Author: John McHale

Last summer, the Dublin City Centre Business Association commissioned Felim O’Rourke and myself to examine how Dublin’s tourism product could be rejuvenated. Our report is at www.dcba.ie.  If short of time, skim the 33 pages reviewing existing tourist attractions, since each was afforded one page, regardless of its attractiveness. Among the conclusions and recommendations are, 

1. The Irish Government may not be able/willing to burn the bank bondholders, but it should liquidate Treasury Holdings, rather than allow NAMA to keep it alive. This would cause the 25 year PPP on the Irish Convention Centre to lapse, and save the Exchequer €0.7bn.
2. My colleague and I are retired, and thus our recommendations are not modified by the expectation of future work. But in 80 years of commercial activity, neither of us has ever come across such a combination of overspending and underperformance as is exhibited by the national tourism organisations (NTO’s). We did not make specific recommendations for organisational change, but your respondents may wish to take up this baton!
3. The Irish national tourism organisations (NTO’s) perform poorly when benchmarked against Scotland, Edinburgh and Amsterdam. In 2009, if Scottish rates of attracting tourists were applied to Ireland, the budgets of Irish NTO’s would have been reduced by two-thirds, or by c. €100m. p.a.. Amsterdam attracts eight times the tourist numbers per employee of Irish NTO’s, at just over one-half the cost per employee. Within Ireland, there is a mismatch between visitor numbers and NTO spending: Dublin accounted for 32% of tourist revenue in 2009, but only 6% of current spending by NTO’s was spent in Dublin.
4. This is sectoral stuff, microeconomics. At the micro, micro level, Dublin tourism is going to have to function in future with lots of ingenuity and with little finance. For example, the municipal food market should maintain cleanliness standards with frequent water sluicing on tarmacadam floors, rather than by (much more expensive) investment in ceramic floor tiling. Again, where a tourism product is space-constrained, such as the Book of Kells or the Anne Frank house, it is cheaper to extend visiting hours, rather than to invest in expanded waiting areas. Let’s have similar cost-constraining initiatives in other major areas of social expenditure, such as health, education and social welfare.

This industry and this report are too important for Ireland’s future to be consigned to the neglect of the authorities.

Mario Draghi’s statement before the European Parliament is available here.   

Some key paragraphs from statement:

Yet we are at a difficult stage at present. We have set up these new mechanisms, but their positive effects on the credibility of government fiscal policies are not yet visible. And the government changes that have taken place in some of the more exposed countries have not yet had much of an effect on the continuing fragility of financial markets.

Fundamental questions are being raised and they call for an answer. At the heart of these questions are not only the credibility of governments’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance.

I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.

What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.

We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.

Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.

On the precise legal process that brings about a move towards a genuine economic union, we should keep our options open. Far-reaching Treaty changes should not be discarded, but faster processes are also conceivable.

Whatever the approach, companies, markets and the citizens of Europe expect policy-makers to act decisively to resolve the crisis. It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union.

I don’t think it is an exaggeration to say the next few weeks will be make or break for the euro zone.   Four elements should be kept in mind:

1.  Lacking a reliable lender of last resort to (large) states, the creditworthiness of countries with large debts and uncertain growth prospects is extremely fragile.   Where any doubts exist about solvency, it is easy to shift to bad equilibrium, even where it is very likely that the state would not default if interest rates stay low.   Ryan Avent at the Economist provides a good analysis here. 

2.  Introducing a credible lender of last resort creates big transfer-risk externalities.   All euro zone countries should be wary of such a lender without some central controls on fiscal policies. 

3.  Even absent the need for central controls, euro zone countries would benefit from stronger national fiscal frameworks given the propensity to (structural) deficit bias.   And some degree of external surveillance and enforcement can help to make those frameworks more credible.   The cost of central controls should not be exaggerated. 

4.  It will be much harder to pull out of the crisis without the use of growth oriented macroeconomic policies where they are feasible.   This applies to fiscal policy in countries where some degree of fiscal space exists, monetary policy and macro prudential policy.

This seems significant.   Gavyn Davies does some scenario analysis here.

Update: Wolfgang Munchau provides his analysis here. 

Wolfgang Münchau and Derek Scally each have thoughtful (and complementary) pieces on what it will take to solve the euro zone crisis.  (Apologies for linking to these so late in the day.)

Not mincing his words, Wolfgang Münchau makes it clear what won’t work:

The consensus view in Brussels and Berlin is that the crisis can be solved by technocratic governments imposing structural reform and austerity. That proposition is, in my view, insane. In any case, it will be tested shortly. Mario Monti, Italy’s new prime minister, is about to introduce a programme of reform and austerity. I wish him luck, but I doubt the bond markets will change their view on the sustainability of Italy’s debt in the absence of outside intervention. We have gone way beyond the point at which this crisis is solvable by standard instruments of economic policy. The survival of the euro will now depend on whether Ms Merkel or Mr Draghi, or both, will blink.

Derek Scally provides a useful window on German thinking.   I would be especially interested in thoughts on his closing paragraphs.

For Dr Merkel, limited treaty change to allow EU budgetary supervision is the sugar-coating she needs to sell to her voters the bitter pill of greater ECB market intervention or even eurobonds.

Far from holding the euro zone hostage to its hyperinflation history, some German analysts see Merkel readying herself for a euro zone deal, aided by her two new pragmatic allies in Frankfurt.

“Pushing for a new euro zone regime of rules is exactly what was to be expected from Berlin,” said political analyst Jan Techau, director of the Carnegie Europe think tank in Brussels.

“What people don’t understand is that this package of rules is the political price Merkel needs for German concessions on the ECB.”