Larry Summers coined the phrase “The Davos Lie” back in 2007; my latest column in Critical Quarterly covers some of what I’ve written on the subject over the years. Here is another recent piece on the subject.
This is one way to try to boost your position in the world university rankings.
Another would be to shift admittedly very scarce resources from administrative to frontline staff, so as to keep class sizes under control; remember that the university’s core function was always to provide an excellent undergraduate education, and value those members of staff whose dedication made that possible; and value the outputs of research, instead of the financial inputs into it.
I notice that there is no election thread, which makes sense given that we were probably all fed up with the campaign before it even began. And I’ve nothing original to say on the subject either. But there probably should be an election thread, and if there is to be one, someone has to kick it off by saying something. So, in that spirit: do we all agree that (a) the Irish economy is now recovering, and doesn’t need further stimulus right now; (b) that the Irish economy has proved itself over previous decades to be unusually volatile; (c) that the international outlook right now suggests that there are risks on the horizon; (d) that the Eurozone is a very dangerous place to be anyway, if you are a small country; (e) that broad tax bases are preferable to narrow tax bases; and (f) that given all of the above, arguing for the abolition of the USC or water charges (water charges, as opposed to Irish Water) is grossly irresponsible, and should suffice to disqualify a party from being taken seriously as a “safe pair of hands”?
I’m writing an economics column in Critical Quarterly, a humanities journal, which is a bit of fun. They are supposedly free to view for 12 months after publication. I already posted a link to the first, on the European democratic deficit, but neglected to link to the second, on migration. The third, on secular stagnation, is available here.
PK’s piece also gives me an excuse to post a link to this piece by Oxford Economic & Social History graduate Christopher Kissane on incentivising emigrants to come home, which makes several good points IMO.
Why is anyone shocked at the political news from France this morning? Everyone is saying that the FN got a boost from the November 13 atrocities, and perhaps they did, but there are far longer run forces at play here.
One is the corruption and sleaze that characterises Parisian politics. But there are also economic factors that are having a predictable impact on attitudes (and if they are predictable, then economists don’t have the right to ignore them). Globalisation creates losers as well as winners, for example, and if no-one really cares about the losers, and we just pay lip service to the problem, then it is predictable that there will be a backlash. The Euro has not only locked in a set of distorted real exchange rates, but a macroeconomic policy mix with a pronounced deflationary bias. If times remain tough enough for long enough, and politicians hear your pain but don’t actually do anything about it, some people will eventually respond by voting for candidates who reject existing constraints on policy making. “Europe” is increasingly experienced as a set of constraints preventing governments from doing what their people want them to do, rather than as a means of empowering governments to collectively solve problems.
So why would anyone be surprised that Mme Le Pen has done so well; and is it not likely at this stage (though 2017 is a long way away) that absent major policy shifts she will come first in the first round of the Presidential election? And let there be no mistake: if she actually won the second round, either then or in 2022, this would mean the end of the EU as we currently know it.
What is so frustrating about all this is that it has been so predictable. Here are some links dating back to 2010, a year that risks being viewed by future historians as a fateful one:
And me, with apologies for the self-indulgence, writing for Eurointelligence.
I am pretty sure Martin Wolf was saying similar things back then, and that many others were too.
The good news is that, as recent Irish experience shows, the populist vote stops rising when the economy recovers. (The decline in the independent vote share is quite striking, and SF have clearly stopped rising. And no, I’m not saying that anyone is like the French National Front, but support for these parties is the closest Irish equivalent to the French anti-establishment protest vote that is benefiting the FN so much.) And 2017, and even more so 2022, are a long way away. But Eurozone monetary and fiscal policy, and social policy too I would think, need to start taking into account the fact that the entire European project, the good bits as well as the harmful bits, is now facing an existential threat.
Update: Paul Krugman weighs in here.
It was way back in April 2009 that Barry Eichengreen and I first compared the world industrial output collapses of 1929 and 2008. The situation looked pretty alarming at that stage, but it turned out that we were a good leading indicator of recovery: the world economy started turning around almost immediately afterwards, thanks to a coordinated reflationary macroeconomic policy response. Then 2010 happened, reflation turned to austerity in Europe, and the global recovery slowed, to the point where at times it seemed to be petering out almost altogether.
And in August of this year, the inevitable happened: measured in terms of industrial output, our current recovery was overtaken by that of the interwar period. Pretty dismal stuff. Let’s hope that we can at least avoid the famous 1937-38 double dip, visible at the end of the interwar series.
Paul Krugman suggests that exchange rates might matter for economic performance here.
On Ireland and exchange rates, one could add that, because of our large trade exposure to non-Eurozone markets, we benefitted from an unusually large nominal depreciation in 2014-15 (which translated into a substantial real depreciation) (slides 8 and 9 here). I doubt this is unrelated to the employment boom we have enjoyed since then.
Courtesy of VoxEU, here.
The proceedings of this CBI/CEPR/IMF conference, held in January 2015, are now available here.
Many congratulations to Philip who has been named as the new Governor of the Central Bank.
I assume this means that his blogging activities will be curtailed, and so it seems appropriate that he be publicly thanked for setting up this blog, in December 2008. Whether it made a contribution to public debate during the crisis is for others to judge — I think it did. But it also gave a platform to many Irish academics who otherwise would not have had a public voice, by dramatically lowering the cost of engaging in public debate. It helped bring us out of our academic comfort zones and engage with issues outside our research specialisms. In my case blogging even led to a couple of serious research projects, using history to shed light on the present. Finally, the blog provided a model for other group blogs in Eurozone crisis countries.
So, many thanks Philip and best of luck in the new job.
Here are three papers I have read recently.
1. Reinhart and Trebesch on the way that external debts can hollow out local democracies. No need to elaborate on this I think.
2. Avdjiev, McCauley and Shin on cross-border banking: well worth a read for people not familiar with this stuff. They are talking about complicated transactions, but as we know in Ireland, much simpler transactions (banks borrowing overseas) can have dangerous consequences.
3. Athanasios Orphanides on the highly politicised nature of crisis decision-making in the Eurozone.
From 3, and from everything that we have observed during this crisis, from Ireland in 2010 to Greece in 2015, I infer that a small country is much more vulnerable inside the Eurozone than outside, if it gets into trouble. Outside, you will deal with the IMF on its own, and they have a standard policy template: debts will be written down, currencies will be devalued, and yes, there will also be austerity. Inside the Eurozone creditor countries will sit alongside the IMF at the table and you may find that neither of the first two policies will be feasible, which will make the austerity far more harmful than it would otherwise be, both economically and politically.
From 2, I infer that a small country needs to watch its banks like a hawk, especially if it is inside the Eurozone, because (from 1, and 3, and from what we have experienced since 2010) the political consequences of not doing so are just too damaging.
And from 1 and 3, I infer that government debts are something that small countries inside the Eurozone also need to be very concerned about. Especially in a monetary union without a banking union, like ours.*
So I find myself in agreement with Colm McCarthy. As was the case 15 years ago, we need to worry about the possible real exchange rate consequences of expansionary fiscal policy at this point in the cycle. And to be fair to the Irish economics profession, lots of people did worry about that then. But the main concern for me is no longer about economics, but about the risks to our Republic’s democracy. The price of freedom is eternal vigilance.
*What is a banking union? If Arizona elects a bunch of communists or survivalists to run the state, and the state budget explodes as a result, local banks will still be backed up by the Fed. My money will still be safe. I will still be able to withdraw it if I choose. This is what a banking union looks like, and don’t let anyone in Brussels or Frankfurt tell you any different.
Papers are available here.
Philippe Legrain points out that, far from creating the sort of European-level democratic space that would allow citizens to choose between political and economic alternatives, closer European political union is likely to place more even restraints on the power of politicians to respond to voters’ demands for alternative policies. This is because ever more rules proscribing what others can do, and made up by Germany, is what Germany wants (not that she has historically felt bound by rules when fundamental national interests are at stake, as inter alia the collapse of the EMS and the scrapping of the excessive deficit procedure inform us; and quite right too in my view).
But why does Germany want this?
Harold James has one view here.
And here is J.A. Hobson:
Moreover, while the manufacturer and trader are well content to trade with foreign nations, the tendency for investors to work towards the political annexation of countries which contain their more speculative investments is very powerful.
Policies undertaken from a narrow national perspective that encourage systematic fiscal surpluses coupled with a national consensus on wage suppression between unions and industry facilitated by the state, impact negatively upon domestic spending while increasing national saving and may lead to mercantilist outcomes of systematic policy-induced positive trade balances with large financial flows going the other way. This mechanism in relation to export-dependent countries like Germany has been recognized for a while by leading American economists like Obstfeld (the IMF’s new chief economist succeeding Blanchard) or Bernanke, while many have also pointed out low domestic investment, consumption taxes, and rigidities in the service sector as additional policy-related reasons for this German systematic phenomenon. Continue reading “Guest post by Marios Zachariadis: On the Greek Crisis and German Imbalances”
1. “We averted the plan of a financial choking and banking system collapse.” (Tspiras)
You are the prime minister Mr Tspiras. Did you not have a plan B to deal with ECB blackmail? If not, why not? Did you really think that the others would back down because of the possibility of Grexit, when it was so clear that you would be willing to do almost anything to avoid it?
2. The new (and conveniently self-interested) German doctrine that defaults are impossible within the Eurozone. Remember the no bailout clause? Ashoka Mody is surely right: these negotiations will kill the entire European project sooner or later. Better to let countries default when that is what is required.
3. Nice to hear Merkel saying that Greece may win back her trust. If I were Greek I might not trust European promises regarding debt rescheduling. Have we not heard those before?
4. How high is Greece’s debt to GDP ratio going to be now? Over 200%? Even if there is some reprofiling, does anyone think this makes sense?
All in all a great day for Golden Dawn. As for the rest of us: I don’t suppose that any other left wing party that may come to power in the future seeking to challenge the current European economic policy mix will be as feckless as the Tspiras government. The lesson that they will draw from this debacle is: negotiating with Germany is a waste of time; be willing to act unilaterally, be willing to default unilaterally, have a plan for achieving primary surplus if you haven’t already achieved it, have a hard default and euro exit (now possible, thanks to the Germans) option in your back pocket, and be willing to use it at the first sign of hassle from the ECB. A deal could have been done today that would have strengthened the Eurozone, but instead it has just become a lot more fragile.
Update: Wolfgang Münchau is well worth reading, here.
Update: this is also well worth a read.
Update: Charles Wyplosz is well worth reading here. Good to see someone pointing out the obvious about this extraordinary programme, and also taking on the (to my mind bizarre) argument that the headline debt/GDP ratio is irrelevant.
Update: Dae Woong Kang and Ashoka Mody offer a historical perspective here.
1. I see that Juncker is saying that it is a shame that the Greeks walked out of the negotiations last week; and yet the creditor negotiating stance seems to have been “give us everything we want, and maybe we will discuss what you want (debt relief) at some later date”. For an account of the negotiations, see here.
2. I see that Hugo Dixon was describing the parties that got Greece into this mess over the course of several decades as “pro-European”, implying that Syriza is anti-European. Come again? Since when does opposing a particular policy mix (in this case one that has failed disastrously over the course of several years) make you anti-European?
3. I see that Martin Schulz is now denying having said that a no vote meant that Greece would have to leave the euro.
4. I can’t count the number of times I have heard French friends tell me that the problem is that the Greeks don’t pay taxes. (All Greeks, you understand.) What about Troika officials?
5. Aside altogether from the immense catastrophe of the last several years, Greece’s GDP shrank 0.4% in the last quarter of 2014, before Syriza got to power. Just saying.
What I found most galling was the argument that Grexit would bring about an economic catastrophe, as though the catastrophe had not already happened.
Some of the crocodile tears being shed on Sunday night about the humanitarian catastrophe that the Greeks were now supposedly bringing down on themselves (as if the ECB’s refusal to ensure financial stability in that country is irrelevant) I found pretty hard to take. Where have these humanitarians been hiding for the last seven years?
7. No comment necessary:
SPIEGEL ONLINE: Herr Fuest, angenommen, Sie wären wahlberechtigt, wie würden Sie am Sonntag beim griechischen Referendum über die Reformpolitik abstimmen?
Fuest: Mit Ja. Nachdem Ministerpräsident Tsipras sein politisches Schicksal an den Ausgang der Wahl gebunden hat, wäre mein primäres Ziel, ihn und seine Regierung loszuwerden.
8. Faymann: “Europe is known for compromises. Renegotiation until the last minute. Greece didn’t do this when it walked out of negotation.” The Greeks have been making compromises for months; where is the German compromise on debt relief?
There, that feels better.
On the bright side, it seems that around 80% of young Greek voters voted no.
Three questions arise. Why would any non-European country be willing to accept another European IMF head? Would it not be better for the Europeans themselves if a non-European IMF head provided us with an “adult in the room” at times of crisis? And why would any European be happy living in a monetary union in which a politicized central bank cannot be relied upon to act as a lender of last resort, and in which their guns could be turned on any (sufficiently small) member state in a time of crisis?
I am writing this in the Aer Lingus lounge in Heathrow’s new Terminal 2, somewhere I spend a lot of time. Like a lot of other Irish people, I am a loyal customer of the national carrier, for a very simple reason: it’s a fantastic airline. It serves lots and lots of destinations direct from Dublin — no more going through London to get anywhere, which was once very often the case. It’s cheap — thanks to competition with Ryanair, British Airways and others. It offers the things that frequent fliers want — lounge access and terrific service. It pays decent wages. It’s Irish.
What’s not to like?
When deciding whether or not to sell the State’s remaining stake in Aer Lingus, you have to make value judgements, whether you admit to doing so or not: there are no “scientific” grounds to prefer one outcome to another. It’s the customer experience that matters to me, and I don’t see why you would think that selling the State’s stake would improve that in the long run.
So, what’s in it for
Here’s a radical thought: ballot Aer Lingus customers, and see what they think. Isn’t the customer supposed to be king?