Author: Stephen Kinsella

Dawn Holland and Jonathan Portes present the results of their macro-econometric model of the EU in this Vox column. Specifically they argue that because of the times we live in, large scale and largely uncoordinated fiscal consolidations across the EU will lead to a collective fall in GDP and an increase in debt to GDP ratios. The increase in debt is obviously the opposite of what was intended.

The figure below shows their scenarios.

Scenario 1 is a fiscal consolidation with a working financial system, scenario 2 models a constrained financial system and so is a bit closer to reality.

Meanwhile, this paper just published in the Economic Journal (unpaygated .pdf here) tells essentially the same story using a New Keynesian model with all the bells and whistles.

The annual festival where economics meets comedy in Kilkenny is on this year from 1st to the 4th of November. I’m speaking at it this year and really looking forward to it. The lineup looks good and the sessions will definitely be interesting. Here’s a video of the type of stuff that goes on. The festival has always sold out. I’m told the tickets are almost gone now so if interested, readers of this blog should book them now.

We know Ireland isn’t Iceland. It’s not Greece, and definitely not Spain. Now we know that when it comes to mortgages, at least, Ireland isn’t Denmark. A Bill (.pdf) introduced by Senator Sean Barrett designed to add the stable Danish mortgage model to the obviously unstable Irish model was shot down by Minister Noonan this week. Simply put, the Bill’s idea is to allow a balance principle to regulate mortgage credit. A 2007 IMF paper on the Danish market (.pdf, again) noted that

The Danish mortgage system is widely recognized as one of the most sophisticated housing finance systems in the world. Through the implementation of a strict balance principle, the system has proved very effective in providing borrowers with flexible, transparent and close-to-capital markets funding conditions. Simultaneously, as pass-through securities, mortgage bonds transfer market risk from the issuing mortgage bank to bond investors. Lastly, strict property appraisal rules and credit risk management by the mortgage banks have also historically shielded mortgage bonds from default risk.

Naturally enough, the Minister felt the need to shoot the Bill down.

The Minister’s reasons are outlined here, but essentially they are:

1. We are not, nor were we ever, Denmark.

2. Changing wholesale to this system has risks, most of which I won’t go into here, but the Danes give defaulting households 6 months and we’d really like that to be longer, say a year.

3. Changing to this system would imply loans at 80% LTV, most banks are at 92% LTV, this would make it more difficult for first time buyers.

4. We’re in the middle of negotiations on the various capital requirements directives, this could throw a spanner in the works with the EU.

Senator Barrett is to be congratulated for bringing a fresh perspective to the Mortgage market in Ireland. It’s a real pity the Bill didn’t get more traction, but hopefully parts of it may make it into other pieces of legislation.

Michael O’Sullivan has an interesting piece in today’s Irish Times, have a read here.

Best bit (for me anyway):

The political response to the jobs crisis is pitched at the micro level – the drawing in and amalgamation of disparate projects. This might help boost shorter-term employment figures, but doesn’t necessarily bolster the potential long-term economic growth rate. Arguably the correct response is a more coherent strategy, one that links economic factors like our banking system and household debt with social issues, as well as incorporating our strategy on Europe.

In Ireland job creation is popularly associated with tax cuts, multinationals and the IDA. But the employment crisis is much less regularly traced to our balance sheet recession, or rather blockages in the banking system and household finances.

A lack of employment growth is the sclerotic and very unfortunate effect of these underlying difficulties, and of important decisions not taken throughout the past year. Should we fail to address them now, there is a high risk of the “Japanisation” of our economy.

The latest overview of competitiveness for the 27 member states is here. Ireland gets a mixed review, with the Commission reporting:

Ireland has made good progress in achieving its adjustment programme’s goals. Despite the remaining challenges, these efforts have improved business prospects and strengthened competitiveness.

The challenge for Ireland is to improve the prospects of the domestic SMEs. The sector is held back by weak domestic demand, lack of innovation, problems with access to finance, and rising costs of doing business at local level. The government should continue to keep a close eye on access to finance, as improvement in this area is crucial for future growth. The lack of domestic demand and lack of finance have lowered the level of investment in equipment, which remains under the EU average.

The Irish government’s ‘Action Plan for Jobs 2012’ is a broad-based plan to address these challenges. If implemented steadfastly, it could considerably reduce the differences in the competitiveness of the domestic and multinational sectors. The challenge is to avoid the fragmentation of efforts, and to increase policy focus on the most promising initiatives enhancing innovation and growth.

They show the following graph for Ireland, which makes for interesting reading.