The Irish Economy

Dan O’Brien examines the grievance-based case for debt relief here.

Seamus Coffey has an excellent article on resolving the euro zone banking crisis in today’s Irish Independent (HT DOCM).   For the Irish situation, Seamus puts the proper focus back on the case for extending the maturity of the promissory notes/ELA arrangements as the correct focus of negotiations.   The idea that the ESM would retrospectively cover already crystallised losses in the Irish banking system looks fanciful, and only serves to create confusion about what Ireland needs – and could realistically be provided – in order to further the shared objective of getting Ireland off external assistance.  

In the certainty of attracting vitriol in comments, I think Seamus is being a bit hard on the ECB.    The problem that the ECB faces is a bank creditworthiness crisis across a significant part of the euro zone.    In fairness, they have been willing to meet their proper function of acting aggressively as a lender of last resort to stem deposit flight.   But they can only do this if the banks they are lending to are solvent.   They have insisted that the banks be recapitalised, preferably directly from centralised bailout funds, but failing that by governments, with money borrowed from those funds.  

I think most analysts agree that the future stability of the euro zone will require a form of banking union, with centralised supervision, centralised deposit insurance and a centralised resolution regime that allows for losses to be imposed more broadly on certain classes of bank creditors.   The challenge is how to get from here to there.  In the short term, putting creditors at greater risk of losses reduces bank creditworthiness further, potentially causing the crisis to escalate.   Moreover, given the differences in the solvency of the banks in different euro zone countries, any move towards centralised deposit insurance has potentially large distributional implications across euro zone countries.   If a deposit insurance regime could be agreed behind a “veil of ignorance”, with negotiators not knowing which country they represented, it should be relatively easy to agree to such arrangements.   But alas this “ignorance” is not available.   The messy and fragile two-way process involving greater risk sharing and more credible assurances of mutual discipline will continue. 

Today’s proposals from the EU Commission on banking union offer a draft directive whose operative date would be January 1st. 2015, by which time the game will be well and truly over. It would also apply to the EU as a whole, and has that familiar, watered-down, look to it. 

Here’s a slightly more urgent suggestion from Daniel Gros and Dirk Schoenmaker:

http://www.voxeu.org/index.php?q=node/8069

In Greece, they argue, the sovereign has brought down the banks, while in Spain the banks are about to bring down the sovereign, as happened in Ireland, with a little help from the ECB.

The new ESM needs to be deployed to re-capitalise the Spanish banking system, pronto, as soon as the stress tests have been completed. Placing the burden on the sovereign, before the stress tests, is insane. We have been here before.

They also have a better idea for stopping the bank run in Greece.

I have been meaning to comment on the results of the Survey of Income and Living Conditions (SILC) 2010, but hadn’t got around to it with all the excitement on fiscal matters.   As has been widely reported, the survey showed a dramatic increase in income inequality, with the quintile ratio (the ratio of the incomes of the highest income quintile to the lowest income quintile) rising to 5.5 from 4.3 in 2009.   The Gini coefficient also jumped dramatically, from 29.3 to 33.9.   (A Gini of 0 represent perfect equality; a Gini of 100 represents perfect inequality – i.e. one household having all the income.)  These increases more than reversed the measured declines since the middle of the decade.  

Although these increases took place at a time of wrenching adjustment in the Irish economy, the magnitude of the increases in measured inequality is still surprising.  All the more so since the ESRI’s analysis of the 2010 budget indicated that the changes were progressive (see here for an analysis of the period 2008 to 2012).  (See also page 17 of this European Commission report on Ireland.)

The SILC is an extremely carefully constructed survey.    However, as noted in the survery report, sampling variation is unavoidable, and results must be always be interpreted carefully.   One indication that sampling variation may be an issue is the fact that the number of “household heads” with a third-level qualification or higher increased to 1,830 from 1,505 (p. 83).   This increase occurred despite the total number being surveyed falling to 11,587 from 12,641.   Thus the proportion of survey respondents with a household head with a third-level education or higher – a fraction that changes relatively slowly over time – increased to 15.8 percent from 11.9 percent.  This suggests that sampling variation may explain part of the measured increase. 

My purpose here is most certainly not to diminish the importance of inequality as an issue – quite the contrary.  And it may well be true that inequality will turn out to have risen over this recession after balancing market and post-market factors.   But those concerned with inequality might be unwise to put too much emphasis on one year’s survey results.   To the extent that the increase in inequality partly reflects sampling variation, there is a greater likelihood that it will fall again in the next survey release.   This could too easily be interpreted as indicating that recession-related inequality effects are not an issue.   Perhaps of greater concern than the results in SILC 2010 is the breaking of the recent trend of progressive budgets in Budget 2012 (see Figure 1 here).   However, we will need to see more than one budget to accurately gauge the distributional implications of Government policies.