The Irish Economy

New paper here.

• 7-11-2013
  Successful completion of 12th and Final Review Mission of the EU/ IMF Programme Ireland has successfully concluded the 12th and final review mission
  
• 7-11-2013
  The Department of Finance announces two senior appointments.

via Gavin Kostick in comments, earlier

Fishamble’s production of ‘Guaranteed!’ by Colin Murphy is back on national tour, starting at Kilkenomics this Friday. First panel discussion includes Bill Black and Dan Ariely.

http://fishamble.com/guaranteed

The Annual Conference of the Economic and Social History Society of Ireland is being held in NUI Galway on Friday 22nd and Saturday 23rd of November, convened by Niall Ó Ciosáin and Caitríona Clear.

Registration/booking information and the conference programe are available at:

http://eshsigalway2013.wordpress.com/

The Society’s main web page is here.

Using standard provisions in tax codes internet companies face low or no corporation tax bills in the countries of their customers.  This issue has been repeatedly raised in the UK by Margaret Hodge, chair of the Westminster Public Accounts Committee.  In relation to Google in particular much of the focus has been on whether Google has a permanent establishment in the UK.

This issue is also agitating the chair of the Italian lower house Budget Committee, Francesco Boccia, who has drafted a bill to try and force companies like Google to engage with their customers in Italy through a party that has a permanent establishment in Italy.  See this report from Reuters.

The proposal would not tax the multinationals directly but would force them to use Italian companies to place their advertisements, rather than doing so through third parties based in low-tax countries like Luxembourg, Ireland or outside the European Union.

Doubts about the feasibility of such a proposal seem justified but it does show someone trying to take some action on this issue.

All the documents can be accessed from here.

The main figures for Ireland (“rebalancing on track”) are:

Among Euroarea countries six are expected to face a BoP current account deficit in 2014: Estonia, Greece, France, Cyprus, Latvia and Finland.  The largest deficit is expected to be in Estonia at 2.2% of GDP.  On the other side Germany, Luxembourg, the Netherlands and Slovenia will have a current account surplus of more than 6% of GDP.  The first three will have three-year averages greater than the 6% of GDP threshold set out in the Macroeconomic Imbalance Procedure.  In aggregate the euroarea is projected to have a current acount surplus of around 3% of GDP for the next two years.

The Spanish public deficit is forecast to increase to 6.5% of GDP in 2015 with France, Cyprus, Malta, Slovenia and Slovakia also projected to have deficits in 2015 over the 3% of GDP threshold for the Excessive Deficit Procedure.  In aggregate the Euroarea is expected to run a public deficit of around 2.5% of GDP for the next two years with public debt steady at around 95% of GDP.

Leaving aside the empirical question of what it is that, in fact, leads to universities having international “brand recognition”, I would be very curious to know how much the “review of its brand” that Trinity is apparently engaged in is costing the university in these difficult times.

The opening address at the Irish Labour History Society Annual Conference delivered by Minister for Social Protection Joan Burton is available here.

Here.

The CSO have published the Statistical Yearbook of Ireland 2013.  The 20 chapters provide a useful compilation of the broad range of measures produced by the CSO.  The naming of Chapter Nine suggests we have a way to go before we “break the vicious cycle”!

The CSO have also issued the October update of the Live Register which continues to show a decline.  In the SA series it can be seen that most of this drop has been among males.

Separately, Eurostat have published updates for unemployment and inflation.  In September, Euroarea unemployment remained at 12.2%, while the flash estimate of October HICP inflation shows a drop to 0.7%.

UCD Sutherland School of Law is hosting a morning seminar in the IFSC, 14th November, 8-10.30am, on opportunities and challenges for  Ireland’s financial services sector. Justin O’Brien, Visiting Professor at UCD Sutherland School of Law, will address key issues facing Ireland’s financial services sector including, regulatory engagement – problems and perspectives, regulating culture – the rationale for intervention and nurturing a world-class regulatory environment in Dublin. Justin O’Brien is a Professor and Director of the Centre for Law, Markets & Regulation in the University of New South Wales. He has written many books on the subject including his most recently published Integrity, Risk and Accountability in Capital Markets – Regulating Culture (Hart Publishing, Oxford, 2013), Engineering a Financial Bloodbath (London: Imperial College Press, 2009) and Redesigning Financial Regulation: The Politics of Enforcement (Chichester: Wiley, 2007). Details and bookings at http://www.ucd.ie/law/events/title,187039,en.html

UCD’s Dr Niamh Hardiman, funded by IRC, has organised a conference on The Political Economy of the European Periphery in Newman House, 85 St. Stephen’s Green, Dublin, on Tuesday 3 December 2013. Registration is free, but places are limited so please book by email to geary@ucd.ie, with the subject line ‘European Integration’, before Tuesday 26 November 2013.

The full programme is here (.pdf).

Eurointelligence’s news briefing this morning (the professional edition) had a really excellent comment regarding the news that Jeroen Dijsselbloem is proposing that the stability pact be reformed, so as to link flexibility on deficit correction to “economic reform”. The question is, of course, what constitutes “economic reform.” Says Eurointelligence:

We recall that the expression „economic reforms“ had the exact opposite meaning in the 1970s – a reduction in market liberalism, more regulation, more workers rights. Economic reforms is always a political process. Is Dijsselbloem saying that decision on labour market organisations, for example, should be done at central level, and if not, who decides what reforms are desirable, and what constitutes reform? Say, the Commission enters into a “contract” with a country on certain types of reforms, what would stop a newly elected parliament in that country from breaking such a contract? In German constitutional law, for example, the parliament’s sovereignty would always rank above such contracts. One of the lessons of the eurozone’s short history is that one should not put currently fashionable ideological positions into a treaty or a law.

It is one thing to say that monetary policy should be the preserve of technocrats. You can also make a case that the same should be true of governments’ overall fiscal stances (although as soon as you get into questions of taxation and expenditure, you are beginning to trespass on matters that should properly be dealt with by democratically elected parliaments; and there are also the questions of whether the beurocrats in charge know what they are doing, and whom they are listening to). But the balance between expenditure cuts and tax increases in a deficit reduction programme? The composition of taxes or expenditures in normal times? Microeconomic regulations influencing the balance of power between employers and workers? These are political matters, on which the right and the left have legitimate disagreements (and, besides, economists know a lot less about a lot of this stuff than they sometimes pretend). Sorting out these disagreements is a core function of any modern democracy.

If, as a technical matter, the Eurozone requires at least some degree of fiscal union, and if, as a political matter, a big obstacle to this is citizens’ distrust of “Europe”, then measures which can be seen as attempted power-grabs by the centre at the expense of voters would seem to be directly counter-productive. Not everything in the economic life of a nation is a purely technical matter; we should be trying to convince voters that the Euro, and the EU itself, are compatible with the principle that our votes count for something, and that we can change policies that we don’t like, no matter how “technically desirable” they are thought to be in 2013 by the OECD or IMF or EC or whoever it is. Make the electorate feel disenfranchised, and you play into the hands of the populists.

The Staff Report on the Commission’s latest review of Ireland’s EU/IMF programme is now available.  It does not contain much that is new.  There is this on page 20.

Ireland’s fiscal stance has not been overtly pro-cyclical since the beginning of the crisis. Using conventional metrics, discretionary fiscal policy has been clearly leaning against the wind in 2008 and 2009, and did not move openly or blatantly into the wind in 2010 and after, in spite of the significant budgetary adjustment efforts put in place by the Irish government (Graph 2.1) (14). Fiscal policy remained, and is expected to remain broadly in line with the stabilisation function of discretionary fiscal policy, or at least not to run counter that function. In the early years (2008-2009) when fiscal policy was incontrovertibly counter-cyclical, the fiscal policy strategy mainly consisted of correcting previous policy commitments built on optimistic growth projections accompanied by the fact that in a deflationary environment, nominal expenditure freezes implied increases in real terms. Since 2011, the improvement of the structural deficit has taken place in an environment of slightly improving economic conditions.

This is Graph 2.1. Click here to enlarge.

Maybe footnote 14 is important:

(14) The structural changes of the economy during the economic crisis are beyond normal business cycle fluctuations. Therefore, potential growth and structural government balance estimates need to be treated with caution.

Representatives of the UK’s Revenue and Customs appeared yesterday before the Public Accounts Committee of the Houses of Parliament.  The exchanges were interesting though the evidence from the HMRC officials was sometimes confusing.  Following on from previous work done by the committee much of the focus was on corporation tax with issues relating to tax residency, tax compliance, the tax gap and permanent establishment among those referred to.

The questioning from the committee chair, Margaret Hodge, was forthright but at times slipped into grandstanding, primarily a suggestion that the Revenue show take “a few show cases”.  Ms Hodge also wanted the Revenue to estimate how much the tax gap would be if it was calculated “between the money that you collect and the money if everyone paid their fair share”.  Of course, “fair share” is an alien concept to tax collectors; their job is to collect what the tax code prescribes. Unless something illegal is being undertaken the answer to such a question in relation to MNCs will be close to zero.   If the UK wishes to collect more corporation tax Parliament changing the tax laws would be more effective than the Revenue undertaking some show cases.

An investigation into Google’s activities was alluded to through an exploration of documents provided by a former employee but it is not clear that it will lead to a change in the judgement that Google does not have a permanent establishment in the UK.

I don’t know if the Houses of Parliament make transcripts of the committee sessions available.  The transcript of a recent appearance by our Revenue Commissioners at a sub-committee of the Oireachtas Finance Committee is available here.

A Bloomberg feature on some elements of the Irish corporation tax regime was also published yesterday.

UPDATE: A transcript of yesterday’s Commons PAC hearing is here (H/T Gavin).

Paul Krugman has provided a new paper and post on the effects of a “sudden stop” of capital inflows in a country with a floating exchange rate and constrained by the zero lower bound on the short-term interest rate.  In previous posts (see here and here), Paul made two claims: (i) that a government operating an independent monetary policy should be able prevent a loss of creditworthiness; and (ii) that even if that loss did occur its effect would be expansionary through a depreciation of the exchange rate. 

He sets out the two issues in the introduction to the new paper:

What I want to talk about instead is a question that some of us have been asking with growing frequency over the last couple of years: Are Greek-type crises likely or even possible for countries that, unlike Greece and other European debtors, retain their own currencies, borrow in those currencies, and let their exchange rates float? 

What I will argue is that the answer is “no” – in fact, no on two levels. First, countries that retain their own currencies are less vulnerable to sudden losses of confidence than members of a monetary union – a point effectively made by Paul De Grauwe (2011). Beyond that, however, even if a sudden loss of confidence does take place, countries that have their own currencies and borrow in those currencies are simply not vulnerable to the kind of crisis so widely envisaged. Remarkably, nobody seems to have laid out exactly how a Greek-style crisis is supposed to happen in a country like Britain, the United States, or Japan – and I don’t believe that there is any plausible mechanism for such a crisis.

I think a lot of people, for differing reasons, found the second claim too good to be true (although I don’t think anyone has in mind quite a Greek-style crisis).  In a couple of earlier posts (here and here) I suggested one contractionary force: a loss of government creditworthiness could impair balance sheets in the banking system.  

In the new paper, which contains some really nice new modelling, Paul attempts to dispose of various objections to the claim that a creditworthiness shock would be expansionary.   (And for the record I am a big Krugman fan.) Here is what writes on the banking channel:

Several commentators – for example, Rogoff (2013) — have suggested that a sudden stop of capital inflows provoked by concerns over sovereign debt would inevitably lead to a banking crisis, and that this crisis would dominate any positive effects from currency depreciation. If correct, this would certainly undermine the optimism I have expressed about how such a scenario would play out.

The question we need to ask here is why, exactly, we should believe that a sudden stop leads to a banking crisis. The argument seems to be that banks would take large losses on their holdings of government bonds. But why, exactly? A country that borrows in its own currency can’t be forced into default, and we’ve just seen that it can’t even be forced to raise interest rates. So there is no reason the domestic-currency value of the country’s bonds should plunge.

But this response essentially just invokes point (i) – that the government with an independent monetary policy won’t lose creditworthiness.   As far as I can see, it does not deal with the second part of claim that the loss of creditworthiness would actually be expansionary even with adverse effects on the financial system at all.   The problem actually comes out more clearly in the original formulation of Paul’s model, where it is explicitly assumed there is a rise in the risk premium – and presumably a reduction in the market value of outstanding government bonds – and it is shown that the effect is expansionary.  

It still seems to me that to dispense with the banking-related objection Paul needs to argue either theoretically or empirically that this particular contractionary force is not relevant.   On the empirical side, the interesting case studies that he looks at do not isolate an answer to the second claim.  

Finally, it is worth considering a simple thought experiment.   Imagine that in the recent imbroglio over the debt ceiling, a solution wasn’t reached and the US government was forced to (temporarily?) default on its debt.   Thinking back to the post-Lehman experience, I don’t think it is hard to imagine that this would be extremely disruptive to the US financial system, notwithstanding a depreciation of the dollar, in ways that would be difficult for the Fed to fully counter in both the banking and shadow-banking systems. 

Alan Taylor sends me to this post: the chart is definitely one for the classroom.

The financial architecture of the Eurozone is still a mess. One possible improvement might be a wave of cross-border bank takeovers and mergers. Such a change might make the Eurozone less fragile since country-specific economic shocks would not have a two-way negative-feedback through the balance sheet of country-specific banks. This change would also kill the potential for country-specific deposit runs. The bank regulatory authorities in the U.S.A. (FDIC and Federal Reserve) often arrange mergers and takeovers of troubled banks to snuff out liquidity/solvency crises at individual banks and/or dampen regional shocks. J.P. Morgan was encouraged to take over Bear Stearns and Washington Mutual by the regulators for exactly these reasons. Now, quite appropriately, J.P. Morgan is responsible for the “legacy liability” issues of these two absorbed banks, and it looks like the final bill for J.P. Morgan could be over $10 billion. J.P. Morgan is the legal successor and a change of ownership does not eliminate the liability, even if (as in this case) the regulator gave you a Best Boy in Class ribbon when you agreed to the takeovers. The J.P. Morgan case is in a foreign jurisdiction, but nonetheless this case will have knock-on effects for the Eurozone.  The J.P. Morgan case makes it less likely that there will be any takeovers of troubled or formerly-troubled Irish banks.

The WSJ has a detailed report on the current state of negotiations - here.

Òscar Jordà, Moritz Schularick, Alan Taylor have a new piece on the issue, available here.

Press release here.

Information note here.

The NYT has a profile of Ignazio Angeloni, a senior ECB official who is closely involved in the new SSM process: it is here.

Simon has an interesting post on the EU measurement of output gaps and structural budget balances.   See: here.

A final reminder that this year the DEW, kindly sponsored by Dublin’s Chamber of Commerce, will be held at the CastleTroy Park Hotel in Limerick from 18-20 of October. The final programme is here.

All bookings and reservations for the conference should be directed here.

The 36th DEW Annual conference will see more than 30 presenters, with Ministers Michael Noonan and Pat Rabbitte giving plenary talks, along with policy makers, academics, and members of the business community, it’s going to be a lively debate. See you there.

The NYT reports here.

John McHale’s IT op-ed is here.

This post can also serve as an open thread for budget-related comments.

Bain / IIF report is here.

Awarded jointly to Eugene Fama, Lars Peter Hansen and Robert Shiller "for their empirical analysis of asset prices". 

A release with “popular information” is here and one with “advanced information” is here.

Many of us will be gearing up for the wonkfest that is the Budget, and as long time readers probably know, the Estimates of Receipts and Expenditure (.pdf) white paper is a key document in shaping any budget. Seamus has some thoughts on the latest one, and I’d really only add one point: several documents have now made much of the savings and passthrough coming from the full year’s property taxes, last year’s budgetary out turn, and the IBRC liquidation. Fiscal consolidation is on track.

All of this is, of course, predicated on growth coming back in strength, and as you’ll know if you stare at these things, growth is always magically 2-3 years away. The latest HERMES simulations estimate the cumulative effect of fiscal consolidation since 2010 is the reduction of annual growth rates by between 3/4–1%. So with more austerity, and a fragile international environment, growth may be hard to come by.

With two more years of relatively harsh budgets to look forward to, a good question might be what is the probability distribution around those growth estimates, and what downside risks–and resulting contingency plans–exist?

Karl Deeter, Marie Hunt and Brian Lucey have a new paper on this here, with some of the results of their survey abstracted here.