Category: European economy

Mrs Merkel gives Ireland the perfect reason to postpone the referendum

In this interview, Mrs Merkel gives the forthcoming Irish referendum as a reason why the treaty should not be renegotiated.

Almost no-one in Ireland thinks this treaty is a good one, and that includes the people who believe that we have no realistic option but to ratify it. Indeed, almost no-one outside Germany seems to want it, including the governments who signed it. It follows that if M Hollande were to lead a push to have it renegotiated, we should support that effort. If our May referendum is an obstacle in the way of achieving that goal, we should postpone it.

Labour Costs

The question of achieving an ‘internal devaluation’ has been raised in a late contribution to the previous thread.  It deserves more attention than it tends to receive on this site.

The phrase refers to improving competitiveness in the absence of a national exchange rate by reducing costs and prices relative to those of competitor countries.

Labour costs are a major component of domestic costs and one over which we retain ‘sovereignty’.

In March Eurostat published some relevant data on hourly wage costs. (Today’s Irish Independent carries a summary of the report.)

In 2011 Irish hourly labour costs were €27.4, which was 99.3 per cent of the Eurozone (EZ) average of €27.6.  In 2008 (the peak year) Irish labour costs were 105.7 of the EZ average, so there has been some improvement in this measure of our competitiveness.

However, Irish costs remain much higher than those in several EZ countries.  Here are some relevant comparisons: Spain €20.6, Slovenia €14.4, Portugal €12.1 and Estonia €8.1.  Outside the EZ the UK figure is €20.1, while the US Bureau of Labor Statistics gives a figure of $34.2 for hourly labour costs in US manufacturing in 2010 compared with $36.3 for Ireland.

Obviously all EZ countries cannot gain competitiveness relative to each other by reducing labour costs, although the EZ as a whole could become more cost-competitive relative to the rest of world by this strategy.   However, I think it is clear that we would have to wait a long time to see any dramatic results from this source either in Ireland or in the EZ as a whole.

Andres Velasco at INET

There is an absolutely terrific talk by Andres Velasco here. It would be great if European (and Irish) policy makers would take these kinds of arguments to heart, but at this stage in the Eurozone crisis I am not sure that they will before it is too late.

Debating the fiscal compact at Joint Committee on European Affairs

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.

New ESM Treaty

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!