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After a temporary misstep the latest Quarterly National Accounts have now been released.  For Q1 2012 they show that real GDP dropped 1.1% in the quarter so this poll was fully wrong while this poll was somewhat right.

To add to the confusion the release shows an economy that has contracted but exited recession at the same time.  The Q4 2011 change has been revised from a quarterly contraction of 0.2% to an expansion of 0.7% meaning that there was not two consecutive quarters of contraction following the decline in Q3 2011. 

In fact, there has not been two consecutive quarters of GDP contraction since the end of 2009.  This is very much an L-shaped recession.

The National Income and Expenditure Annual Results for 2011 have also been released.  Real GDP growth for 2011 was 1.4% but there was a GNP decline of 2.4%.  Nominal GDP was just under €159 billion.

As expected the Balance of Payments shows a small current account surplus for 2011.  If the BoP numbers aren’t big enough you can always have a glance at the Quarterly International Investment Position and External Debt figures.  The net column shows that there are lots of big numbers on the asset and liability sides.

FTAlphaville have put up a post that links to a draft of the Memorandum of Understanding for the loans to be provided by the EFSF to recapitalise the Spanish banking system.

At first glance there are many similarities to what was followed in Ireland.  There is no bailing-in of senior bank creditors and all senior bonds seem set to be repaid in full.  An Asset Management Company will be established to remove bad loans from the banks’ balance sheet.  There is lots more detail.

I am just back from a conference in Berlin that was attended by finance officials from a number of euro zone countries.   I must admit that what I heard left me with an increased sense of foreboding on the future of the euro zone.     To no great surprise, officials from stronger countries made it clear their governments are willing to pay a significant price to save the euro zone – but not any price.   What worries me most is the emphasis on restoring “market discipline” given concerns for moral hazard, including the continued threat of debt restructuring.   (The sentiment behind Deauville has not gone away.)  While I have no trouble in understanding this position from likely net contributors under enhanced risk sharing arrangements, it is a recipe for Italy and Spain being driven from the bond markets.   The concern of stronger countries for their own creditworthiness under guarantee arrangements was also emphasised – and, again, is understandable.  

As has been pointed out before, the main message from “second-generation” currency crisis models is very relevant.    Concerns about the willingness of policy makers to bear the costs of protecting a currency peg — or avoiding default — leads to increased expectations of those events, raising the costs of avoiding them still further.   It is all too easy to fall into a self-fulfilling, bad-expectations equilibrium. 

So what is the way out?   Stronger countries need to lay out what institutional arrangements they require to support enhanced risk-sharing arrangements, including some substantial form of euro bonds.   For the medium-term, credible institutional discipline must replace market discipline.   The present mixed approach is not working.   In deciding whether to accede to arrangements that would significantly diminish fiscal/banking sovereignty, all countries must recognise the likely path under the present course.   It might be a bridge too far, but at least we should not stumble into disaster. 

Colm writes in today’s Sindo on the outstanding problem of obtaining satisfaction from those responsible for the banking crisis within the banks. As usual there is a lot to think about and digest, but one piece stood out for me:

In Ireland, almost four years after the balloon went up, not so much as a parking ticket has been issued. Inquiries are under way by the Director of Public Prosecutions, An Garda Siochana, the Criminal Assets Bureau and the Office of the Director for Corporate Enforcement but none has yielded fruit. The Irish banking bust has been described by Central Bank governor Patrick Honohan as one of the largest, relative to the size of the country, which has ever occurred anywhere.

The snail-race by the investigating bodies is an embarrassment, has fed public cynicism and the belief that those responsible for the disaster will never be brought to account.

The socially corrosive effect this delay is having cannot be estimated. There has been at least one file prepared and sent to the DPP, but that’s it as far as we go. Colm has a gloomy outlook on the possibility of any redress coming via the Oireachtas:

It does not matter which Oireachtas committee undertakes the next incomplete inquiry.

The current account is the sum of the balance of trade, factor income and cash transfers. It is one half of the balance of payments, together with the capital account. The current account matters in every country for a host of reasons, but it is especially important for small open economies like ours. Here’s the latest data on Ireland’s current account, here’s that data in chart form.

We see the imbalance within the current account throughout the crisis. Much of this imbalance came through the ‘services’ and ‘income’ channels, as we can see in this figure that simply decomposes the components of the current account over time.

There is a new working paper from the ECB by Ca’Zorzi et al which shows that, accounting for a host of other factors, the current account imbalance story is really the only one that matters. Once the current account become decoupled from what the authors call ‘fundamentals’, the wheels come off the bus. This paper should be food for thought for our policy makers.