Category: European economy

Lending between National Central Banks

See the following contribution here from Hans-Werner Sinn.  It is certainly original but frankly alarmist.  It focuses on the fact that National Central Banks within the euro system are lending bilaterally to each other though without changing the monetary base as a whole.  Sinn jumps from there to draw apparently worrying conclusions:  that these are “forced capital exports”; that they are the counterparty to current account deficits and that “the PIGS would have had a hard time finding the money to pay for their net imports”.

There is not a scintilla of evidence that the private non-bank sector in the PIGS has lost access to normal European financial markets.  If the Bundesbank lends to the Central Bank of Ireland, it does not, in any sense, expand the availability of credit to the private non-bank sector in Ireland.  Similarly, German households and firms do not suffer a credit contraction.  This is, of course, because there is free movement of capital within the single currency area.

The second non-sequitur in Sinn’s article is the association of accumulated current account deficits in the PIGS with these bilateral loans.  Ireland has, of course, a current account surplus so the point is completely irrelevant to at least one of the PIGS.  Sinn notes that Italy has not availed of these inter NCB loans, despite its current account deficit, but mistakenly attributes this to virtuous policy on the part of the Italian authorities!  It is of course because Italy so far has not yet suffered from a banking or sovereign debt crisis.  And for no other reason.

My suspicion is that Target 2 credit is ultimately guaranteed by the ECB: that the Bundesbank loans to the Central Bank of Ireland should be considered as contingent items on the ECB balance sheet.  In short, that Target 2 credit is simply a mechanism for implementing ECB policy.  But I remain to be corrected on this.

NI Corporation Tax

The UK Budget was published yesterday. One of the noteworthy changes announced as part of this is a reduction in corporation tax:

“a reduction in the main rate of corporation tax by a further one per cent. From April 2011, the rate will be reduced to 26 per cent with further yearly reductions of one per cent until 2014 when it will reach 23 per cent”.

In addition the UK Treasury has published a consultation document entitled Rebalancing the Northern Ireland Economy, which specifically considers the potential for, and costs and benefits of devolving the power to vary the corporate tax rate in Northern Ireland, potentially reducing the rate in Northern Ireland to the 12.5% that applies in the republic of Ireland.

In the context of the pressure from France and Germany for the Republic of Ireland to raise its corporation tax rate, both the reduction in corporation tax rates in the UK and the potential harmonisation of the corporation tax rate to 12.5% on the island of Ireland are an interesting development.

CCCTB Proposals

The Commission’s new proposals for a Common Consolidated Corporate Tax Base (CCCTB) are available here.

New IIEA Blog\Post on Bank Debt

I’d like to flag an excellent new initiative that our readers are likely to find useful. As many of you know, the Institute for International and European Affairs has played a very important role in recent years in promoting debate on European issues. The Institute has now started a blog focusing on European topics which already has a lot of interesting material. I have agreed to contribute some longer pieces there.  They’ve promised to make me some pretty graphs if I ask nicely which might make a nice change sometimes from the no-frills approach we adopt here at the IE blog!

Which brings me back to an issue related to my proposals for a debt-to-equity swap for central bank loans. Some commenters have rightly pointed out that this proposal seems to give up on burden sharing with bondholders. That it does so is just a reflection of the current EU position on this issue. However, this strengthens the case for the EU becoming involved in owning the Irish bank sector: If they want the bondholders paid back so badly, then one can argue that they should contribute some of their own funds to the effort.

But coming back to the European debate on bank debt, I think the EU officials are adopting the wrong approach to dealing with this issue. I also think that the proposals adopted by the European Commission to allow haircuts on bonds that are issued in the future, say after 2013, is unworkable. For a discussion of this and an alternative approach, see this post at the IIEA site.

Common Consolidated Corporate Tax Base: a critique

I presented this paper on CCCTB to the Kenmare economics conference back in 2008. Many in attendance felt that it was unlikely to come to pass. It is clearly on the agenda now though it is not yet certain that it will meet the requirements associated with “enhanced co-operation” (which, under Lisbon, requires nine countries rather than the eight mentioned in the paper, which was correct at the time. Nothing else, as far as I can see, needs updating).

I characterise the proposals as a “Trojan horse”. The logic is similar to that of Bettendorf et al., writing on “Corporate Tax Harmonization in the EU” in the journal Economic Policy in 2010. They say “consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.”