Tag: EU-IMF

Daniel Thomas: Irish Bail-Out Terms Endanger EU’s Future

Here‘s an article by my UCD colleague Daniel Thomas that makes an important argument. If the Irish authorities are to get anywhere in relation to getting a better deal on issues such as the interest rates on official loans or dealing with our banking problems, they cannot rely on arguments based on narrow self interest.

Dan points to the dangers to the EU political reform process stemming from Ireland getting a bad deal. I think one can also argue that a deeper role for the EU in solving Ireland’s banking crisis can also be justified on the grounds that it can help to maintain financial stability throughout the Eurozone.

Kenny Returns from Brussels

Enda Kenny has returned from Brussels without any agreement yet to reduce Ireland’s interest rate (Irish Times story here and FT story here). Not surprisingly, Mr. Kenny wasn’t too keen to give up Ireland’s 12.5% corporate tax rate in return for a mere one percent reduction in the interest rate on the EU loans.

To my mind, there is a lot of shadow boxing going on here. The EFSF is an EU institution and it cannot set the terms of its lending on a bilateral basis with individual countries. I’d be surprised if thee tradeoff between these two elements ended up being as explicit as suggested in this weekend’s news stories.

I think the business about interest rates and corporation tax rates has a feel of fiddling while Rome burns. More interesting were Kenny’s comments about the ECB:

“I made the point that for me to conclude a deal here I need to be much clearer in respect of elements related to the ECB,” he said.

“I spoke to president Jean-Claude Trichet and the Minister for Finance will be meeting with him on Monday. He has agreed that I should meet with him before the [next EU summit on March] 24th/25th to discuss a number of issues relating to the ECB and its positions.

“Before the council meets again in two weeks time we hope to be in a much clear position insofar as Ireland’s position is concerned and continue on our progress arising from the mandate that I’ve got about an improvement in the terms of the package for Ireland,” the Taoiseach said.

He continued: “In the next couple of weeks I expect to be in a much clearer position in respect of the state of what we have inherited is in respect of Ireland’s position.

“We’ll have had discussions with the ECB in respect of a number of matters. We’ll have a much clearer picture of what’s emerging from the stress tests and as the principle has now been accepted and implemented of a reduction in the interest rate I . . . would regard that actually as the beginning of a process.”

I reckon they could fill Croke Park if they sold tickets for those discussions with the ECB.

After the Election: Reality Bites

Here‘s a column I wrote for Business and Finance on the challenges facing the new government.

The Fine Gael “Black Hole”?

I was accused yesterday in the comments of being biased against Fine Gael and for Labour. However, today I’m going to have to wave the yellow card at Labour for their role in the ongoing rumble about fiscal plans, specifically the supposed €5 billion “black hole” (e.g. here and here) in Fine Gael’s budgetary plans.

The issue relates to the following statement on page 29 of European Commission’s report on Ireland:

If the consolidation to reduce the deficit to 3% of GDP needed to be achieved by 2014, this would risk choking the recovery and further weakening the banking sector, possibly resulting in additional budgetary costs. The necessary additional budgetary effort in 2011-14 would amount to around €4 ½ to €5 bn, according to the Commission services forecast.

Fine Gael’s plans use what they call “the Department of Finance’s forecasts”, which presumably means the growth projections in the four-year plan (though it would be nice if they said that and produced a table being explicit about how their growth assumptions and other spending and tax promises translate into deficit ratios.) Based on this, they project reaching a deficit of 2.8% in 2014, just like the Four Year Plan.

Since FG are promising to deliver a deficit below 3% in 2014, does the Commission’s statement mean there is a €5 billion “black hole” in FG’s plans? Well, no. The additional adjustments that the Commission believe would be necessary to reach the 3% target stem from the Commission’s lower forecasts for the growth rate of nominal GDP. The Commission projects an average growth rate of 3.1% for nominal GDP over 2011-2014, compared with 3.9% in the Four Year Plan (and 3.85% in Labour’s projections.)

This means lower GDP and higher deficits in 2014 than are projected by the government and FG. However, FG are explicit that they will not introduce additional cuts to meet the 3% target in 2014:

We will review the pace and timeframe of the fiscal adjustment with the EU and IMF on an annual basis to take into account developments in the real economy. Should growth rates disappoint, we will continue with the same level of fiscal adjustment, but will avail of the extra year to reduce the deficit to under 3% of GDP offered by the EU-IMF Programme of Support.

Of course, it’s questionable whether the 3% target can be achieved by 2015 either and the IMF, freed from the strictures of having to pretend the Stability and Growth Pact matters, forecast that it won’t be.

Anyway, the black hole business is unfair to FG and the truth is that the differences between the overall stance of fiscal policy being proposed by FG and Labour are fairly small. FG planning to implement €9 billion in adjustments over the next three years, while Labour are planning to implement €7 billion. One can debate whether a slightly slower pace of adjustment is a better idea but the fact remains that policy will be severely contractionary whichever party gets its way.

When looking for black holes in the Fine Gael plan, one would be better off focusing on whether the promised efficiency improvements can really generate the predicting savings on the spending side.

Lucey: Time for Debt Write-Down

Brian Lucey writes in today’s Irish Times “Time to persuade Europe debt write-down is needed”