The Free Exchange blog at the Economist’s website makes the point that the flip side of postulating that the Irish and Spanish governments were insufficiently countercyclical during the boom is that countercyclical deficits are symmetrically helpful during downturns. (Self-publicity disclaimer – the post cites my work with Agustin Benetrix on fiscal cyclicality).  Of course, the asymmetry of credit constraints means that countercyclicality during downturns is more possible for governments that retain the trust of the sovereign debt markets.  More generally, even for countries that must rely on official financing, it indicates that the speed of adjustment must be carefully designed.  Indeed, as emphasised by quotes from Olli Rehn in this FT article yesterday, the EU fiscal framework recognises that flexibility is needed in the interpretation of fiscal rules.

“The stability and growth pact is not stupid,” Mr Rehn will say, according to a draft of his address seen by the FT. “Yes, the EU fiscal framework is rules-based … but at the same time, the pact entails considerable scope for judgement when it comes to its application.”

I hope Karl does not mind a link to his post back here on the mother ship.   Karl’s post does a very nice job explaining that the Treaty does not imply additional austerity beyond what Ireland is committed to under the revised Stability and Growth Pact.  This fact does not seem to be getting through.    

The basic conclusion (emphasis in original):

. . . Yes campaigners have failed to highlight that the treaty does not, in fact, imply additional austerity in the coming years relative to what would occur if there was a No vote, even if the EU did decide to fund Ireland via EFSF or some other vehicle. The fiscal parameters laid down in the treaty are all part of the existing EU fiscal framework that Ireland is already operating within and would continue to operate within after a No vote.

The National Library has launched its web archive for the 2011 presidential election; it includes this site. Explanation below – more details here.

By the way, an interesting summary of this blog’s readership is provided:

Compared with all internet users, Irisheconomy.ie appeals more to users who have postgraduate educations; its visitors also tend to consist of less affluent, childless men between the ages of 35 and 65 who browse from home.

The Irish Presidential Election 2011 Web Archive collection consists of  70 archived websites relating to the Presidential Election of 2011. Selected websites can be broken down as follows:

• The seven candidate websites
• Political Party websites
• Official Government websites
• Informal and formal policital commentary websites
• News media websites

A one off snapshort of 70 websites was taken in the two weeks prior to the election date of 27th Oct 2011, with a further 10 sites (such as that of the newly elected president)  being archived after the election as well.

Given that we are in Fiscal Compact mode here on the site, I thought I’d make a point about industrial production in Ireland. Today’s monthly release of the Census of Industrial Production (.pdf) shows up a few interesting features of the Irish economy. The CSO report that the seasonally adjusted volume of industrial production for Manufacturing Industries for the first quarter of 2012 was 5.2% lower than the preceding quarter, but the seasonally adjusted industrial turnover index for Manufacturing Industries increased by 3.2% in March 2012 when compared with February 2012 and actually increased on an annual basis.

I thought I might dig into this a little. The chart below shows monthly data from 2007 on industrial production for the ‘modern’ sectors of chemicals, pharmaceuticals, recording media, and medical devices, and individually the key exporting pharmaceutical and chemical sectors. Seasonally adjusted and indexed to 2005, then, we have the following:

Which shows that, for these key sectors on a seasonally adjusted basis there has been a marked drop since the end of last year. Before we all go shorting Ireland just yet though, to put these figures in a bit more context, here’s the same series averaged annually, with the last period averaged quarterly for 2012.

There’s still a decline, but it’s not quite the patent cliff Frank Barry has been highlighting recently. Definitely a series to watch however. Here’s the turnover statistics for the two chemical sectors, they don’t produce one for the modern sector:

We can clearly see more of a drop , but it’s a bit too soon to tell where this series is headed. Again, one to watch.

Many thanks to Seamus for providing an excellent analysis of the debt rule.   At the risk of overkill, I think it is useful to offer one further angle.  

One aspect of the debt (i.e. 1/20^th) rule that may not be fully appreciated it that it is – like the 3 percent deficit rule – a trigger for the Excessive Deficit Procedure (EDP).   In the past, the trigger for the EDP was a deficit greater than 3 percent of GDP.   With the revised Stability and Growth Pact, the EDP can be triggered either by an excessive deficit or an insufficient rate of reduction in the debt to GDP ratio.   This fact is important for reasons that link to the discussion about the uncertainty surrounding growth prospects across recent threads.  

To see this, it is useful to recast both the deficit and debt-reduction rules in a way that makes them more easily comparable.   (I will make some approximations to make the maths a bit more digestible, but they don’t change the basic message.)

The equation for the change in the debt to GDP ratio can be approximated by,

Δd = (i – g)d_-1 – ps,

where d is the debt to GDP ratio (in percent of GDP), i is the average nominal interest rate on outstanding debt, g is the nominal growth rate, d_-1 is last year’s debt to GDP ratio (in percent of GDP), ps is the primary surplus (in percent of GDP), and Δ represents the change in a variable (measured in percentage points of GDP). 

Noting that the overall deficit as a percent of GDP (denoted def) can be written as id_-1 – ps, we can rewrite the equation as

Δd = def – gd_-1.

The 3 percent deficit rule says that the deficit must be below 3 percent of GDP.   Using the last equation, we can rewrite the deficit rule as a debt reduction rule,

Δd < 3 – gd_-1.

Ignoring the averaging procedure that Seamus details in his post below to keep things simple, we can write the debt reduction rule as,

Δd < (1/20)(60 – d_-1) = 3 – 0.05d_-1.

Both rules take a surprisingly similar form.   Given the existence of deficit rule, the debt-reduction rule only binds on fiscal policy (in the sense of triggering an EDP) if the nominal growth rate is less the 5 percent per year.   (Note this is consistent with Seamus’s calculations given that the deficit is projected to fall below 3 pecent of GDP in 2015.)

(As an aside, some commentators have noted the superiority of debt-reduction rules over deficit rules.   I agree with this as a general principle.   But it is not necessarily the case when it comes to comparing the particular rules we have above.  The deficit rule has the advantage of being “growth contingent”: the implied required rate of debt reduction falls as the growth rate falls.   The debt-reduction rule is insensitive to the rate of economic growth.   I see the growth contingency as an attractive feature of the deficit rule.) 

While noting yet again that the debt rule is already in place under the revised SGP and so not new to the fiscal compact, critics of the rule have a point when they draw attention to possible drastic implications of the rule in a very low-growth scenario.  (In our previous posts, both Seamus and I took existing projections from the IMF and Government (SPU).  These projections are based on a return to reasonable growth rates.   But there is downside risk to these relatively benign growth scenarios.) 

This is where the fact that the debt-reduction rule is a trigger for the EDP becomes so important.   If the rule actually forced debt reductions according to the third equation above, the results could be catastrophic.    To take an extreme case, if nominal growth was zero percent and the debt to GDP ratio was 120 percent, then the rule would require that the debt to GDP ratio is lowered at the rate of 3 percentage points per year.  

This would be crazy in the context of zero growth; it would require a overall surplus of 3 percent of GDP and a primary surplus of about 9 percent of GDP.   But it is not what would happen.   If the rule is not met the country would enter the EDP.   Under the EDP, a deficit reduction path would be worked out that would balance the need to move towards compliance with the need to phase the adjustment over time.    The fact that what the debt-reduction rule does is trigger the EDP is a critical fact in understanding the implications of the rules.

Note: The post has been corrected for an error in the original version.