Category: Economic Performance

A Eurozone Safety Net?

From the FT:

Eurozone authorities would help a member-state in serious economic difficulties before it needed to turn to the International Monetary Fund because of a risk of debt default, a senior EU policymaker said on Tuesday.  “If crisis emerges in one eurozone country, there is a solution before visiting the IMF,” Joaquín Almunia, the EU’s monetary affairs commissioner, said. “It’s not clever to tell you in public the solution. But the solution exists.”

Also:

Mr Almunia’s comments made clear not only that EU policymakers would not remain impassive in the face of a crisis in a eurozone country, but would act pre-emptively before a bail-out became necessary. “By definition this kind of thing should not be explained in public. But we are equipped intellectually, politically, economically,” he said.

I’m not sure that it’s really so clever to keep this solution a secret.  As the FT piece notes, there are serious legal restrictions in place that can hinder this kind of thing, such as restrictions on ECB lending to governments (The ECB website states “The Eurosystem is prohibited from granting loans to Community bodies or national public sector entities.”) and the so-called no-bailout clause in the Maastricht Treary prohibiting collective liability for debts (considered “an important pillar on which the European Union was founded” by reliably hard-line ECB Executive Board member Juergen Stark.)

Would it not be better for the Eurozone countries to have an explicit debate about this and, if necessary, outline a strategy and explain why it is legal?  Wouldn’t financial markets be less jittery if they could be genuinely assured that a coherent Eurozone strategy was in place?

Guest Post by Jonathan Westrup: Major Regulatory Reform?

We are pleased to bring you this guest post by Dr Jonathan Westrup of the IMI and author of the 2002 TCD Policy Institute Studies in Public Policy No. 10 Financial Services Regulation in Ireland – the Accountability Dimension .

” Further to Karl Whelan’s post, the government has clearly decided to radically reorganise the present unwieldy structure that, for the past 6 years, incorporated the financial regulator within the Central Bank.

Two features of the proposed reform immediately stand out. First, the decision to put responsibility for stability and supervision into one organisational structure rather than to have them divided between the Bank and the Regulator. Second, the decision to set up a presumably stand alone Financial Services Consumer Agency with responsibility for consumer protection incorporating the existing consumer directorate of the Regulator and the Office of the Financial Services Ombudsman.

What is intriguing is the Taoiseach’s reference in his speech to “international best practices similar to the Canadian model”. A quick look at the Canadian regulatory system, as Karl mentions, shows that a distinguishing feature of the model is that the Central Bank has never had a responsibility for regulation. Instead, since 1987, the Office of the Superintendent of Financial Institutions (OSFI) has regulated both the banking and insurance sectors while Canada remains the only major country without a securities regulator, with responsibility devolved to the individual provinces. In terms of a consumer protection mandate, the provincial securities regulators all have a responsibility while, since 2001, the Canadian government established the Financial Consumer Agency of Canada with a mandate “to strengthen oversight of consumer issues and to expand consumer education in the financial sector”. However, according to its website, it has a budget of only 8 million Canadian dollars.

So on the face of it, the relevant part of the Canadian model to which the Taoiseach refers, is the hiving-off of the consumer protection aspect of regulation.

There is little further detail at the moment of the new regulatory system but there are some very important questions. We are told that a new Head of Banking Regulation will be appointed, but how will insurance and securities regulation fit into the Commission?  What will be the relationship between the Governor of the Central Bank and the Head of Banking Regulation, given the demands of the Maastricht Treaty in terms of determining the governor’s accountability towards the domestic political system? Will the present 50/50 funding arrangement between the industry and the Central Bank continue with the new model? What will be the powers of the new consumer agency outside the Banking Commission?

The government has clearly decided, yet again, not to set up a stand alone single financial regulator, but to go for a variant of the Twin Peaks model where all prudential regulation is the responsibility of the Central Bank and conduct of business regulation is regulated separately. However, in the Dutch case, which is the Twin Peaks exemplar, the conduct of business function is more comprehensive than appears to be the case with the proposed Financial Services Consumer Agency.  With details so limited at this stage, this assumption may not be accurate.

Many governments are wrestling with reforms at the moment, with the UK’s Financial Services Authority promising “a revolution” in financial regulation in their proposed reforms due before the end of the month. The government has moved quickly but more detail is required before making assumptions about how the system might work. Given the fairly immediate need to hire the new head of banking regulation, questions about the model will presumably be clarified very quickly.”

Labour Market Trends

The publication by the CSO on Friday of the Quarterly National Household Survey (QNHS) sheds light on recent developments in the labour market.  Naturally the headlines were grabbed by the fall over the year of almost 87,000 or 4.4% in the numbers at work.  Even larger proportional decreases were recorded among men and full-time workers.  A small decrease was recorded in the participation rate, which is reflected in a rise in the number of “discouraged workers” (outside the labour force, but expressing some interest in employment).

So these figures do not in any way modify the gloomy picture of recent economic trends available from other sources.

Nor does a comparison of the QNHS data with the more up-to-date Live Register (LR) releases give any cause for optimism.  In fact, the contrary is the case because – somewhat surprisingly in my view – the QNHS shows unemployment (measured on an International Labour Office basis) rising faster than the numbers on the LR.

Comparing September-October-November of 2006 with the same months of 2008, the QNHS measure of unemployment rose by 89% (114% for men, 50% for women), whereas the LR measure rose by 69% (88% for men and 42% for women).

It might have been expected that the LR would show a bigger jump in the earlier stages of the recession, as short-time working and other partial-employment arrangements lead the increase in full unemployment and the latter are more likely to be reflected in the LR than in the QNHS numbers.  However, there is no evidence of this trend in a comparison of the two data sources over the past year.

Looking ahead, since the LR numbers showed a very large increase in December 2008 and January 2009 over the corresponding months one year earlier, it is to be expected that the next QNHS will display even gloomier trends that those revealed on Friday.  Using the LR data, the CSO estimates that the standardised unemployment rate for January 2009 was 9.2% (compared with only 4.2% in the last quarter of 2006).  When the next QNHS data are released (and they will be based on normal quarters from now on), the estimate of the standardised unemployment rate is likely to be revised upwards.

VOX: Ireland in Crisis

Written by Patrick Honohan and Philip Lane, there is a new essay posted on the VOX website that seeks to explain the current state of the Irish economy and recommends a shift in fiscal strategy: you can read it here.

Update:  A shorter version of the article appears in the March 1 edition of the Sunday Business Post.

Update:  The article is also cross-posted at Roubini Global Monitor.

A Primer on the Financial Crisis

The EEAG Report on the European Economy 2009 has just been released.  This report is written by a panel of excellent economists and is full of interesting analysis.  In particular, Chapter 2 provides an outstanding primer on understanding the financial crisis.