Karl holds forth on the fiscal treaty in the IT here.
Author: Stephen Kinsella
Senior Lecturer in Economics at the University of Limerick.
Today saw contributors to this blog John McHale (wearing his IFAC hat), Alan Ahearne, and Karl Whelan, as well as TASC’s Tom McDonnell appearing before the Joint Committee on European Affairs.
Colm Keena reports on the committee proceedings here. The transcript of the discussion will be up here fairly soon. Update: Karl’s remarks are here. Update 2: Tom’s remarks are here. The divergence in viewpoints is fairly obvious from the reporting, with Alan and John thinking the fiscal compact is the way forward, Karl thinking in practice it’s a done deal anyway and even though rule sets like this make little sense (which Colm McCarthy hacked away at in a previous post), we should sign it. Tom didn’t think it was a good idea at all.
Karl’s point on macroeconomic thinking is worth expanding upon. He is quoted as saying
“What is noteworthy about the new EU fiscal compact, however, is that it does not correspond to mainstream thinking among economists as to how an ideal fiscal policy framework should operate.”
I think this is an important point to make. You don’t see discussions about balanced budgets from year to year in macro textbooks because for very large economies they just don’t make sense. Even cyclically balanced budgets, where you save during the surplus years and spend during the deficit years, is a bone of contention between Keynesian and non-Keynesian economists (how’s that for a sweeping generalization?). Most macroeconomists will tell you that measuring a cyclically adjusted quantity like the budget balance is no joke, as this paper (.pdf) by Girouard and Andre sets out in some detail.
Karl is also reported as saying that:
“Structural deficits were a theoretical phenomenon and establishing legally binding rules about impossible to measure quantities was sure to create trouble sooner or later. He thought the rules would lead to more austerity across Europe than was required.”
So to summarise: arbitrary targets for at best very difficult to measure quantities don’t make much sense.
Now on the other side, having read the text of the treaty a few times, I think that what the fiscal compact treaty really tries to do is to reduce the chances for poor fiscal policy in one country affecting another country, and the rules as well as the budgetary oversight and coordination, as well as multi-year budgeting, are there to enshrine such good fiscal policy by making poor fiscal policies harder to enact. No bad thing on paper, but in practice, especially with a particularly harsh set of austerity policies, the fiscal compact may end up doing more harm than good.
This session was stuffed with people, the introduction by Constantin Gurdgiev was excellent (and funny) and the papers were illuminating. Karl’s slides were already discussed, but this post puts them (and the audio from his talk) in context.
PodcastChair: Constantin Gurdgiev (TCD)
Brian Lucey (TCD)
Banking in Ireland: Back to the Future
Karl Whelan (UCD)
The IBRC, ELA, Promissory Notes and All That…
Frank Barry (TCD)
Rectifying Design Flaws in the Euro Project
Below are the presentation slides and the audio of the panel I chaired at the Irish economy conference on January 27th. Ronan’s presentation received a fair bit of coverage, understandably, but all the presentations were well received. The full programme is here, and video of the talks will be up later.
Residential Site Value Tax: Valuation, Implementation & Fiscal Outcomes
Michelle Norris (UCD)
Pathways Through Mortgage Arrears
Rob Kitchin (NUIM)
Prospects for the Irish Property Market
Eoin Reeves and Dónal Palcic write in today’s Irish Times on the issue of privatisation, and they don’t pull their punches. From the piece:
Not only is there a lack of clarity about the companies to be sold and the timing of any sales, but it has also emerged that there are significant differences between the Government and the troika on the role privatisation should play in contributing to any economic recovery. These differences do not bode well in terms of making the best decisions about the future ownership of critical infrastructure industries.
At this stage, two key points of difference between the Government and the troika can be discerned. First, the drip-feed of information provided during the latest visit indicates that the troika views privatisation as a structural reform issue that should be implemented to improve the overall competitiveness of the economy. The Government, meanwhile, appears to be focused on privatisation as a means of raising exchequer revenues.
The second point of difference concerns how the proceeds from privatisation should be used. Whereas the Government wants to direct revenues towards job creation, the troika views proceeds as a means of paying down the national debt.
The troika’s view of privatisation as a tool for reducing costs and improving competitiveness is an orthodox proposition that is traditionally associated with multilateral organisations such as the International Monetary Fund but it is one that can be readily challenged.
Palcic and Reeves finish by making an important point about the dangers of short term political thinking applied to long term strategic assets. This problem is rarely discussed, as far as I can see, in Irish public policy. Hopefully we’ll see some more discussion in the comments about this problem.