able to withhold our pity”.

Higher Education Funding Links

There have been lots of contributions since the Cassells Report issued. It’s probably worth putting them all in one place. If I’ve missed some, please pop them in the comments.

The Cassells Report itself.

The reaction to the report

Carl O’Brien has a great series of articles on the subject. Here’s one: College funding explainer: The three options to pay for third level

Michael O’Regan: Senators criticise proposal for student loan scheme

The reaction to the reaction

Brian Lucey: Third level financing fails to paint the whole picture

Niamh Hourigan: Student loans will make graduates flee. Face it, tax is the best way to fund third level

Lorraine Courtney: State continues its war on youth, denying them a brighter future

Kim Bielenberg: Facing a higher degree of debt – students could graduate owing €20,000

Darragh Flannery and John Cullinan Study now, pay later? Please read the terms and conditions

Brian Hayes Why this Dáil may actually grasp the nettle of higher education funding

Paying the price for free education

Below is my Sunday Business Post column from this week, reposted with permission.


Today, I’m writing as an academic and as the Acting Chair of the Higher Education Authority, because I think it’s really important to respond to the recent publication of the Cassells Report on the funding of higher education.

You might not know much about the HEA. It has three main jobs. It disburses about €1 billion in funding to the higher education institutions of this State, it regulates the higher education sector, and it provides policy advice to the Minister for Education and Skills.

The government, the HEA, and all the higher education institutions work within a national strategy around higher education, which takes us out to 2030.

The strategy we as a society have adopted for higher education until 2030 is to push for further and higher education for everyone who wants to go, regardless of their ability to pay at the moment they are admitted. Education should be freely available to those that want to avail of it.

But education is not free. Education has never been free to provide. As I said, the HEA spends over €1 billion of your money on it, and this is nowhere near enough to provide the kind of system envisaged in the strategy to 2030.

Continue reading “Paying the price for free education”

Study Now, Pay Later? Please Read the Terms and Conditions.

Posted on behalf of Darragh Flannery (UL) and John Cullinan (NUIG).

The Cassells report was finally published last week with various options for funding higher education outlined. With the dust settled, now may be an appropriate time to take stock of a few important issues. The debate around this topic has largely taken a full state funding approach versus a student loan approach. The student loan scheme suggested as one option within the report is an Income Contingent Loan (ICL) system, whereby graduates borrow for the costs of their education from the State but do not make any repayments towards this debt until they reach a certain income threshold. However, the discussion around this option has been muddied a lot within the debate. There are a variety of student loan systems in operation around the world; some good and some bad. The point of this post is to simply summarise some of the key design parameters within an ICL scheme and highlight the implications of varying these parameters. These have rarely featured in the public debate but can have significant implications for graduates and will thus require deep consideration if an ICL scheme is to be seriously considered.

Firstly, it must be noted that an ICL scheme entails that some students may never pay back any of the debt they owe. For example, if somebody leaves third level education and chooses not to work for the rest of their life, they repay nothing.  In this instance, the taxpayer would ultimately foot the cost of this individual’s education. From an efficiency viewpoint this makes sense as it provides a system where there is burden sharing at its core.  Students that benefit from third level education through higher earnings pay back some of the cost of that education. Society pays through taking on the default risk of those that do not repay fully or anything at all; this particular point seems to have been completely lost in the debate recently. From an equity viewpoint, an ICL scheme provides free access to higher education at the point of entry to every young person in the country.  It has been argued that this is the same with a household mortgage style loan system – the house is free at the point of entry but you pay for it over the next thirty years or so. However, the key difference is that under an ICL system, if an individual makes no repayments due to some spell of unemployment, nothing is repossessed and there is no impact on your future credit worthiness. From both an efficiency and equity viewpoint it can therefore be argued that there is some sense in an ICL system. However, like any change in policy, the devil will be in the detail.

Two separate studies have previously looked at this issue for Ireland, my own ESR paper with Cathal O’Donoghue here and more recent work by Aedín Doris of Maynooth University and Bruce Chapman of Australia National University here. Also, the appendix of the Cassells report presents some sensitivity analysis around certain parameters. While these go into much finer detail around the issue of ICLs, we will simply summarise some of the key parameters and highlight why there are important. These include the debt liability imposed on students, the specific income threshold to be set, the interest rate attached to the loans and the possible capping of repayment burdens.

The first issue that would have to be addressed is the level of debt a student is burdened with for every year they are in higher education. This has to strike a balance between having the ability to provide adequate funding for the third level institutions and not proving extremely burdensome for graduates. This can take the form of a blanket fee for all those attending higher education as outlined in the Cassells report; however, a more efficient way would be to have some variation in this debt across students. This could be linked to the cost of educating the student and/or the potential lifetime earnings from pursing different subject fields. Australia has adopted a system of this type whereby those wishing to study subjects that generally provide a higher return in the labour market such as medicine and dentistry face a slightly higher debt burden compared to those studying in fields such as humanities or nursing.

To be seen as progressive an ICL must have an income repayment threshold that reflects the fact that only those that benefit from third level education should be responsible for some of the cost. The danger of setting the threshold too low is that it places an extra expenditure burden on those graduates that are not earning very much, despite having gone through four years of higher education. Australia has set the threshold at which graduates begin to repay their debt at the average industrial earnings. The Cassells report mentions a lower threshold of the average wage of new graduates; presumably to ensure more graduates pay something towards the cost of their education.

With regard to the interest rate, the level at which this is fixed will help determine both how long it takes for graduates to pay off their debt and the overall state subsidy. An interest rate that is lower than the rate of inflation may significantly increase the subsidy the state provides on the loans by allowing graduates to ‘inflate’ away their debt. If the interest rate is set too high, the debt burden may increase rapidly and lead to longer repayment periods for graduates. A sensible approach would be to either index the interest rate on the loans to the consumer price index or the state cost of borrowing.

Capping the repayment burdens of graduates on an annual basis has seldom arisen in discussion but would form an important part of illustrating the difference between an ICL scheme and personal loans from the banking sector. Such a mechanism would limit the repayment amounts any one graduate may face in a particular year, no matter what their income level is. For example, if a graduate earns well in excess of the repayment threshold of the system, the repayments they make in that year are capped at a certain proportion of their income. Bruce Chapman of Australia National University, the architect of the much referenced Australian ICL system, suggests that this helps to avoid unduly harsh repayment burdens in any given period and could be fixed at around 8-10% of a graduate’s income.

Arguments have been put forward that increased funding for higher education should be provided through increased general taxes, as is seen in some European countries. The Cassells report acknowledges this by outlying two alternative funding options whereby state funding to higher education would be increased significantly and either the student contribution fee would be removed or maintained it at current levels.  However, given the suggestion that an additional €600 million euro per annum is needed in the higher education sector to meet the current demographic and quality challenges, it is highly unlikely either of these options is feasible or desired politically.

There are other important issues within an ICL system that deserve more attention than I have scope for here. These include the potential impact of emigration on repayments and whether the higher education grant system is restructured concurrently. However, for the majority of graduates that may be impacted by such a reform the specifics of debt amounts, income thresholds, interest rates and the capping of repayment burdens are of huge importance and require careful consideration by policymakers. They also deserve more consideration in the public debate around higher education financing.

Preliminary Census Results

The CSO have published some preliminary findings from last April’s Census.

The population was measured to be 4.76 million up from 4.59 million in 2011 giving an increase of 170,000 (+3.7%).  The natural increase was just over 198,000 so the estimate of net migration over the five years since the last census is –28,500.  This is the second consecutive occasion where inter-censal population estimates were out by around 100,000.

The housing stock increased from 2,003,914 to 2,022,895, a rise of less than 20,000 over the five years.  On census night just over 1.7 million units were occupied with 45,000 units where the occupants were temporarily absent and there were 60,000 unoccupied holiday or second homes.  There were just under 200,000 “other vacant dwellings” a drop of 30,000 in this category since 2011.  There is a wide variation in vacancy rates by area.

There is plenty of interesting detail available by following the link.

The Irish National Accounts: Towards some do’s and don’ts

The statistical distortions created by the impact on the Irish National Accounts of the global assets and activities of a handful of large multinational corporations have now become so large as to make a mockery of conventional uses of Irish GDP. I suggest four preliminary remarks to help overcome some of the challenges facing observers of the Irish macroeconomy.

  1. GNP is now almost as unhelpful an aggregate economic measure for Ireland as GDP. (This is due to a change in the way in which some globalized countries are managing their affairs, with some significant global headquarters now being located to Ireland)

  2. Ratios to GDP are now almost meaningless for Ireland in most contexts. They need to be supplemented by alternative purpose-constructed ratios for specific uses, as the Irish Fiscal Advisory Council already proposed a few years ago with its weighted average of GDP and GNP for assessing fiscal sustainability – though that particular solution will no longer work well for the reason mentioned in point 1.

  3. International statistical conventions should be revisited to help the interpretation of the data in a world where huge MNCs, legally controlled from small jurisdictions are moving assets around on this scale.

One natural approach is to apply the thinking underlying the current statistical treatment of financial intermediaries to this kind of MNC.

(One aircraft leasing firm that publishes its accounts has just 164 employees in Ireland – and just 221 elsewhere – but a balance sheet total of $44 billion, the bulk in the form of aircraft that are operated by other firms. I do not know how the statisticians classify it, but in economic terms it looks much more like a financial firm than a non-financial firm).

Failing international convention changes, it may be necessary to envisage a parallel set of accounts being also prepared for the Irish economy.

  1. Some of the big aggregates of the national accounts are largely unaffected by the distortions. For instance, the figures for personal expenditure on consumer goods and services and for government expenditure on goods and services. These two series can still be used to get a more realistic picture of the recovery as it is felt in public and private consumption. But they should not be expressed as a percentage of GDP, but instead in real constant price terms, seasonally adjusted.

Thus, by the first quarter of 2016, personal expenditure was still just below its quarterly peak of eight years ago; it has been growing for twelve quarters since the trough at an annual average rate of 3.5%.

Government spending on goods and services (i.e. not including transfer payments) in the first quarter of 2016 was still six per cent below peak but has grown by 4.0% per annum on average in those twelve quarters.

Personal disposable income (a much under-used series; up to date figures not available yet); other elements of the government finances; building and construction investment are other series that remain valid and usable for understanding the relevant parts of the economy.

How do these recent growth rates in consumer and government spending compare with those registered in the decade before the bust? Much lower of course: consumer spending rose by an average of 5.6% per annum 1998-2008, and government spending by 4.9%. Recovery yes: boom no.


Sports Economics Workshop – Full Programme

Friday 22nd July 2016. Cavanagh Pharmacy Building, University College Cork.

9.45 Registration

9.55 Opening Address – David Butler

10.00 Session 1 

  • Dr Declan Jordan (University College Cork) – Power and place – the capital city effect and performance in European leagues from 1992 to 2015.
  • Fionn Fitzgerald (IT Tralee) – How important are physiological, anthropometric and psychological measures for talent identification in Gaelic football?
  • Prof Robert Simmons (University of Lancaster) – Special Ones? The Effect of Head Coaches on Football Team Performance.

11.15 Refreshments

11.45 Session 2

  • Prof Paul Downward (Loughborough University) -‘No man is an island entire of itself.’ The hidden effect of peers on sport and physical activity.
  • Pat Massey (Compecon) – Measuring Efficiency of the Republic of Ireland International Football Team: A Production Frontier Approach
  • Dr John Considine (University College Cork) – Radical Competition Structure Change and Competitive Balance.

13.00 Lunch

14.15 Keynote Address

  • Prof Rodney Fort (University of Michigan) – ‘The Future of Sports Economics’

15.15 Round-table Discussion

  • Coaching for Participation or Elite Development – A Challenge for Instructors? Discussants: Dr Elish Kelly (ESRI), Greg Yelverton (FAI), Dr John Considine (UCC) & Prof Paul Downward (Loughborough).

16.00 Closing Address – Dr Robbie Butler

This workshop is free to attend and open to the public. The event is funded by the Irish Research Council Government of Ireland “New Foundations” Scheme. Register for the workshop here.

The farce of Ireland’s national accounts: let’s go plane watching!

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham.

So what’s really going on?

The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes. As a student of mine nicely put it: imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they?

In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

The increase in exports, although more real, and somewhat more complicated, is a result of a similar dynamic. It’s large corporations transferring assets and IP patents into Ireland – with no real connection to employment – and then booking it as real investment, for tax purposes. There can be no doubt Ireland has an export-led economy, and this is being driven by US FDI. But these massive jumps in growth are not linked to real goods/services. They shouldn’t be in the GDP figures.

The 26.3% makes for a great media headline. But if the media want to go find this growth, they might as well go plane watching at Dublin airport. It’s a farce. There is simply no credibility to the national accounts. Most serious observers looking in at Ireland, know this. And this is what should really concern the government and civil servants.

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Economy expands by 26.3%

Or at least that is what the national accounts tell us.  The CSO have published the National Income and Expenditure Accounts for 2015.  These show that real GDP expanded by 26.3 per cent in 2015 and real GNP grew by 18.7 per cent.  Do these numbers mean anything?  It is hard to know.

Looking at the expenditure approach the big real changes were in investment (+26.7%), exports (+34.4%) and imports (+21.7%).

In nominal terms, exports in 2015 were put at €317.2 billion, up from €219.8 billion in 2014. Exports minus imports was €81.2 billion compared to €34.6 billion in 2014.  We would usually expect most of this to feed through to the outflow of factor payments but net factor income from abroad only went from –€29.7 billion in 2014 to –€53.2 billion in 2015.  That means most of the improvement in net exports also contributed to GNP but the “gross” part of this seems to be important.

The reason is that there seems to be an awful lot happening on the asset side of the national accounts.  The nominal provision for depreciation rose from €30.9 billion in 2014 to €61.6 billion in 2015.  It looks like a large part of the increase in gross value added in 2015 of €60 billion went to cover the depreciation of assets.

The biggest source of the additional value added was in the Industry sector which rose 97.8 per cent in real terms over in the year (and in nominal terms rose €50 billion).  The CSO don’t provide a sectoral breakdown for this (they usually do) but it is probably a safe guess that a large part of it is related to the chemical and pharmaceutical sector.

One explanation is that a number of sectors saw MNCs move intangible assets onshore.  This increases gross value added in Ireland as there are no longer outbound royalty payments.  There is also a once-off increase in investment when the asset moves here (but the growth effect of this is offset by the import of the asset).

It is also worth noting that the increase in value added isn’t necessarily related to goods manufactured in Ireland.  The CSO’s External Trade data, which only include goods that physically leave Ireland, shows €111 billion of goods exports from Ireland in 2015.  Goods exports in the national accounts are done on a different basis (where ownership rather than location matters) and show exports of €195 billion.  A large part of the value added from these exports is accounted for in Ireland.

So we have a large increase in gross value added but this doesn’t fully feed through to increases in wages and/or profits.  Non-agricultural wages and salaries rose from €67.7 billion in 2014 to €71.5 billion in 2015.

The domestic trading profits of companies rose from €52.3 billion in 2014 to €74.4 billion in 2015.  This €22 billion increase roughly corresponds the increased outflow of net factor income.  Profits before depreciation would be up by even more but a lot of that went against the fall in the value of the assets.

But even then the value on onshored assets can’t account for all of this.  Most of the increase in investment can be attributed to research and development which in nominal terms rose from €9.6 billion in 2014 to €21.3 billion in 2015.  It is likely that most of this increase is due to once-off purchases of intangible assets rather than ongoing expenditure on R&D.

There may also be impacts from the aircraft leasing sector.  Although the investment figures show a small decrease in investment in transport equipment in 2015, a balance-sheet effect may have resulted in increased aircraft assets being accounted for in Ireland.  Gross value added in aircraft leasing may be high but depreciation of the asset would again consume a lot of this.

The CSO highlighted this and slide 6 of their presentation on the figures shows that Ireland’s gross capital stock rose by about €300 billion in 2015, from €750 billion to €1,050 billion.  Even with today’s inflated figures this corresponds to an increase in the gross capital stock equivalent to 120 per cent of GDP in just one year. Investment in 2015 was equivalent to just over 20 per cent of GDP so these balance-sheet effects impacted the capital stock to the tune of almost 100 per cent of GDP.

The best we can do to strip out all of this madness is probably to look at net national income which excludes the provision for depreciation from all assets and accounts for net factor income from abroad.

Net National Income at Market Prices grew by 6.5 per cent in 2015 which is probably somewhere around where “the Irish economy” grew at in 2015 rather than the 26.3 per cent that “the economy in Ireland” grew by.

The rise and fall of social partnership: do governments need trade unions?

During the 1980’s one of the core economic problems facing the Irish government was minimising strikes and controlling wage inflation. The rise in inflation was widely attributed to individual trade unions using their collective bargaining strength to push up wages at the expense of competitiveness. This policy continued despite the rising unemployment crisis. Over 50% of the workforce was unionised, and 70% of it was covered by some sort of collective bargaining agreement. Crucially, unions were organised in the core export sectors of the economy.

From 1981 to 1986 the Fine Gael/Labour government employed a simple strategy: they ignored unions. They excluded them from policymaking and promoted firm-level wage setting. This was fine in theory, but in practice, it meant chaos. It meant that a fragmented union movement, with little or no coordination from the ICTU, continued its strategy of wage militancy. Unemployment soared. Spending on social welfare increased by over 200%. In the decade from 1980 to 1990, there were over 400,000 days lost to industrial action, one of the highest recorded in the OECD at the time. The government responded by raising income taxes. These were followed by a series of mass demonstrations, initiated by the ICTU, leading to one of the largest public mobilisations against an elected government in the history of the state.

Eventually, through engaging with the ICTU and the employer associations, the new Fianna Fail government of Charlie Haughey brokered a new centralised political deal with ICTU – key to this, was the unions’ acceptance of wage restraint in the interest of national competitiveness (to complement the gains of the 1986 currency devaluation). In return trade union leaders would only end their strategy of wage-inflation and industrial militancy if they were granted political access to the public policy levers of the state (particularly fiscal policy). The unions were off the streets, and it was the beginning of twenty years of national ‘social partnership’.

What ICTU could offer a weak government during this period was stability. It could refrain from industrial action, negotiate reform and get its members to comply with wage restraint. All of this, however, was dependent upon the ICTU having the legitimacy to be considered a representative of working people. In the 1980s, this legitimacy was generated from having a broad and inclusive membership in both the traded and non-traded sectors of the economy. But throughout the late 1990’s and 2000’s, trade union membership was increasingly narrowed to the public sector, with the implication that ICTU became a weakened social partner.

From 2008-2009, during the economic crisis, FF eviscerated social partnership and cut public sector pay twice. ICTU attempted to mobilise public opinion against government austerity. The strategy backfired. All attention focused on the rise in public sector pay from 2002, as part of the benchmarking process. Public distrust in unions jumped from 30 to 55%. Unlike 1987-1992, trade unions were increasingly perceived as a public sector interest group, lobbying government in defence of overpaid civil servants, and labour market insiders.

The weakened ability of ICTU to be considered a social partner is intimately bound up structural changes in the labour market, which have affected all western economies. Collective bargaining coverage (the percentage of workers covered by a negotiated agreement) declined from approximately 71% in 1981 to 40% in 2010. In the late 1980’s, most of the Irish export sectors, and the commercial semi-state sectors, were highly unionised. In 2011 the 400,000 days lost to industrial unrest had dropped to 3,700, the lowest ever recorded.

What does all his mean? ICTU has lost the stick of protest to threaten government and the carrot of problem solving. Overall trade union density has declined from 35 per cent in 2007 to 27 percent in 2015, an all time historic low. In the private sector, density has declined from 24 per cent to 16 per cent. In the public sector, density has remained strong at over 60 per cent, whilst collective bargaining remains at least 85 per cent. Unions in the public sector are simply too strong to be ignored.

Outside the public sector, it has been assumed that the government no longer need private sector unions to guarantee national competitiveness, or to ensure industrial and political stability. The recent LUAS strike, however, challenges this assumption. Previously this strike would have been solved within the institutions of social partnership. SIPTU shop stewards would have been brought into line for breaking a national agreement. Much like the 80’s – in the absence of a strong ICTU, and a national process to solve wage and labour market problems, individual unions are now free to pursue their own self-interest without constraint.

This creates a strange paradox. In the context of EMU currency constraints, the only policy instrument left to government, aimed at coordinating cost competitiveness, is wage and labour market policy. During the crisis, collective bargaining was re-centralised in the public sector and de-centralised to the market in most of the private sector. But contrary to a lot of neoliberal market assumptions, it was the centralised institutions of collective bargaining in the public sector that made possible a coordinated “internal devaluation”. In the absence of the public sector agreements (Croke Park and Haddington Road, in particular), it is highly questionable whether the government could have implemented their fiscal adjustment policies whilst retaining social peace.

This observation complements a large body of research in comparative political economy, which suggests that coordinated wage setting, rather than the market, is better placed to generate the conditions for national competitiveness. Think Germany.



‘Taking back control’? Britain after Brexit

A fortnight after the British referendum on EU membership, Britain is still in turmoil. Some of the negative lessons are all too clear: don’t try to solve party political problems by invoking existential issues; referendums are volatile and uncertain; if you must have one, get a crack team together first. But, as weary politicians are fond of saying, we are where we are.
So what is likely to happen now?
There are different views about what course of action the referendum requires; but there are also very different views about what it might mean to ‘take back control’, which was the core theme of the campaign.

Continue reading “‘Taking back control’? Britain after Brexit”

Alcohol in Ireland: A sobering report

Last month, as the UK called time on the EU, the Health Research Board (HRB) released a sobering report on the harm and cost of alcohol consumption in Ireland. Using data from the hospital in-patient reporting system, the authors examine the patterns and effects of alcohol consumption and the impact on Irish society.

The report is extensive and thorough, with headline figures, such as:

  • In 2014 Irish drinkers consumed on average 11 litres of pure alcohol, with 50% of drinkers consuming alcohol in a harmful manner. Among 36 OECD countries, Ireland has the fourth highest alcohol consumption.
  • The number of people discharged from hospital whose condition was totally attributable to alcohol rose by 82% between 1995 and 2013. Three people died each day in 2013 as a result of drinking alcohol and in 2014 one-in-three self-harm presentations were alcohol-related.
  •  In 2013, alcohol-related discharges accounted for 160,211 bed days in public hospitals – 3.6% of all bed days that year. €1.5 billion is the cost to the tax-payer for alcohol-related discharges from hospital. That is equal to €1 for every €10 spent on public health in 2012 (This excludes the cost of emergency cases, GP visits, psychiatric admissions and alcohol treatment services).The estimated cost of alcohol-related absenteeism was €41,290,805 in 2013.

The full report is here, with a summary of findings in graphical form here.

A Slow Negotiation Might Help Achieve a Better Brexit Solution

Writes Patrick Honohan for the Peterson Institute’s blog here. I’ve said a few times that the Brexit negotiations will take years (and–gasp–require immigrant labour).

Patrick’s point is well made. The sheer length of the negotiation process may give time to let the British people understand the benefits of being within a free trade area, while also managing somehow starting to solve the problems the referendum result threw up. These could be solved, arguably, by less austerity and more capital spending in areas left behind in recent decades.

Danish lessons for the UK, and in particular Northern Ireland?

Reading this article by Fintan O’Toole got me thinking about my other country, Denmark. The Kingdom of Denmark isn’t just Denmark proper, it includes two other autonomous countries as well. Only Denmark is in the EU.

Just saying.

Update: a researcher in Aalborg who actually knows something about Greenland had much the same thought as I. And they are practical people up in northern Jutland.

Annual DEW ‘Kenmare’ Conference: save-the-date

The readership of this blog are encouraged to note in their diaries that the Dublin Economics Workshop’s annual policy conference – held during the ‘Great Moderation’ in Kenmare – is taking place in White’s of Wexford this year on Friday 23rd and Saturday 24th of September. Further details, including a provisional programme, will be posted in early August.

On behalf of the organising committee, I am happy to take suggestions for sessions, and speakers, via email: my email takes the form As in previous years, the aim of the conference is to bring together those involved in economic research and analysis – across public, private and higher education sectors – to deliver sessions that provide insights of relevance for those involved in making policy here.

9th Annual Economics and Psychology Conference

9th Annual Economics and Psychology Conference

The ninth annual one day conference on Economics and Psychology will be held on November 25th in Belfast, jointly organised by researchers in QUB, ESRI, Stirling and UCD. The purpose of these sessions is to develop the link between Economics, Psychology, and cognate disciplines throughout Ireland. A special theme of these events is the implications of behavioural economics for public policy. If you would like to present at this event please send a 200 word abstract to before Friday 9th September.

As well as the annual workshop we have developed a broader network to meet more regularly to discuss work at the intersection of economics, psychology, and policy. This has had five meet-ups so far, as well as some offshoot sessions. Anyone interested in this area is welcome to attend. A website with more details and a mailing list to sign up to is available here. There are currently over 200 people signed up to the network and the events have been, at least in my view, very lively and interesting. There are several more planned for throughout 2016/2017 and we welcome suggestions.

Cameron’s Referendum Gamble

This is Colm McCarthy’s latest column for the Farmer’s Journal. They’ve very kindly let us repost it here:


The decision last Thursday to detach the United Kingdom from the European Union was taken by referendum, a procedure familiar in this country but a constitutional novelty in the UK. Ireland has a written constitution and one of its provisions is that it can be modified only by popular vote. If the Irish government wished to scrap EU membership it would have to seek deletion, by referendum, of the article inserted on entry in 1972. There are other countries with written constitutions which can be modified without a popular vote, usually by some kind of parliamentary supermajority.

Britain is completely different. There is no written constitution at all and parliament is completely sovereign. The UK joined the European Economic Community without a popular vote, could leave without a popular vote, could abolish the monarchy, invade France, expel Scotland or opt for a decimal calendar. Constitutionally a referendum in the UK is always a war of choice, never a war of necessity. The referendum last week was only the third such national poll in British history and the first to go against the incumbent prime minister.

Britain’s first-ever national plebiscite was called by Harold Wilson, the Labour premier, in 1975, not to approve British entry to the EEC but to confirm the entry decision already taken and implemented by simple majority of the sovereign parliament. Wilson called a referendum to heal a rift on Europe in his party, as did David Cameron this time round. Wilson won a comfortable 2 to 1 majority with all main political leaders, including Margaret Thatcher, campaigning in favour. He was widely criticised for this unprecedented constitutional adventure but it was low-risk – there was little likelihood that the electorate would vote for exit. The cost of the ‘wrong’ result was also low – Britain had been in the EEC only a few years, it was a much more limited organisation than the EU has since become and exit would have been a major nuisance rather than a major crisis.

The second also produced a vote against change. When the Conservatives formed a coalition with the Liberal Democrats in 2010 they promised their partners a referendum on the voting system. It was opposed by both Conservatives and Labour and duly defeated 2 to 1. The ‘wrong’ result would again have been no big deal, a limited move towards proportional representation.  Britain’s first two national referenda thus shared some key features. The Prime Minister who initiated each had good reasons to expect a win, and the stakes were not too high. Defeat would hardly have ended their political careers.

The third referendum shared none of these features. David Cameron’s decision was announced in January 2013 at a time when his party trailed Labour in the polls and faced vote leakage to the Eurosceptic UK Independence Party of Nigel Farage. Both his Liberal Democrat partners and the Labour party favoured continuing in the EU and opposed the holding of a referendum. At the time a YouGov opinion poll showed that 40% would vote to stay in the EU with 34% voting to quit and 26% undecided. Cameron promised to hold the referendum should he win a Conservative majority at the election in 2015 which he duly did. It was never likely to be anything but close.

Moreover the European Union had become far more than a free trade zone, with extensive and detailed common policies covering energy, transport, environment, worker protection and a single market in financial services. The international economy had not recovered from the worst downturn since the Second World War. The consequences of withdrawal from the EU by a key member were unlikely to be minor, never mind predictable or easily managed. Cameron’s decision in January 2013 has been described, accurately, as a roll-of-the-dice, a high-stakes gamble driven by concerns about internal party management. His decision to resign was the correct one: he has landed Britain, Europe and indeed the world economy in an unholy mess at the worst possible time.

He is not the first of Europe’s leaders to place domestic political concerns ahead of economic prudence. The faulty design and subsequent mismanagement of the Eurozone owes much to short-sightedness in Germany. The next domino to drop could be in Italy, for long the least successful of the major Eurozone economies. The government plans a referendum in October on constitutional reforms supported by mainstream opinion. But it may be lost. It provides an opportunity to disgruntled voters to give the establishment another kicking in an over-indebted country with a dodgy banking system and could end the political career of Prime Minister Matteo Renzi. More importantly for Ireland, it could spark a terminal crisis for the common currency. The anger of European leaders with the United Kingdom’s referendum gamble is entirely understandable.