Kevin O’Rourke

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.