Angela Merkel has just given us a compelling reason to be grateful for central bank independence.
Update: Wolfgang Münchau is pessimistic about future ECB independence here.
There is a widespread consensus among opposition politicians, unions and business lobby groups such as ISME that the government needs to launch a “jobs plan” to reduce unemployment. One such proposal is Fine Gael’s plan to give those firms hiring unemployed workers either a €6000 subsidy over two years or a waiver on employer PRSI. (Labour have a more restrictive version which only applies to recruiting people unemployed more than six months.) Another proposal is ISME’s call for “an employment subvention fund to protect existing jobs.”
At a time of rapidly rising unemployment, I’m sure these seem like tremendous proposals to the public and the government is being widely criticised for its failure to adopt “innovative” proposals like these. To my mind, however, it would be a mistake to adopt proposals of this type. Let me explain why.
In order to provide a home for some longer posts and associated papers by contributors, there is now a new numbered series Irish Economy Notes which can be found here (and via the blogroll on the right panel of this site). The first batch includes contributions by Greg Connor, Colm McCarthy and myself.
The news today that the proportion of Leaving Cert students taking honours maths and physics has declined confirms what third level teachers already know: mathematical literacy is poor in Ireland. There are obvious implications for the credibility of the government’s knowledge economy ‘strategy’, but since the government has little credibility anyway that is not of any great importance. The problem of low mathematical standards is, however, an important one for the economy. It is a problem for which there are no quick fixes, but which could be solved given time, willingness to change, and attention to detail. Which makes it a nice metaphor for the Irish economy more generally.
From today’s Sunday Times:
Brian Lenihan, the finance minister, said last week that the plight of Anglo Irish Bank was a reminder that nationalisation carried a heavy price for taxpayers.
Lenihan held up Anglo as a warning to academic economists who support the nationalisation of Ireland’s big two banks, Bank of Ireland and Allied Irish Banks.
A direct quote along these lines is reported in Saturday’s Irish Times. The Minister is quoted as saying that
Anglo’s need for capital “illustrates the point that, when nationalising a bank, there is an issue for the taxpayer”.
Ok then, perhaps I shouldn’t bother taking the bait at this point, but let’s think about this for a second.
Suppose Anglo had remained in private hands after last Autumn, perhaps with new management after Seanie and co were cleaned out. Now they report losses that wipe out their capital base.
What would the government do at this point? No private investor would be willing to recapitalise Anglo. The government could decide to let Anglo be liquidated. However, the September 30 guarantee would then put the government on the hook for paying back Anglo’s liabilities and a disorderly asset firesale would probably only make things worse. (Which is the government’s argument for not winding up Anglo right now.)
So, because of the September 30 guarantee, the government would be forced to re-capitalise Anglo now, whether the bank had previously been nationalised or not. To blame the cost of re-capitalising Anglo on the decision to nationalise is putting the cart before the horse. The principle argument in favour of nationalising Anglo was that the government had guaranteed its liabilities and could not afford to keep a discredited management in place gambling with taxpayers money.
I would summarise the moral of the story here somewhat differently: When issuing blanket guarantees to troubled banks, there is an issue for the taxpayer.