Category: Uncategorized

The FT and IT report on Jacques de Larosière’s call for a reform of European financial regulation. de Larosière’s report

recommended the establishment of a body under the auspices of the European Central Bank to develop policy and provide risk warnings to European Union supervisors. It also proposed another body to co-ordinate the decentralised network of supervisors monitoring individual institutions and markets.

The FT reports that “European banking and insurance groups welcomed the conclusions”, but I don’t suppose that this in itself should lead us to reject them outright. Eurointelligence is extremely disappointed by the absence of a proposed EU-wide super-regulator, while the FT likes the proposal. Supervision and coordination of the existing supervisors, who have failed, does seem much less attractive than having one new central regulator, and so I tend to side with Eurointelligence. On the other hand, the new European supervisory structure “would combat regulatory arbitrage by: deciding compulsory minimum EU-wide standards; providing binding mediation between disagreeing national authorities; and coordinating international “colleges of supervisors”.

Readers of this blog will be familiar with the arguments made in a two-parter here and here. (Can’t say that I would have chosen those headings though.)

The immediacy and scale of the interrelated public finance and financial system crises have naturally – and rightly -generated the vast bulk of comment and economically informed analysis to date. I wondered whether this reflects an implicit collective judgement that the third part of the government’s soi-disant strategy, namely that related to the role of innovation securing long term economic progress is at best uncontroversial or at worst irrelevant? I seem to recall most reviews of the government’s “Smart Economy” policy document evidencing general scepticism and disappointment that this focus for policy action was, to put it mildly, misplaced in the eye of the fiscal and financial storms by then well underway.

I would argue the need for more critical analysis to be focussed on this area—understandably more so if and when we’re a little surer we’re not going bankrupt tomorrow, and/or have to ritually abase ourselves before the IMF—but nevertheless at some stage.

My concern is that the policy machine keeps working, explicitly rationalising more government expenditure and significant institutional policy shifts (without much apparent economic oversight), by ritually linking of such policies to economic growth.

For example, Science Foundation Ireland today announced the allocation of €24m in respect of five new “Strategic Research Clusters”. There’s a broad debate to be had here, but one wonders whether this (by now unremarkable type of initiative) prompts the question for example whether innovation policy here, is or could become, merely a Trojan horse for old-style ‘picking winners’ industrial policy, particularly at a time when there are no apparent limits to the scale and scope of government intervention which in other contexts is now deemed acceptable.

Much more specifically, is there any concern that the renewed emphasis on commercialisability (and thus at least partial private capture) of outcomes of publicly funded research on the part of the policy makers is in unacknowledged tension with the original public good rationales for the ramping up of publicly funded R&D?

I was prompted in part to raise this kite by Nicholas Craft’s VOX post of July 2008 on ‘learning to love creative destruction’ which concludes in part:

Politicians find it attractive to wax lyrical in support of the “knowledge economy” and rush to adopt targets for R&D spending and participation in tertiary education. This “happy clappy” approach to addressing Europe’s productivity growth shortfall keeps them in the comfort zone. More progress would be made if the dark side of productivity improvement implied by creative destruction – exit of established producers and re-deployment of labour – were accepted and facilitated.

There are a small number of policy makers whose views actually matter in Europe right now, and up to recently it wasn’t clear to me that they held the right views. And so, it is extremely reassuring to read

Jean-Claude Trichet, the head of the European Central Bank, said that only emergency measures would help the world recover. “We live in non-linear times – the classic economic models and theories cannot be applied, and future development cannot be foreseen,” he said.

OK, we might query whether ‘linear’ or ‘convex’ is more appropriate, but the sense of urgency is very welcome.

A second piece of good news is the widely flagged rethink in Berlin regarding options for financing eurozone economies. If Juergen Stark wants EMU to survive in the long run, he should welcome such initiatives, since in the long run they will be necessary.

A third piece of good news is that Gordon Brown appears to be going along with Continental demands for greater regulation of financial markets. This is going to be a necessary part of any European Grand Bargain going forward, and in turn it is important that Europe speak with one voice at the London conference in April.

The Irish Economy blog won the Best Specialist blog category (sponsored by iQcontent) at the Irish Blog Awards last night. I thank all the contributors and commentators for the success of this blog.  Special thanks to Agustin Benetrix for his technical contributions to setting up the site.

The full list of blog award winners can be found here.