Rossa White (Chief Economist of the NTMA) has written an article on debt and sustainability issues – it is here.
Some of my students today complained – softly – about the workings of the Back to Education Allowance. Like many such schemes globally it allows for some mechanism to maintain welfare payments whilst returning to full time education at both second and third level. Laudable enough, although I haven’t seen this evaluated in terms of impact but then again what is new for Irish policy.
Even as we are distracted by political upheavals at home, the debate on how best to reorient the euro zone’s bailout mechanisms continues. The proposal gaining most traction, with at least a degree of German support, is to allow countries in difficulty to use EFSF funds to buyback their own debt on the secondary market. The initial focus is on Greece, but any new mechanism should be available in time to Ireland. (Wolfgang Munchau provides a critical analysis here.)
The attraction of buybacks is that they allow a country to reduce the face value of outstanding debt without a formal default. A disadvantage is that they can be gamed by bondholders: it makes sense for bondholders to hold out for a higher price if a buyback is really expected to improve creditworthiness. One partial solution that I mentioned previously is for countries to buy back the debt accumulated by the ECB through its Securities Markets Programme (see here).
Writing on Friday before the latest developments, Arthur Beesley reminds us of the stakes:
[T]he debate merits serious attention across the political spectrum in Dublin. Political activity for the next . . . weeks will centre on the election, but neither the Government nor the Opposition can afford to lie low on this front.
The debate on Greek debt takes place amid an intensive negotiation of key reforms to the European Financial Stability Facility (EFSF) rescue fund, including lower interest rates. Any inattention here would hamper Ireland’s argument for a rate cut, which is already difficult. But the Irish dimension does not end there, far from it.
. . .
[S]etting the election date brings clarity as to when a new government is likely to take office. From the perspective of European talks, the timing is tricky enough. Polling day is March 11th. EU leaders are working to make final decisions on EFSF reforms and a new permanent bailout fund at a summit only 13 days later.
There will be time – just about – to install a new taoiseach. By then, however, the really tough talking may well be done.
The ESRI’s new emigration forecasts are sobering (see here for QEC Press Release). For the year to April 2011, net emigration is forecast to be 60,000, falling to 40,000 for the year to April 2012. The gross emigration forecasts are 75,000 for 2011 and 60,000 for 2012. The numbers are consistent with anecdotal evidence of a resurgence of interest in the emigration option. It is also worrying that significant outflows are forecast in the context of a relatively depressed UK labour market, and despite quite restrictive and skill-biased immigration policies in the destinations of choice: Australia, Canada and the US.
The numbers are a reflection of how limited opportunities are at home for young people, though it would be even worse for those who leave if outside opportunities were not available. The unemployment rate for those aged 20-24 is 25.5 percent. And this is despite a fall in the participation rate from roughly two-thirds in 2008Q3 to half in 2010Q3.
We must also worry about the implications of large-scale emigration for economic recovery. In a thought-provoking post back in November, Kevin O’Rourke drew attention to the danger of an adverse fiscal feedback loop given the large fixed cost of the national debt. We get a form of fiscal increasing returns: the more people leave the greater the tax burden (and indeed the poorer provision of State services) for those who stay, further increasing the incentive to leave.
Over the past week, there have been repeated references during the Fianna Fail heave\confidence vote to the government’s achievement in securing funding for the state for a number of years.
The plan was originally presented as funding the state for three years. However, yesterday on Morning Ireland, Brian Cowen claimed that “funding for the state for the next four years had been organised” while on the Vincent Browne show on Monday night, junior minister Tony Killeen swung for the stars and claimed that we had secured “financing for the state for the next ten years or so”. (15.40 in).
Given the hyperbole\confusion on this matter, I thought it might be worth pointing out a few figures that suggest that the maximum length of time that the deal allows the state to stay out of the bond market is three years and that a more realistic assessment would suggest about two and a half years.