The Irish Economy

There is some discussion of this issue in the comments but it’s worth putting on the front page. A much-heralded part of December’s EU negotiations was the decision to change the language on Private Sector Involvement (PSI) in the ESM Treaty.

On December 9, Herman van Rumpoy said

our first approach to PSI, which had a very negative effect on debt markets is now officially over.

It was being replaced with the following

from now on we will strictly adhere to the IMF principles and practices

Sure enough, the new ESM Treaty states

In accordance with IMF practice, in exceptional cases an adequate and proportionate form of private sector involvement shall be considered in cases where stability support is provided accompanied by conditionality in the form of a macro-economic adjustment programme.

Some are arguing that this is effectively a commitment to limit PSI to Greece. I don’t see how this is a tenable assumption. As this FT Alphaville post discusses, there is no sense in which IMF procedures rule out PSI. Furthermore, bond markets are also clearly not interpreting the new ESM treaty in this fashion since Portuguese bond yields are still effectively pricing in a default.

It’s very hard to see how, if the stars end up aligning sufficiently badly for Ireland, that “an adequate and proportionate” haircut won’t get applied to private sovereign bond holders.

A newly-modified ESM Treaty has been signed. Documents are available here. One key aspect:

It is acknowledged and agreed that the granting of financial assistance in the framework of new programmes under the ESM will be conditional, as of 1 March 2013, on the ratification of the TSCG by the ESM Member concerned.

Viewers of the Vincent Browne show take heed!

Information on the Treaty agreed last night by 25 EU member states is available here. Somewhat remarkably, given that draft texts have been circulating for weeks, there is no version of the agreed text.  Anyone out there have a link?

I’d note that the materials released all point to the need to implement the structural deficit rule at “constitutional or equivalent level” while the Independent reports that “preferably constitutional” is in the final draft.

If indeed it turns out that we need a referendum, this is a pretty bad start.

Update: The EU Council have finally released the text here. Anyway, “preferably constitutional” has been retained, which begs the question as to what van Rompuy and his officials were up to with their statements about “constitutional or equivalent level”.

“Europe would not function any more if it changed course after every election.”

(Angela Merkel, quoted here, poo-pooing the notion that French voters might have any say over whether the next government ratifies this treaty or not.)

Words fail me, but they’re hardly necessary,

I’m sure all the presentations will be posted here at some point but I had promised readers that I would put up my slides on ELA and promissory notes from today’s conference, so here they are.

Via the IIEA blog, a new leaked draft of the proposed fiscal compact. Importantly for Ireland, the wording that balanced budget laws need to be “constitutional or equivalent” has been replaced with “preferably constitutional”.

The most recent Final Conference to Save the Euro ended in disarray when the UK refused to sign up to a proposed set of EU treaty changes. The UK’s veto was due to the inclusion of an EU-wide Tobin Tax on security transactions in the set of proposals. The justification for an international Tobin Tax is quite strong. Hypercompetitive securities markets with excessively-large trading volumes and hyper-fast price changes are a serious danger to global financial stability. A Tobin Tax would eliminate these dangerous trading excesses without impinging much on underlying market efficiency. On other hand, the UK government’s refusal to sign up to an EU-only Tobin Tax, imposed on the City of London while the US and Asian global financial centres remain outside the tax net, was an obvious and sensible policy decision for the UK.

After the proposed EU treaty changes were restricted to a coalition of the willing, the Irish government fretted that a Tobin Tax might particularly disadvantage the Irish financial services industry, given that the UK will be outside the tax net.

What should be Ireland’s policy stance toward an international Tobin Tax? Should Ireland do the right thing as a global citizen by supporting such a tax within the Eurozone, or should it protect its international financial services industry from UK (and non-EU) predation and therefore veto any such tax proposal? It would be much better for all concerned if the Tobin Tax could be imposed at a global rather than EU level.
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A reader alerted me to this, which apparently is not a joke. For a horrible moment, I thought there was going to be ninety five theses but mercifully, the “people who count themselves friends of the Ifo Institute” limited themselves to sixteen.

Anyway, happy Christmas to one and all, even the friends of the Ifo Institute.

The latest attempt by the ECB to get a grip on the Eurozone crisis might work. It has the potential both to push sovereign market yields toward sustainable rates, and to block self-fulfilling institutional bank runs in which corporate deposits move to stronger Eurozone countries, draining weaker member banking systems of liquidity and credit.

Colm McCarthy was keen on a “reverse tap” in which the ECB enforces a maximum yield (minimum market price) on Italian/Spanish/etc sovereign bonds using its money-creation potential to back up this policy. The problem with his plan, in my view, was the lack of a surveillance mechanism to ensure the funded countries were continuing their needed restructuring. Germany would not accept that solution. My own preference was for the IMF to serve as conduit for sovereign funding via official IMF programs backed by ECB-funded bonds. Colm criticized this as an unnecessary intermediation by the IMF in a problem that needed to be solved by Europe.

The new ECB unlimited-three-year bank funding strategy uses the banks themselves as the monitor for sovereign discipline. It also provides direct bank liquidity so that the slow-motion institutional bank run phenomenon is less likely to lead to the negative feedback loop (corporate depositors distrust the PIIGS banks, PIIGS banks lose liquidity and restrict credit flow to their national economies, PIIGS national economies slow down due to shortage of credit, PIIGS banks suffer due to national economic slowdowns). Actually the “G” does not belong in this acronym anymore since it is a separate case. Perhaps PISI? Commercial banks in the PISI who lose corporate deposits to Germany or elsewhere can replace them with even cheaper funding from the ECB.

Might the new ECB strategy work?

A draft of the proposed Treaty has been released. I think we should be very very slow to look to put this to a referendum, if such is required (and it probably is).  Many things may happen in the meantime that could derail this particular process.

In the meantime, our leaders should stop making up exciting scenarios involving Ireland leaving the euro if a treaty is rejected. That Stephen Collins vehemently disagrees with this only strengthens my conviction on this point.

The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 19.12.2011). Five papers (including one by me) discusses issues related to ratings agencies, prompted by the recent package of regulations proposed by the European Commission.  Three other papers discuss the ongoing Euro crisis.

This could have been a useful contribution to the discussions about Target 2 if it was tweaked a bit.

For instance, the following slight re-wordings may have helped to inform rather than mislead:

Involuntary money acquisition is what happens when your spouse wins the lottery and gives you loads of money. At some point it dawns on you that you’re rich.

Or this

The bottom line: Germany’s Bundesbank—BuBa for short—has quietly, automatically received €495 billion to the European Central Bank via Target2.

Ok, no big deal. Financial journalists in getting things wrong shocker!

However, the piece does address a new aspect of the question that was not discussed in earlier discussions about the Target 2 balances. What happens if the Euro area breaks up?

Mr. Coy from Bloomberg is pretty sure it will be bad for Germany:

If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget.

But let’s take a closer look. Who is this “Germany”? Will the German residents who got their accounts credited as a result of the Target2-facilitated transfers out of Ireland now lose their money? No. There will be no losses to private citizens. Despite all this misleading stuff about “enforced lending”, German citizens will be very grateful that they managed to repatriate their money to German via Target2.

So who loses? Well, the Bundesbank has a Target2 credit from the ECB, an organisation that used to be considered sound and a good credit because they have the power to print money.

If the ECB ceases to exist and the Bundesbank wanted its balance sheet to still balance, it could simply replace the “Target2 credit” by writing itself a big check and sticking it in the vaults. Call it “Sondervermögen Ersetzen Vermögensverwaltung Früher als Target2 Kreditkarten Bekannte“ (“Special Fund Replacing Asset Formerly Known As Target2 Credit” – blame Google Translate!)  Just like that, the Bundesbank’s balance sheet is balanced again.

Now watch how many commenters will try to convince you that placing a piece of paper in an empty vault will unleash hyperinflation.

I wrote this post last night for the IIEA blog. I concluded it by discussing what I view as the likely upcoming referendum

Quoting myself(!):

It will be very important that other Eurozone member states be careful when discussing the problems faced by countries such as Ireland, for whom ratification of a new treaty will be politically complex.

For all the temptation to present such an agreement as a “yes or no” moment on euro membership (a temptation last seen with Mrs. Merkel’s “ya oder nein” moment) the truth is that there is no clearly defined way to expel a country from the single currency. Beyond the potential of a bullying approach back-firing with the Irish public, a focus on a referendum as a decision about euro membership risks triggering a massive bank run as depositors take flight to avoid the redenomination that is being threatened.

Needless to say, what happens today? Our own Minister for Finance comes out with the following:

FINANCE Minister Michael said today that any referendum here on the new EU deal would essentially be a vote on the country’s continued membership of the eurozone.

“It really comes down on this occasion to a very simple issue, do you want to continue in the euro or not,” Mr Noonan said in an interview with Bloomberg Television.

“Faced with that question, I think the Irish people will pass such a referendum.”

I think this is a very poor way for the government to approach this issue and I would hope they reconsider it.

The Irish public have a history of responding poorly to threats as a motivation for voting for EU treaties. And if Mr. Noonan is keen on triggering another disastrous bank run (this time also involving retail depositors) then he should keep talking this way and linking the probability of Ireland being in the euro with the latest polls on how likely the referendum is to pass.

The truth is that, whether people like it or not, the debate about this referendum will have many parallels with the Lisbon Treaty debate. It wasn’t true that voting no on Lisbon meant leaving the EU. But it was true that the rest of the EU could have decided to form some new agreement, something which would have required a complex legal and political process.

Similarly, there is simply is no expulsion route from the euro. If Ireland voted down the new intergovernmental treaty but the government wished us to stay in the euro, then there is nothing that could be done to eject Ireland from what is legally a fixed and irrevocable currency union.

It is possible for other countries to move on after an Irish No vote to set up their own currency union. However, this would require them to leave the euro, which would very likely involve them leaving the EU. Legally and economically, such an approach would be hugely difficult for the EU, certainly more difficult than going on to apply the Lisbon changes to some inner core EU.

So a “No” vote would likely leave the EU with a legal and political mess similar to that which occurred after the failure of the Lisbon vote in Ireland in 2008. From the point of view of the core EU countries, this is all very undesirable. They hardly want to admit that any country that doesn’t like the proposed treaty should go around asking for changes on an a la carte basis. If this were the case, then there probably would be no treaty at all (no bad thing, some might say).

But that’s where things stand and it wasn’t a situation schemed up by Irish politicians.

Government ministers should say there is simply no question of Ireland leaving the euro and that’s the end of it. Then they should enter treaty negotiations reminding everyone in Europe of the terrible nuisance that is their constitution and of the huge decline in the popularity of the EU in Ireland since Lisbon and Nice were voted down.

While I don’t necessarily want to endorse Fintan O’Toole’s language about causing trouble, the legal situation is what it is and the government need to make the most of a bad situation. (This issue was also discussed on Monday’s edition of The Frontline).

It’s time to argue for a better treaty and a better deal on the IBRC debt.

It’s not time to bully the public about signing up to whatever is put in front of them or face being booted out of the euro.

Today’s FT Alphaville carries another story by Izabella Kaminska on why the Bundesbank’s Target credit and its low level of private securities owned, em, loans to German banks may be a source of problems.

Thankfully, the Bundesbank flogging off the family silver, em, gold, has disappeared from sight. This time, Izabella cites two potential problems. Taking them out of turn, there’s the argument of Perry Merhling on factors affecting the “collateral crunch” in the banking system:

A second source of demand for collateral is the discount lending by national central banks to their own private bank clients. And a third source is the Eurosystem lending between national central banks, which takes place more or less automatically through the operation of the TARGET2 payments system.

Except that the TARGET2 credits and liabilities don’t involve the use of any collateral, so this is not, in fact, a source of collateral crunch.

Izabella’s other mechanism for concern isn’t accurate either but does have a bit more plausibility about it. She notes about the process of deposits flowing to Germany that

every time the German Bundesbank attracts commercial liabilities (deposits) via this process, in an ideal world it would want to sterilise them to keep its bond market in check with ECB policy.

In order to do that, it would be inclined either to offer domestic assets into the market outright or unwind the number of bank loans it has extended against domestic collateral

In other words, Izabella reckons that to implement ECB policy on interest rates, the Bundesbank needs to control the money supply in Germany. If this was true, and the Bundesbank had no loans to German banks, then it couldn’t cut back on these loans as a way to control this supply of money and thus influence interest rates.

This is an interesting idea but it’s also pretty far from an accurate description of how European monetary policy works. A couple of points.

First, you’ll be very hard pressed to find a real-world central banker familiar with operational issues who believes that the short-term money market rates targeted by central banks depend in some predictable way on controlling some definition of the money supply. Here and here are two good papers that discuss this issue in detail. And here and here are my own teaching notes where I discuss these issues.

To summarise, the ECB influences money market rates in the Euro area via a “corridor system” determined by the interest rates on its range of instruments (deposit facility, marginal lending facility and refinancing operations) rather than via the quantity of money supplied.

Second, in an “ideal world” (i.e. a fully functioning monetary union) the supply of money in Germany should have no influence whatsoever on the rates at which German banks borrow from each other. A bank can borrow funds from any other bank in the Euro area or directly from the ECB. Even in the ideal world that preceded the crisis, the Bundesbank wasn’t attempting to hit some target for the German money supply, so there’s no loss of control for the Eurosystem relative to what prevailed before and no loss of control over price stability.

Now, of course, the absence of an ideal world means that all sorts of other complications are affecting European money markets. The super-low rates that Izabella notes here are likely related to factors such as fears about the end of the Eurozone and the drastic reduction in the amount of assets viewed as truly safe. They’re not due to the Bundesbank losing the ability (which it wasn’t using anyway) to control the German money supply.

An important argument for the adoption of the euro was the expectation that it would boost trade.  This paper  analysed the effects of the euro on Irish exports over the period 1993-2004. The results  indicate that the impact of the euro on Irish exports to euro area countries relative to the rest of the Irish trading partners was significant and positive from 2000 onwards. This effect has increased over time. Furthermore, it apperas that the impact of the single currency on Irish exports has varied across industries.

I know we’ve devoted too much time to this already but, for the anoraks out there, here’s a VoxEU piece that I’ve written responding to the earlier article by Tornell and Westermann.

One of the funny aspects of this debate is it tends to trigger comments from German residents that say something like “phooey to you and your technical details, you know that Sinn is right that we’re getting ripped off”.  Forget the facts, feel the truthiness.

I have a Project Syndicate column on the summit, available here.

Wolfgang Münchau asks whether the only way to save the eurozone is to destroy the EU here.

My guess is that if Europeans had to choose between the EU and the euro, most would opt for the former.

Today’s Euro summit document commits all members to a fiscal rule in which “the annual structural deficit does not exceed 0.5% of nominal GDP.” It also commits to “The specification of the debt criterion in terms of a numerical benchmark for debt reduction (1/20 rule) for Member States with a government debt in excess of 60%.”

I’m on the record as being in favour of numerical benchmarks for debt reduction. Indeed, I argued for a more stringent one than the one-twentieth rule that has been proposed by the Commission and has been adopted today.

However, I wonder whether those proposing the limit of 0.5% of nominal GDP on the structural deficit have thought about what this implies for debt ratios. I take this proposal to mean that the average deficit, going through the cycle, should not be more than 0.5% of GDP.

Now suppose a country consistently ran a deficit of exactly 0.5% of GDP. What would happen to its debt-GDP ratio?

Here’s a little note describing the dynamics of the debt-GDP ratio in a simple world with a constant deficit ratio, d, and a constant growth rate of nominal GDP, g. It shows that the debt to GDP ratio converges over time to (1+g)*d/g. (One could add random fluctuations in the growth rate or the deficit ratio and then the debt ratio would cycle around this long-run average value. Also, the timing assumption could be changed so that the current-period debt is determined by last period’s deficit, in which case the (1+g) would dissappear, but that wouldn’t make much difference to the calculation.)

Let’s assume a modest long-term growth outlook for the Euro area of 3 percent nominal GDP growth, i.e. 2 percent inflation and 1 percent growth in real GDP. In this case, the long-run implication of a 0.5 percent of GDP deficit ratio is a debt-GDP ratio of 1.03*0.005/0.03 = 0.172.

Since 0.5 percent of GDP is to be a maximum for the average deficit, this is a fiscal rule that would see long-run debt-GDP ratios below 17 percent of GDP in all Eurozone member states.

This is, of course, a long way from where we are now in most member states. Many countries currently have excessive debt ratios and there is a need to get debt and deficit ratios down over the medium term. It would take a very long time for countries like Ireland to end up with this very low debt ratio, so these limits may work fine as a medium term rule for high debt countries.

However, taken on its own merits, this rule doesn’t seem to make much sense as a long-run legally binding rule. As an alternative, an average deficit of 1.5 percent of GDP could combine with a nominal growth rate of 3 percent to produce a stable and manageable average debt-GDP ratio of 51.5 percent. This would seem like a more sensible benchmark.

Of course, if a government followed such a policy, normal cyclical fluctuations would likely take the economy above a 3 percent deficit fairly often without in any way jeopardising long-run fiscal stability. So the elevation of a three percent deficit limit to sacred cow status (“As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed”) has little grounding in the actual economics of fiscal stability.

There is little doubt that Europe needs to act to reduce debt levels over the medium term and better institutional fiscal frameworks are required. However, these rules, however much they may appeal to the Swabian housewife instinct, are overly restrictive and have little connection to fiscal arithmetic. They are all the more likely to be flouted in future because of their poor design.

Here’s the statement by the Euro Area Heads of State.

In honor of the summit, I thought I’d post a link to Colm’s last piece in the Sunday Independent, which hasn’t yet had a thread of its own.

Summiteers, please remember: just because a particular “solution” seems politically necessary, that doesn’t mean that it makes any economic sense at all. If you really want to save the euro (as opposed to enabling it to hobble along for a few more weeks, months or years), then shouldn’t reforming the mandate of the ECB be at the top of your agenda?

And do please think about what constitutionalizing the equation

“Europe = austerity + unemployment”

will mean politically for the European project going forward.

I have told myself to stay out of the Target 2 debate, partly because this pretty much sums it up and I’ll just end up repeating myself and partly because the brave Olaf Storbeck has taken this on himself so many times.

However, this article by Tornell and Westermann is worth bringing up because the appearance of two people who are not Hans Werner Sinn making Sinn-like claims might suggest there is a point here. In fact, this piece has even less to add (and more to subtract, if believed) to the stock of useful knowledge than Sinn’s various pieces. (Unfortunately, its points were repeated on the usually-excellent FT Alphaville.)

Tornell-Westermann (TW) repeat the fallacy that the Bundesbank has loaned money to the so-called GIPS central banks. Their new twist on this story is that “In order to fund these loans, the Bundesbank sold its holdings of German assets.”

They back this up with a table showing information from the Bundesbank balance sheet. A line labelled “Private securities owned by central bank” shows a large decline in recent years.

What does this line correspond to? Well, TW’s line for “Private securities owned by central bank” equals €224 billion in 2009 and €277 billion in 2008.

Let’s go consult the Bundesbank’s own description of its balance sheet for these years (page 148 of this file). It tells us that “Lending to euro-area credit institutions related to monetary policy operations denominated in euro” equalled €223.61 billion in 2009 and €277.425 billion in 2008. I’m going to guess that the resemblance between these figures and those reported by TW is not coincidental and that TW’s figures correspond to the same entries.

Is “Private securities owned by central bank” – as best I can see a terminology invented by TW – a more accurate description than the terminology used by the Bundesbank, which effectively means “loans”?

Well, no. These entries correspond to loans. They are securitised loans, specifically repurchase agreements, so the Bundesbank holds a security as collateral for the (usually short) maturity period of this loan. But the value of the loans are less the value of the corresponding securities (i.e. a haircut is applied to the collateral) so the asset on the Bundesbank’s balance sheet is the value of the loan, not the value of the asset. Also, the asset remains on the balance sheet of the borrowing bank because the bank regains the asset on repayment of the loan and thus the transaction does not correspond to the accounting requirements for “derecognition” of assets.

So, this item – lending by the Bundesbank to German banks – has declined in recent years, from €277.425 billion in 2008 to €37.6 billion in August 2011 (the latest figures I could find – page 111). The reasons for this are not too surprising. There has been enormous capital flight from the periphery into German banks which, as a consequence, have had far less need than previously to borrow funds from the Bundesbank for liquidity purposes.

Note also that Eurosystem policy in recent years has been to supply banks with a full allotment of funds requested in refinancing operations, so the Bundesbank has not made any conscious decision to reduce the amount of lending it has done.

If “the Bundesbank has done less lending because German banks have asked for a smaller amount of loans” sounds different from “the Bundesbank has had to sell off securities to fund loans to peripheral central banks” that’s because it is. The first statement is true and the second isn’t.

The rest of Tornell and Westermann’s article is not much better.

· The presentation of the Bundesbank’s “Other claims within the Eurosystem (net)” (i.e. the Target 2 credit) as some kind of enforced loan to the rest of the system rather than the accounting entry that reflects a transfer from the rest of the system to Germany mirrors Professor Sinn’s ability to make something that is good for Germany appear to be Germans getting ripped off.

· The idea that the Bundesbank is about to “run out of money” – “the Bundesbank will soon exhaust the stock of securities that it can sell to fund further loans to the Eurosystem” – is completely without basis in reality. Still, the stuff about the Bundesbank’s gold holdings and the German public not wanting to sell it will appeal to paranoid goldbugs everywhere.

· The material about Target claims being collateralised by, for example, Greek bonds sounds scary but, in reality, is just false.

· The less said about TARGET being “overwhelmed” because “the ECB has a relatively small capital base” the better.

The crazy thing is that the Euro area is undergoing a real crisis and there is a huge need for an informed public debate on potential solutions. We don’t need academics making up fake crises and stirring intra-European resentments based on a misunderstanding of central bank arcania.

The IT has answered Karl’s question in the affirmative:

Taoiseach Enda Kenny has publicly opposed the need for treaty changes and that remains the Government’s official position in advance of the summit.

However, there is a realisation among senior Ministers in Dublin that Dr Merkel’s commitment to treaty change and the backing she has received from French president Nicolas Sarkozy may have made that process unstoppable.

So, in a Union of 27, if Merkozy wants a new Treaty requiring an Irish referendum then, the IT assumes, this is what will happen. They are quite possibly right.

This should remind us that there are political objectives which the 25 should have in any new Treaty negotiations as well as economic ones. (If we are going to have a referendum, this will take time, and create uncertainty, anyway: so why not get it right?) Economically speaking, if you want EMU to survive in more than the immediate short run, you should logically want a new mandate for the ECB, and some method to provide counter-cyclical adjustment in depressed regions. (I guess we are not going to get this, and indeed we are probably going to get the opposite of this.) Politically speaking, we need moves to reaffirm the primacy of the Community method, or it will be more than EMU that is endangered in the long run. I guess we’re not going to get that either. Of course I would love to be proved wrong.

We’ve gotten used to disingenuous arguments by István Székely regarding the EC/ECB stance on burning bondholders, but (given that the original interest rates they insisted on were a disgrace) this one really takes the biscuit:

Separately, the top European Commission official on the Irish bailout said critics of the decision not to impose losses on senior bank bondholders should recognise the benefit from the interest cut on Ireland’s rescue loans.

István Székely said the cut would yield €12 billion while moves to “burn” Anglo Irish Bank bondholders might have realised €3 billion.

Also, €3 billion?

Karl is right: it is too late to do anything meaningful about this, and the game has moved on. But that doesn’t mean that we should let these guys rewrite history.

I was asked by an Irish Times journalist recently if anyone had written up a review of the Irish debate on joining the single currency.  This paper of mine from 1997 came close, though it doesn’t for the most part name or ascribe  positions to the participants.  Rereading it now though, it strikes me that a lot of it remains relevant.

The Bayoumi and Eichengreen material makes clear that central control of national fiscal deficits across the eurozone – the suggestion du jour - will not remove the vulnerability of Ireland and the Mediterranean economies to asymmetric (country-specific) shocks.  This is what I was referring to in my post of a few months ago entitled:  Jean-Claude Trichet, 2004: ‘no design flaw in the euro project’.

Colm McCarthy and I agreed recently that the Irish debates (in which both of us were anti) did not identify the precise fault lines that would ultimately emerge.  Centralised eurozone banking regulation and resolution regimes – the absence of which we all now recognise as design flaws – will not address the problem of asymmetries however.

The article makes the point that “those worried about the rigidity of the single currency system argue instead for policy co-ordination alongside floating rates.  In that way the destabilising element associated with ‘maverick’ macro policies would be removed but the exchange rate would still be free to adjust to counter country-specific shocks.”

Alternatively, within the single currency, “fiscal federalism” could go some way towards correcting the problem.  The Federal Budget absorbs about one-third of  the average region-specific shock in the US; the figure for Canada is around one-fifth.  We have nothing similar in Europe.  But think of the pork-barrel politics this would (will?) entail.

And have a wry smile at footnote 11, which I had forgotten about, concerning an aspect of the debate between Patrick Honohan on the one hand and Peter Neary and Rodney Thom on the other.  (The ‘foreign currency’ refers to the euro).  How times can change!

Kevin O’Rourke delivered a hugely insightful talk on the crisis and the global situation at a conference in Dublin last week. His presentation is here.

The Financial Regulator, Matthew Elderfield, received a clamour of popular support recently when he publicly objected to the Irish domestic banks planned decision not to decrease variable mortgage rates in response to the ECB cut in interest rates. The political establishment was warmly enthusiastic for Elderfield’s intervention. The government used its shareholding and political muscle to ensure that the banks’ decisions were reversed. The government also offered to provide the financial regulator with legislative power to determine banks’ mortgage rates. Wiser heads within the Central Bank prevailed, and the government was told by the Central Bank “thanks, but no thanks” for the offer of new legal power to set retail mortgage rates. (more…)