The Irish Economy

This document reached me by way of the European Commission. It shows that some people are working hard to convince the Commission that Bogtec is a transnational infrastructure project of European importance (and thus qualifies for subsidies). It also shows that the Spirit of Ireland refuses to die.

There is mention of a glacial valley near Kilcar, Co Donegal. A dam, 1300 meters wide and 120 meters high (in the middle), would create an upper reservoir with a surface of 4 squared kilometers; assuming that the valley is triangular, the reservoir would be 6150 meters long. The sea would be the lower reservoir. Surplus wind power would pump the water from the sea into the reservoir. Releasing the water back into the sea, power would be generated when there’s demand.

I’ve been hiking in Donegal only a few times. Is there a glacial valley near the sea, of the above dimensions, uninhabited, and not full of archaeological treasure?

UPDATE: I’ve had one vote for Glenaddragh River Valley, which is a good way from the sea.

UPDATE2: Another correspondent forwarded this map, discussed by Donegal County Council. The hydro plan was apparently rejected as it failed to meet the requirements of the SEA Directive on procedural grounds.

The case of Pat Swords versus the Department of Energy etc continues. See here and here for its history. The media is strangely quiet. At stake is an injunction to halt the National Renewable Energy Action Plan (NREAP), but this case has ramifications for all relations between the rulers and the ruled, and for Ireland’ sovereignty.

There have been two sessions of the High Court, one on April 12 and one of April 16.

State argued that the case should be thrown out because the Aarhus Convention does not apply as it had not been ratified at the time the NREAP was accepted by the European Commission in 2010. This argument was rejected. Even though Ireland did not ratify the Aarhus Convention until 2012, the European Union had ratified it in 2005. Therefore, Ireland must comply with Aarhus.

Read that again: Ireland is subject to an international treaty it did not ratify.

The session is adjourned till June. State now has to engage substantively with the ruling of the Aarhus Compliance Committee, which has that Ireland failed to properly inform its citizens about NREAP and its impact and did not allow them sufficient time to engage with policy making.

In a must-read article, Chris Pissarides states that “far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole.”

This sums up perfectly where the European project is today. Indeed, there isn’t even solidarity among the smaller countries, as Malta and Luxembourg seek to distance themselves from Cyprus, reminding us of many similar protestations by individual PIIGS in the past, Ireland included. Not that it did any of them any good.

Was it not bizarre to see so many anti-German posters in Nicosia last week, when by all accounts it was the Cypriot President (among others) who wanted to see small depositors hit? Actually, no, it wasn’t. We have seen several statements by German politicians saying that the Cypriot business model is dead, and I’m sorry, but irrespective of the rights and wrongs of the issue this is simply unacceptable. The IMF has the right, and duty, to opine on such matters. So does the ECB, which is supposed to care about financial stability, whatever about how it behaves in practice. Perhaps one could find a rationale for the Commission, or maybe even the Eurogroup, to express an opinion on matters such as this. But an individual member state? Formally speaking, and in any club such formalities matter, it’s none of their business. Even if it is an election year.

The EU is supposed to work according to a set of well-understood principles. If we want to re-regulate the banking sector, and we should, then the recent decision to cap bankers’ bonuses is an example of how the system is supposed to work (again, irrespective of the merits of the issue). There are proposals, there is a vote, there is a decision. Fine. I’ll have more of that please.

But that is not what we are seeing here.

It might be less difficult to swallow if the German government were caped crusaders seeking to bring the entire European financial system to heel. But we all know who has been undermining the drive to have a meaningful European system of banking supervision, and it isn’t Cyprus. And is Mr Schaüble really going to try to prevent German banks from touting for business in that island, as the FT recently reported? I don’t think so. None of this means that Merkel and Schaüble are any worse than anyone else’s politicians, but if you are the arbiter of other countries’ fates, and you aren’t any better either, then there’s going to be a backlash. Which is terrible news for Germany in the long run.

My quote of the week is from another must-read article, this time by Wolfgang Münchau, who says that

I have believed for some time that it is impossible for Germany, Finland and the Netherlands to be in a monetary union with Cyprus, Greece and Portugal. Either the two sides agree to adjust more symmetrically, politically and economically, or this experiment should end.

The argument about economically asymmetric adjustment has at this stage been done to death, and almost everyone understands it, although the German government remains resolutely, proudly, and vocally, macroeconomically illiterate. Another reason why anti-German posters at mass demonstrations are something that we will have to get used to, which is tragic. But Wolfgang’s point about politically asymmetric adjustment is just as important, and gets to the heart of the matter.

When the EU club works according to its rules, people accept the outcomes, but in crises policies are made on the hoof, and it is the powerful who call the shots. This is inevitable, but it is also very dangerous, especially since the decisions that are made at times like this have a much bigger impact on peoples’ lives than anything that typically comes out of Brussels. We have been in crisis mode for much too long now, the crisis shows no signs of going away any time soon, and the political asymmetry is becoming intolerable.

A meaningful banking union, that had the power to stick its nose into the German banking system, and had a set of ex ante mutually agreed principles regarding how to resolve banks in all member states, would help reduce political asymmetries. More expansionary monetary and fiscal policies would help make economic adjustment more symmetric. I suspect we’re going to get neither, in which case we need to end the EMU experiment before it drags the broader European project down with it.

On balance I agree with Paul Krugman’s views on whether Cyprus should leave the euro or not. And most people seem to also agree with him that there will be a Cypriot public debt crisis in the not too distant future. Given what is about to happen to their GDP, how could it be otherwise?

As regards the political benefits to Cyprus of staying in the Eurozone, which Paul advances as a possible counter-argument: the Telegraph links to a piece from the Netherlands suggesting that the EU is contemplating earmarking those future Cypriot gas revenues the island has been looking forward to, to ensure that the Troika gets its money back.

Completely logical, and utterly destructive.

It has been several years since I first came across Pat Swords. Pat demanded access to wind energy modeling work that he thought the ESRI had done but not published. There were many layers to our reply. The ESRI is not covered by Freedom of Information legislation. At the time, Ireland had not yet ratified the Aarhus Convention on Access to Environmental Information, so that did not apply either (but see below). Although it would have been appropriate for the ESRI to do a detailed study of the pros and cons of subsidizing wind energy, we had not. And no, we were not aware of someone else having done such a study either. There is no ex ante evaluation of wind energy subsidies in Ireland, and no ex post evaluation either. (And lest people protest, I am aware of a number of partial studies, and a number of not-independent ones.)

Pat lost interest in the ESRI, but not in wind policy. He asked every institution in Ireland he could think of “why do we subsidize wind?” Some replied in the vein of “because we do, now go away”. Others did not respond. So Pat asked the European Commission, with the same result. Although we do generously subsidize wind power, no official was able to satisfactorily answer why.

So Pat went to the United Nations. It first ruled that, because the European Union has ratified the Aarhus Convention and because wind policy is dictated by Brussels, Ireland’s wind policy is bound by the Aarhus Convention – a treaty Ireland had not ratified at the time.

The Aarhus Convention is not at all about wind. It is about public policy. The Aarhus Compliance Committee ruled that Ireland had failed to give its residents a proper say in the National Renewable Energy Action Plan (NREAP). Two failures were identified. First, there was insufficient information to inform a reasoned decision. Second, there was insufficient time given to deliberate and, if need be, protest.

The Committee did not say whether wind power is good or bad. It did say that decisions on wind power are dodgy.

This is a remarkable result in and of itself. The Irish government cannot justify policy decisions with a few half-baked arguments and ram it through the Dail. It often does, but there is now a precedent to call an end to such practice.

The story does not end here. Pat took the UN ruling to the High Court and asked for a judicial review of the NREAP. The judge agreed that there is prima facie evidence that things are not kosher and called a hearing, which is due to reconvene on March 13.

The government’s defense is that Pat’s protest comes far too late, ignoring that all his earlier protests were put aside and ignoring the UN ruling that insufficient time was granted in the first place. The government also argues that the EU has accepted the NREAP, ignoring that the UN ruled that the European Commission was just as much in the wrong as the Irish government.

Inexcusably, the government asked the court to be granted legal costs if they win. If he loses, Pat may have to pay the government’s lawyers.

Such bullying tactics may soon come to an end through another lawsuit, but they have not yet. It is immoral, though, that the mighty government seeks to throttle a judicial review by threatening to bankrupt a citizen who exercises his democratic right.

The government’s behaviour suggests that it knows it cannot defend its case for subsidies for wind power. Carbon dioxide emissions from power generation are indeed already adequately regulated by the EU Emissions Trading System. There is no reason to put subsidies on top. Many Irish households and companies would probably welcome cheaper electricity.

Pat comments on this case here.

I see that some people in Britain are in a bit of a kerfuffle about recent indications that the Americans would not be pleased if they left the EU. So it seems appropriate to quote at length from a well-known passage by Miriam Camps (1964, pp. 336-7):

Early in April [1961], Mr. Macmillan went to Washington for talks with the new Administration. Although he had met the new President at Palm Beach in connexion with the Laos crisis, the April visit was the first opportunity for a general review of common problems, and Britain’s relations with the Common Market was obviously one of the matters which Mr. Macmillan wanted to discuss. The available evidence suggests that Mr. Macmillan asked Mr. Kennedy a hypothetical question: ‘What would be your reaction if we decided to join the EEC?’ and that he was given an enthusiastic affirmative answer. There is no evidence to suggest that Mr. Macmillan was ‘pushed’ by Mr. Kennedy, as was alleged, and denied, at various times. But it is clear that Mr. Kennedy left no doubt in Mr. Macmillan’s mind that a British decision to join the Six would be welcome and that Mr. Macmillan left Washington convinced that, far from straining Anglo-American relations, Britain’s joining the Community might well lead to much closer and more far-reaching transatlantic links than the British could hope to achieve in other ways. The reflection that the shortest, and perhaps the only, way to a real Atlantic partnership lay through Britain’s joining the Common Market seems to have been a very important — perhaps the controlling — element in Mr. Macmillan’s own decision that the right course for the United Kingdom was to apply for membership. Mr. Kennedy’s warm response undoubtedly strengthened Mr. Macmillan’s own conviction that joining was the right course of action and encouraged him to continue his efforts to bring the sceptics in the Cabinet to accept this view. Also, like the discussions with General de Gaulle and Dr. Adenauer earlier in the year, the discussions with the United States Administration underlined, once again, the fact that ‘association’ arrangements were not likely to be negotiable. It was clear that the United States was prepared to accept the additional commercial ‘discrimination’ against itself because of the political advantages it saw in British membership in the Community, but that it would be hostile to arrangements short of membership which, in its view, would simply increase ‘discrimination’ but would not, like full membership, add to the political stability of the Community or strengthen the ‘Atlantic’ orientation of the new power-complex the Six were clearly coming to be.

Brian O’Kelly and I have a new policy paper on Eurozone bank resolution; it is in the Special Papers series produced by the Financial Markets Group at LSE.

(more…)

It would be a good thing if the leaders meeting in Brussels today were to take reports like this one seriously.

I spent a few hours today revising and updating this paper, and was both astonished, and not surprised at all, to see the extent to which trust in the EU and its institutions collapsed in 2011. The figures below show the percentage of respondents in Eurobarometer surveys saying they trusted the institution in question, minus the percentage who said they didn’t trust it. The decline in 2011 is really quite dramatic. I am sure that the usual suspects will tell us that what Europe obviously needs is a better communications strategy. Personally, I think that less destructive economic policies would have a bigger impact.

(Source: Eurobarometer)

The WSJ has a really good piece by Gabriele Steinhauser and Matina Stevis on the core story of the Eurogroup meeting, which seems to have slipped past the domestic media somewhat. Yes, yes, they’ll get to Ireland’s debt in September/October. Grand. The key issue of just who pays for any losses within the ESM is not settled, nor is it likely to be any time soon. From the piece:

Germany’s finance minister said that even once the euro zone’s bailout fund has been authorized to directly recapitalize struggling banks, the lenders’ host government should retain final liability for any losses.

Wolfgang Schäuble’s statement early Tuesday indicated disagreements on how far the currency union needs to go to protect countries from expensive bank failures. His declaration, which followed more than nine hours of talks between euro-zone finance ministers here, clashed with those of other officials, who insisted that banks’ host states wouldn’t have to guarantee any support from the bailout fund.

The issue is hugely important for Spain, which risks being locked out of financial markets amid concerns over how a European bailout for its banks will affect Madrid’s ability to repay investors.

Fun times ahead.

Niamh Hardiman has a post here which echoes one of the most important points George Soros made in his Trento speech: current EU policies are amplifying anti-EU sentiment, which in turn makes it more difficult politically to move towards the tighter Eurozone integration that is economically required to save the Euro project; which in turn exacerbates the economic situation, and so on.

I have two brief comments.

The first is that this sort of negative feedback loop suggests the need for a “big bang” approach to policy reform in Europe: not some temporary liquidity fix that will give the system a little more rope to hang itself with, but a fundamental shift in the policy stance, which could change both the economic and the political dynamics.

The second is that we have got to stop referring to parties which are willing to go along with the current policy mix as “pro-European”, as if a party like Syriza is anti-European or anti-EU (it is clearly not). When Mrs Thatcher set about dismantling the social contract that had defined Britain for thirty years, this did not make her anti-British, and nor was Arthur Scargill anti-British when he tried to oppose her. People disagree, often fundamentally, about policies: that is what democracy is all about, and the moment that “Europe” is defined with any one set of policies, rather than with a framework for deciding policies collectively, it is (or ought to be) finished as a political project.

I conclude that what the EU needs right now is a loyal opposition, willing to provoke an almightily row in order to promote change. Step forward Mr Fabius?

UPDATE2 Over on Twitter, Antoin argues that the plan as interpreted by me would violate EirGrid’s statutory monopoly.

Minister Rabbite yesterday announced plans to export wind power to Great Britain. This is a result of the energy summit organized shortly after the last elections. It now appears ready for public discourse.

The plan is simple. Build a load of wind turbines in the Midlands, where the relative lack of wind is made good by the relative lack of tourists and nature reserves, on land owned by Bord na Mona and Coillte. Build dedicated transmission lines to Great Britain. (The Spirits of Ireland hope that there will be pumped storage as well.)

The plan makes half sense from an English perspective. It is hard to get planning permission for onshore wind turbines in Great Britain. Onshore in Ireland plus transmission is cheaper than offshore in British waters. On the other hand, the plan is driven by the EU renewables target, which is pretty tough on the UK. With Germany abandoning its green energy plans (following earlier such decisions by Portugal and Spain) and with Theresa May wishing to ban Greeks from the UK, it is not immediately clear why the UK obeys the EU with regard to renewables.

It is not clear what is in it for Ireland: English-owned turbines generating power for England, transported over English-owned transmission lines. Dedicated transmission means that there are no benefits for Ireland in terms of supply security or price arbitrage. If the new transmission would be integrated into the Irish grid, Irish regulations would apply — and subsidies too, so that you Irish would sponsor my electricity bill. Ireland does not have royalties on wind power or transmission (and if it would, the same royalties should be levied on Irish turbines and power lines). That leaves some jobs in construction, fewer in maintenance, and 12.5% of whatever profits are left in Ireland for taxation.

It may well be that this plan is a quid pro quo for the UK contribution to the bailout of Ireland.

I am not convinced that the plan will go ahead. The English power market is in turmoil, and the companies may not be interested in an Irish adventure. Recall that the UK government also confidently announced that private companies would build new nuclear power. Well, they did not. The comparative advantage of Ireland in this case is the relatively lax planning regulations. Pat Swords may have put an end to that. But even the current planning regime can be used to block to an English adventure with no Irish spoils.

It is early days for this project still. It is worrying that the minister seems to think that more state intervention is required, and that the state still has money to waste. UPDATE: Paul Hunt points out that it is indeed the Government’s plan to intervene and subsidize: See the new energy strategy.

More academic thoughts on interconnection are here.

At the EU summit of the 21st of July last the leaders’ statement said that:

“We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal’s resolve to strictly implement their programmes and reiterate our strong commitment to the success of these programmes.”

This was reiterated as recently as the EU summit of the 30th of January when the statement of the EU leaders said that:

“We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.”

These both seem pretty unequivocal to me and have not been contradicted in any subsequent EU statements I have seen.

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.

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.

The Sunday Business Post published an opinion piece of mine on the eurozone crisis yesterday under this title. As its content seems to have disappeared behind a paywall, I attach the piece here. 

Angela Merkel’s recent reflections on the future of Europe to which I refer are here.

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.”

“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.”

“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 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.

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.

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.

Before he became über-famous for his history of finance, The Ascent of Money, Niall Ferguson made his name in academia writing ‘counterfactual histories‘. Counterfactual histories are essentially ‘what ifs’, changing the outcome of one or two pivotal events, and taking history for a ride to see where subsequent events take you. A great example is what would have happened if Arch Duke Ferdinand hadn’t taken a bullet to the neck in June 1914 from Gavrilo Princip. Would World War 2 have started? Another cool example is the effect on bridge engineering if ‘Galloping Gertie’ hadn’t collapsed in 1940. Counterfactuals are useful because they allow us to explore the ramifications of what might have happened in the light of what actually happened.

Every citizen in the State has probably sat down at some point asked themselves what might have happened if the late Brian Lenihan hadn’t handed out the blanket guarantee in September 2008 that put the taxpayer on the line for the banks’ many failures. Everyone wonders what would have happened if the Regulator had done his job properly during the years of the construction bubble. And everyone on this blog, I’m sure, has wondered what the outcome would have been if we had burned some of the senior bondholders in bust banks like Anglo long before now.

Official wisdom, as handed down from the ECB as recently as yesterday, holds that confidence in the banking system is more important than individual banks’ liabilities. So the taxpayer must be put on the hook for those liabilities in extremis. Serious people the length and breadth of the country queued up to endorse this policy. If you didn’t–especially if you were an economist–you were being irresponsible and extremist.

The official position has changed slightly. Now it’s just not worth it. We’d lose the ‘confidence’ of the markets for a mere 100 million euros if we burned the remained 3 billion of unguaranteed seniors. I’m not the only one perplexed at how this number is reached.

Today’s Sindo column by Colm McCarthy puts nails in the coffins of the serious people and their preferred policy. The counterfactual element comes through in this piece quite strongly. Colm argues, clearly and simply, that paying off bondholders of bad debt warehouses when the country is bust and within an EU/IMF loan facility is bonkers, and that there is a different way. Read the whole thing, but here’s a key part:

It is unprecedented for bondholders in defunct banks to be paid by a country already in an IMF programme and unable to re-finance its own sovereign debt in the market.

It is an extra irritation to have to endure lectures from EU and ECB officials about their generosity to Ireland, as if the lucky beneficiaries were the Irish public.

The Irish Times interviewed departing ECB executive council member Juergen Stark and reported on Monday last: “He is dismissive of a renewed Government push to avoid repaying about €3.8bn of the senior debt in Anglo Irish Bank and Irish Nationwide Building Society. The ECB remains opposed to such an initiative and Stark says Ireland is ‘not autonomous to take this decision’. The question is a ‘non-issue’ for the bank.”

The phrasing is interesting. Ireland is “. . . not autonomous to take this decision”. The government of an EU member state, accountable to its electorate, is not free, according to Stark, to decide whether or not creditors in utterly insolvent and defunct banks, no longer trading and in wind-down, should be paid by a Government which has not guaranteed these debts. The funds to pay these bondholders are being provided by the IMF and EU, since the country cannot borrow elsewhere. Each payment adds to a debt mountain already so large as to threaten the ability to service the State’s own sovereign debt.

This column would have been heresy, even one year ago. Now let’s hope it contributes to a change in official policy with respect to the bondholders in Anglo, and perhaps in other banks. Colm closes his piece well, it’s worth quoting:

It is bad enough to have to “take one for the team” without acknowledgement. It is much worse to see the team lose the game so ingloriously.

Good news, it seems, from the Commission, allowing us to extend the maturities of our loans, and service them at much lower interest rates, essentially the cost of funds from the EFSM. It also looks like there will be a retrospective reduction (but that’s my reading of the text, I’m open to correction).

From the press release:

The Commission proposes to align the EFSM loan terms and conditions to those of the long standing the Balance of Payment Facility. Both countries should pay lending rates equal to the funding costs of the EFSM, i.e. reducing the current margins of 292.5 bps for Ireland and of 215 bps for Portugal to zero. The reduction in margin will apply to all instalments[sic], i.e. both to future and to already disbursed tranches.

Furthermore, the maturity of individual future tranches to these countries will be extended from the current maximum of 15 years to up to 30 years. As a result the average maturity of the loans to these countries from EFSM would go up from the current 7.5 years to up to 12.5 years.

Two comments. First, this is very welcome news, and well deserved given the levels of austerity we’ve endured and the cooperation the Irish State has given, relative to other EU countries. Second, were this proposal to come from the Irish side, rather than the Commission, in the current climate it would be seen as a call for a controlled default. The fact that we (and our Portugese cousins) are being allowed to do this shows that the EU Commission is aware that the sustainability of Ireland’s and Portugal’s public finances are in question, and they have decided to act decisively to change the probability of our finances becoming unsustainable in the medium term. So: a good news story for once. Commenters may have differing views, of course.

(Ht to Liam Delaney for showing me this)

I’ve seen various explanations for the 2008 crisis: global imbalances, dodgy financial innovations, lack of proper financial supervision, the interaction of all of the above. And a few others besides.

But this is a new one to me, I must confess.

This excellent post by Karl deserves a thread of its own.

This report from the Guardian is consistent with Thomas Klau’s argument that current eurozone governance arrangements are pushing “democratic debate and voters’ choices to the margins”. It also suggests that in the long run the present way of doing things will prove politically unsustainable, in a union of democratic states. Whether Klau’s preferred solution is likely to come about is another question entirely.

Reuters report Minister Noonan as saying:

“There is a commitment that if countries continue to fulfill the conditions of their program the European authorities will continue to supply them with money even when the program is concluded,” Noonan told Irish state broadcaster RTE.

“The commitment is now written in that if we are not back in the markets the European authorities will give us money until we get back in the markets.”

In the event that the State cannot fund itself on the open markets, this statement would seem to imply the Minister readily expects more cash than previously agreed with the EU, IMF, UK, and Sweden. But apparently that’s not a new bailout.

Presumably this statement was intended to reduce uncertainty about Ireland’s post-2013 funding position. But these statements inject more uncertainty.

The Minister expects there will be more cash if we are good boys and girls. Ok, I can accept that. But there are important follow on questions: That’s more cash, for the same terms? On different terms? Cash from whom, using what mechanism (EFSF/EFSM/IMF/Something else)?. When, if not in 2013, will Ireland return to the markets? Is there a Greece-style road map somewhere for Ireland?

Can we see it?

These are just some of the questions raised, on the night at Macgill Summer School we hear the Taoiseach proclaiming Ireland’s intention to repay all of its creditors. which, if we’re Greece 2.0, wouldn’t be correct at all.

Colm McCarthy writing on these, em, pages, a few days ago explained that Europe’s Plan A–no banks will go under, no states will default on their debts, fiscal consolidation plus recapitalisation will see us through–is being quietly dropped in favour of Plan B. Today at the EU Debt Summit we got a glimpse of what Plan B will look like. (updated to official version).

Briefly, Greece is being allowed to selectively default, but this won’t harm Greek banks (nor their French owners) because the greek bonds will be guaranteed by an enhanced European Financial Stability Facility (EFSF) that can intervene in secondary markets amongst other new powers. Other debt-laden member states, including Ireland, will have access to cheaper funds from the uber-EFSF at longer maturities.

The markets liked it too, with bank shares enjoying a nice bounce. There’s some evidence the bounce we saw on the markets was just short equity positions being cleared out, so I wouldn’t take that too seriously as an indicator of how well this new plan will go down. I don’t think many people were surprised at Greece’s default. As macroeconomic events go, the default was pretty well expected, hence the lack of jitters when it was announced.

It is to be welcomed that the Greek default is somewhat orderly and buttressed by other member states’ guarantees to reduce (or avoid completely) balance sheet contagion. What’s not so welcome are some of the phrases used in the draft document. They are vague enough to allow lots of leeway should policy makers require it, but precise enough to guarantee action of some shape or form. All this does is move debate away from ‘what will they do’ to ‘how are they going to do it’, which is unhelpful given the seriousness of the situation. This is, after all, the tenth time EU leaders have met to sort the problems in Europe out ‘once and for all’.

Paragraph 7 of the draft contains the following rather ominous sentence:

To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF, allowing it to:

- intervene on the basis of a precautionary programme, with adequate conditionality

That is really worrying language. Does it mean, for example, that the EFSF can require states to implement austerity measures without negotiation with the sovereign? The language is vague enough to be quite scary.

The composition of the new beefed up EFSF isn’t reported. The only place Italy is mentioned in the draft is to get a pat on the back for its recent fiscal consolidation. Is Italy, in its current fragile state, expected to keep its share of the EFSF up? Look at the table on page 1 of this document from the EFSF showing the contributions of member states. Italy is expected to pony up up to 78 billion euros if required. More information on just where this money is coming from would be most welcome.

Another slight worry is that Ireland has agreed to talk about the common consolidated corporate tax base (ccctb), meaning that perhaps there has been a movement in the government’s position on this issue, though agreeing to talk does not mean that Ireland’s corporation tax rate (a different beast) is under threat just yet.

All in all, a lot to discuss in today’s announcements, but I don’t personally feel the EU has solved its problems to the satisfaction of all, though commenters may of course disagree.

Colm is at his best in this Sindo column. Best bits:

Plan A has failed to create circumstances in which the three ‘rescued’ countries can return to the markets, the over-riding objective of any programme of official support. Their traded debt has collapsed in price and all three are rated junk by at least one of the bond-rating agencies. They will not be graduating from the programmes of official support anytime soon and the verdict of the markets, the only verdict that matters, is that Plan A is also junk.

The essence of Europe’s Plan A, as first applied to Greece, is to pretend that the problem is less serious than is actually the case, avoid any element of debt relief and insist that budgetary stringency alone will do the trick.

…

Persistence with Plan A and blaming the markets and ratings agencies is not a viable option should Spain and Italy go under. The game is up. Plan A is being quietly abandoned. In this sense, this has been a good week for Ireland.

..

Minister Noonan should now be seeking European support for an end to payments to holders of bonds, guaranteed or unguaranteed, in the Irish banks. Every cent paid to them is at the expense of the holders of Ireland’s sovereign debt, who have been treated in quite cavalier fashion at the behest of the European Central Bank and apparently in response to threats from this unique organisation.

ECB officials come and go but sovereign states need sovereign credit forever. It would be an unmitigated disaster if Ireland’s act of faith in Europe were to result in the first-ever default on the sovereign obligations of the State.