Category: EMU

A new referendum likely, says IT

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.

Bad arguments

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.

The Irish Debate on the Single Currency

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 on the eurozone crisis

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.

Variable-rate Mortgages, Liquidity Funding, and the Euro

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.

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