The Irish Economy

Ricardo Hausmann focuses on differences in export capacity in this FT op-ed.

I argue that the fiscal ‘compact’ will not turn the currency union into a full monetary union in this paper from a conference before Christmas;

http://www.ucd.ie/t4cms/WP12_02.pdf

and in another that Croatia, which voted to join the EU a couple of weeks back, should think carefully about joining the currency union as currently constituted:

http://www.ucd.ie/t4cms/WP12_03.pdf

It would be nice to get solemn acknowledgement all round that fiscal rectitude is a good thing. It would be even nicer if some political attention could focus on what kind of EMU 2.0 might actually work in the long term.

The NY Times profiles Michael Hasenstab here.  (HT BEB).

Patrick Honohan’s latest book launch speech is here.

Gerard Kennedy and Tara McIndoe-Calder provide an overview of the state of Irish mortgages in this article in the latest CB quarterly bulletin -  available here.

Lars Calmfors has written a new paper, based on his time as the founding chair of the Swedish Fiscal Policy Council.  The paper is here.

Abstract:

The Swedish Fiscal Policy Council (FPC) set up in 2007 is one example of the recent international trend to create independent fiscal watchdogs. The FPC has established itself as an important participant in the Swedish economic policy discussion. The FPC has small resources and a broad remit including employment, growth, income distribution and monitoring of how well the government explains its policies in addition to evaluation of fiscal policy. The reason why it can work is that the FPC acts as a complement to other institutions. The interaction between fiscal policy and other policy areas as well as the possibility to exploit the council’s expertise in several areas are arguments in favour of the broad mandate, but at the same time there could be a risk that interest is diverted away from fiscal issues. The FPC’s experiences illustrate the time inconsistency issues involved in establishing a fiscal council: a government has an incentive to create such a body as a signal that it will pursue responsible and rational policies, but it also has an incentive to constrain the council’s activities once government policies are criticised.

Bruegel looks at corporate deleveraging in this paper.

I have written an op-ed for the Irish Times on this topic - available here.

[The compressed nature of an op-ed means that I did not cover all issues relating to the fiscal compact - my Croke Park presentation touched on some other dimensions.]

Ken Rogoff is profiled in today’s FT - the article is here.

The podcast and slides from the session on fiscal policy at last Friday’s conference are below.

Podcast

Chair: Dan O’Brien (Irish Times)

Philip Lane (TCD
Ireland and the Fiscal Compact

John McHale (NUIG)
Strengthening Ireland’s Fiscal Institutions

Seamus Coffey (UCC)
Current and Capital Expenditure: Getting the Balance Right (Part 2)

Colm McCarthy (UCD)
Public Investment and Fiscal Stabilisation

The DF has released an explanatory note 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.”

The report is available here.

Patrick Honohan launched this book last night.  His speech is here.

Below are links to materials from the competition, regulation and privatisation session allowing, as with similar threads, for views on the topics and contents of the session to be gathered together.

A very central theme of the presentations and discussions was how reform might stimulate growth and thus reduce the costs of austerity.

Part of Doug Andrew’s presentation on governance is related to the privatisation thread already on the blog here. And, as regulated firms engage in investment, Colm McCarthy’s presentation on investment here could be read alongside some of the presentations from this session.

Although there are no slides from John Fingleton’s talk on competition, there is is a link to a closely-related paper, and you may, in any case, listen to the podcast of his (impassioned) speech, which is to be found from about 24.00 minutes into the recording.

Chair: Cathal Guiomard (CAR)

Podcast

Richard Tol (Sussex)
Energy Policy and Economic Growth

John Fingleton (UK OFT)
Economic Growth - How Can Competition Policy Help?
No slides but related paper here

Doug Andrew (consultant, ex-airport regulator)
Ownership, Governance and Reform

This World Bank report was written as part of the first Polish Presidency of the European Union Council. The report was launched on January 24 2012 in Brussels. I feel it is a good approach to take a European View of the Crisis.  We will see solutions, and problems, differently if they wear our EU hat.
The press release says: The report documents the impressive achievements of the European growth model over the last 50 years. Accounting for the stresses it is experiencing and assessing the longer-term challenges that Europe will face, the report then evaluates the six principal components of the model: Trade, Finance, Enterprise, Innovation, Labour, and Government. It finds that the European growth model has been a powerful engine for economic convergence, helping developing countries in Europe catch up to their richer neighbours and become high-income economies. But recent  changes in and outside Europe necessitate change. The report proposes the adjustments needed to make trade and finance work even better, to encourage enterprise and innovation in parts of Europe which have begun to lag, and address shortcomings in the functioning of labour markets and governments. The changes proposed would restart the European convergence machine, make Europe’s enterprises competitive, and help Europeans afford the highest standards of living in the world.
I was a co-author on Chapter 7 (Government), written by Kaspar Richter, Ewa Korczyc, and Paul Walsh.  My personal view:  Clearly the Economist has picked up on the magnitude of the debt problem facing the EU relative to the rest of the World.  It is also important to note that the size and structure of government spending, particularly social spending, while generous compared to the rest of the world, exhibits huge differences across EU member states. The current debate around the fiscal compact is about aggregate fiscal deficits and debt dynamics. Yet the degree to which member states are so different in the level and structure of their social spending is not really appreciated.  Tax harmonisation is one thing but maybe some thought should be given to divergences in social spending.  As EU citizens facing a potential Fiscal Union, a movement to Eurobonds and increased Political Reform, should Education, Health and Social Welfare supports not be the same for all? Depending on where you live in Europe, and your demographic, and now your debt level, your entitlements can be very different. Some states can deliver a high level of public service and economic growth, even in a high taxation environment, others seem to struggle.  Many countries, and the EU as a whole, seem to need a good deal of Political Reform.   All these good ideas around growth, and reform of taxation and spending, are all fine but can only be implemented with a major restructuring of Political Institutions at the National, EU level and Global Level.  The lack and poor quality of Political Institutions at every level can be blamed for our current situation. Reform of Political Institutions needs to happen to get us back on track.  Ireland can contribute at every level in this reform process. 
Report can be found on the below.
http://www.worldbank.org/goldengrowth

Here are some quick snapshots from my presentation at Friday’s conference in Croke Park.   Some background information can be found in the following:

• Patterns of Investment
• Investment, Depreciation and the Capital Stock
• Investment in EU Countries

From 1983 to 2010 capital expenditure averaged nearly 12% of gross voted expenditure.  In 2011, capital expenditure was 8.1% of gross voted expenditure, the lowest since 1992.

For the four years from 2012 to 2015 it is planned that capital expenditure will be 6.4% of gross voted expenditure.  For every €100 of voted expenditure, €93.60 will go to the current budget (transfer payments, public sector pay, and other non-pay expenditure on goods and services) and €6.40 will go to the capital budget.  Would this satisfy the equi-marginal principle?

(more…)

The concept of “fire sale prices” is a useful one in many contexts – some examples are the October 19th 1987 US stock market crash, the LTCM crisis of 1998, and the 2007-8 US credit-liquidity crisis. In all three of these cases, security prices crashed in a particular sub-market, policymakers stepped in providing extraordinary credit-liquidity support, and eventually (quickly in the first two cases, slowly in the last) the capital market situation normalized. Unfortunately, “fire sale prices” is a useless or even harmful analytical tool for understanding the current Irish financial predicament. A better term for current conditions in Irish asset markets is stagnation prices rather than fire sale prices. Policymakers should look to Japan circa 1991 and the following two decades, rather than the USA, for a useful historical precedent. The fire sale concept gives the wrong policy guidance in the Irish situation; it is metaphorically like trying to use a fire hose to drain a swamp.

Andrei Shleifer and Robert Vishny have a series of papers exploring the use of the fire sale concept in modelling financial markets. There has been a large outpouring of papers by other authors with similar or related models, but the Shleifer and Vishny model is clear and simple and their survey is particularly good. They provide a definition:

“A fire sale is essentially a forced sale of an asset at a dislocated price…. Assets sold in fire sales can trade at prices far below value in best use, causing severe losses to sellers.”

They discuss how fire sales can cause financial and macroeconomic instability via credit and liquidity channels. In a related paper they laud US policymakers for their prompt and correct response in 2007-9 in injecting massive credit and liquidity into the markets for mortgage-related and credit-related securities caught up in the fire sale environment of 2007-9.

Fire sale mitigation policies are unusual as economic policies in that, as a rule, they should result in a net profit for the policymaker. This follows from the theory of the limits to arbitrage. This certainly seems to apply in the US case – the Federal Reserve made a trading profit of $79.3 billion in 2010 and $76.9 billion in 2011. The Fed vastly outperformed the best-performing hedge fund both years, at U.S. civil service pay rates, and without actually trying to make a profit. TARP was also profitable or near profitable, after an adjustment for the expensive but necessary bail-out of the US automobile industry. This is the nature of fire sale mitigation policies – they are about buying securities slightly below fair value and holding them temporarily on government account while injecting liquidity and credit.

The bad news is that this has near-zero relevance for Ireland. Irish asset markets are not suffering from a fire sale problem but rather from a long-horizon stagnation problem. The appropriate comparison case is not from the USA but rather Japan circa 1990. Japanese policymakers and financial institutions worked endlessly to slow the pace of adjustment, leading to an almost twenty year period of stagnation, suppressing growth and business innovation, and leaving a massive overhang of government debt. Irish asset markets need to be forced to adjust quickly and reach their new (much lower) equilibrium values with un-frozen free trading and clear, public pricing. This applies to banks, collateralized pools of debt, commercial leases, and commercial and residential property. Preventing this from happening is not preventing a “fire sale” rather it is guaranteeing a long stagnation. It could even last twenty years, as in Japan.

Another question – what is it about the US environment that gives rise to fire-sale-induced financial crises of typically short duration? Part of the answer lies in the USA lead in financial innovation. New financial innovations were key to all three fire-sale market crashes mentioned in the first paragraph of this post (portfolio insurance, statistical arbitrage, and numerous CDO innovations, respectively). High-frequency trading (the most recent big innovation) will be the likely cause of the next fire-sale-related crash, if one comes in the USA.* Ireland seems to avoid these fire-sale crashes, but is plagued instead by long-lasting periods of stagnation. Let us hope the current one is not dragged out for a decade.

………………………………………………………………………

*A post-script on HFT and the Tobin tax. After my last blogpost, Frank Barry asked me to give more details about Tobin’s use of the term “sand in the wheels” and its application in old-fashioned engineering. I do not know that much about the engineering use of sand in the wheels – I only heard Tobin discussing it in an interview. I now know that historically the sand in the wheels technique was used in the case of a metal (steel or iron) wheel aligned on a track and needing better grip, such as an old-fashioned railway wheel on a wet track. It is used for wheel-type mechanisms and not for gears with teeth. See Wikipedia for some details for those with an interest. I remember Tobin saying he was annoyed that many commentators mistook him as suggesting sabotage, and I remembered that key idea correctly. Sand in the wheels is a technique to improve, not hinder, performance.

Hashtag is #ieconf, this liveblog will host tweets and comments from the Croke Park conference.

The report is available here.   See also the background paper by Robert Hagemann here.

Readers may be interested in the Garret FitzGerald Spring Seminar to be held at UCD on 10 and 11 of February. This is the first of an annual series of “Spring Schools” to be named in Garret FitzGerald’s honour focused on topics that were particularly close to his heart.

This year’s theme will ‘Democracy in the 21st. Century’ and the event will include an opening keynote from Mary Robinson on the evening of February 10th.

Further details can be found here. Those wishing to attend are requested to pre-book a space. Contact Mary.Buckley@ucd.ie.

Official funding runs out at the end of 2013. Today’s manouvre by the NTMA has converted some two-year debt into three-year debt, at a cost. This is not ‘getting back in the market’ in any sense which confirms debt sustanability. No new debt has been issued. The ability to sell new three- or six-month T-bills is not relevant either.

Think about Belgium. The ten-year bond yields 4%, having been briefly higher during the panic. Belgium has a debt ratio about 100%, GGB deficit about 4% and primary deficit about 1%. Belgium is likely (not certain) to be OK and could probably sell 10-year paper in some size. The 4% interest rate is just about consistent with debt sustainability given 2% inflation and a little bit of economic growth.

Ireland’s exit debt ratio will be higher, there are contingent liabilities we all know about and a deficit down to 4% in 2014 would be doing rather well. Can Ireland expect to sell 10-year bonds, in size, in 2014, at 4% yields?

There is a 2025 bond in issue with a 5.4% coupon. It will be an 11-year bond in 2014. The curve should be flat in this zone. So if you think yields on mediums will be 4% in two years time, you can work out the target price for the 2025 bond in 2014. It is about 111.

The bond has recently been trading about 85. So if you think we will be back in the market in a meaningful sense in 2014, on terms as good as Belgium, you can pick up a nice 5.4% coupon twice, and a 30% capital gain, by taking a flutter.

Alternatively you can insist that Ireland can (sustainably) ’get back in the market’, and stay there, in size, at higher yields. This is entirely conditional on economic growth resuming quickly and at decent rates. The debt sustainability analysis in the IMF staff report to the executive board should issue in a few weeks and will be a must-read.

The NTMA offering circular for the 4.5% 2015 government bond can be read here.

Update: NTMA release on the results can be accessed here.

Jamie Smyth profiles the high-tech cluster in this FT article.

The review document is here.

Paul Krugman links to the latest McKinsey report on debt and deleveraging. There’s a lot of useful data in there, but this chart struck me as worth posting on this blog, with little comment required.

PublicPolicy.ie

Job Description -  Senior Researcher

PublicPolicy.ie is a new independent Centre supported by Atlantic Philanthropies.  Its purpose is to carry out and support independent research to inform fiscal policy choices in the Republic of Ireland, communicate the results effectively and stimulate constructive discussion amongst policy-makers, civil society and the general public.   We currently have an exciting opportunity for a Senior Researcher to join the organisation at this early stage and to play a pivotal research role within the organisation.

Role Purpose : The Senior Researcher will be responsible for ensuring that ‘PublicPolicy.ie’, its staff and its various working groups and initiatives are provided with the research and information required to carry out their work effectively.

Key responsibilities

· Carry out research on designated subjects

· Produce policy briefs, conference and seminar papers on research carried out

· Keep abreast of research findings and key developments in the area of fiscal policy

· Support working groups and members’ access to information on aspects of fiscal policy

· Provide support to interns on allocated projects

· Provide support on other assigned tasks as required

Role Requirements

We seek applications from people of talent and commitment to help lead the research function. The ideal candidate will have the following qualifications, skills, abilities and experience;

· A post-graduate qualification in a relevant discipline (e.g. economics)

· A proven track record in leading public policy research & analysis

· A deep understanding of how the public policy process functions

· Excellent oral and written communications skills

· An ability to communicate to a variety of audiences using a variety of media

· An ability to work independently and as part of a team

· IT Skills

This is a fixed term contract to October 2013, which may be extended for a further period. To apply for this role, please email your Curriculum Vitae and covering letter to Donal de Buitleir (ddebuitleir at eircom.net) by 1^st February 2012. For further information see this article.

The Troika statement is here.

The Department of Finance’s statement is here.

Courtesy of Broadsheet.ie, this looks convincing.

Some readers may be interested in this job opportunity at the IIEA. The deadline for applications is this Friday.