Ireland is, probably, not Greece….

This is an expanded version of an oped published in the Irish Examiner 12/January/2013

So, we are back in the bond market, which must mean that every thing is great, and the recession is over….. three cheers….no? really?

Well, one cheer for the NTMA anyhow is due, they did a solid professional job of tapping the existing bond base for additional money. What a lot of commentators fail to realize is that it’s a very long time indeed, back in the late 1970s, when we actually paid off debt. National debt, the stuff that plugs the still yawning gap between government income and expenditure, doesn’t any more get paid off but instead gets rolled over. Absent any banking crisis we still have that gap and it has to be filled. The concerns of Dr Honohan, that the markets don’t get it and demand a risk premium over Germany, are I fear misplaced. We are nowhere near out of the woods. As Van Rumpoy noted, we would have to take much the same corrective action as we are now doing, absent a banking crisis, to fix the broken government finances. And broken they remain

Between this year and next we need to redeem over 13b of government bonds, monies previously borrowed. Between now and the end of 2016 the sum is closer to 27b. So this modest sum is a useful step towards the funding of that repayment, which must be made before a single penny is borrowed to fill the 20b or more that will be spent by government in excess of its income.

Governor Honohan, and to some extent the Taoiseach in his talk to the CDU have expressed concern that the markets are not recognizing fully the efforts that have been made. The NTMA have expressed their concern also. However, the reality is that the markets are only vaguely efficient, if even that. Bond investors are concerned with getting their money back: in the pre crisis period the assumption was that within a union there was, somehow, equalization of risk and that lending to Greece or Ireland was no riskier than to Germany. Of course, we know now that that was completely untrue – it relied on an unspoken and untested assumption that the richer nations would bail out the poorer in a manner that would not scorch the economic earth. That this equalization is not going to return was noted by the Governor. But it then becomes clear that for the very long term we are going to pay much more than Germany or Austria for our debt.

If we examine Ireland and Greece over the last decade or so we can see why. The government have done an excellent job of making clear that Ireland is not Greece. But from a high-level financial analysis perspective its not that clear that we are in fact so very different. Take debt/GDP ratios; for Greece that has risen by 80% from the 2000 base while for us it has gone up by 350%. The difference was that Greece started at a high level, while the banking crisis has dragged us up. EU forecasts are now for debt GDP ratios in 2014 in Ireland to be 120% (140% vs GNP, which given we are unwilling or unable to tax MNC’s at any higher rate is the more appropriate level) versus a Greek level of 188%. Over the period we have run cumulative primary deficits equivalent to 40% of GDP while Greece ran at 25% ; Greece will be paying 6% of GDP in interest payments on debt in 2014, we will be paying 5.6% ( 6.7% of GNP) ; the implicit interst rate on Greek debt is forecast to be 3.2% while we will be paying 4.8%. What distinguishes us from Greece is a) a perception, broadly correct, that we as a nation have played “straight” in terms of making public our problems and in terms of having an effective and efficient tax collection system, b) a perception, again broadly correct, that we have better midterm economic prospects. Thus Ireland is able to contemplate returning to “normal” borrowing while Greece is still in deep trouble. But normal borrowing, even at what the powers that be consider to be inflated prices, is contingent on several stars coming into alignment

First, we must continue to get our basic financial position in order. Despite all the pain that we have taken the reality is we still face deficits of 7% and 5% for 2013 and 2014. Little radical change has been done or will be contemplated in many areas of the economy. Second, and related to that, we continue to pin our hopes on export led growth, into a challenging world economy. Third, government trust (even if ratings agencies and the Troika and independent analysts disagree) that the banks are sorted, in that the slow erosion of capital by the slower writing down of mortgage loans will not ersult in a need for more capital. And fourth, the market perception is that a meaningful deal will be done on the bank debt. The latter is getting more and more unlikely. Noonan has signalled that he is keen to exit the banks, selling the ownership stakes valued at 8b. These represent the NTMA valuaton of the 20b injected. The only large chunk of debt on which meaningful (setting to zero) action is the anglo note, and Brian Hayes stated last Wednesday that it will be paid back in full. So no meaningful deal will emerge – nor should it, if we are back in the markets, out of the banks and singing that we are all ok. Meanwhile, with industrial production slumping, exports (patent income washing excepted) flat, consumer confidence falling, house lrices remaining under lressure, incomes falling , health costs rising as service provision declines, and bank mortgage lending back somewhere last seen in the 1970s, singing that all is well to the international markets will merely sound cacophonously surreal to the domestic audience. But for six months we can be ignored as the government scurry about in fleets of shiny new cars “running Europe”. Running indeed…

 

Ireland should give one (1) cheer for the Greek debt deal.

So, once again (what is it now, the fourth time?) we have a greek debt deal. Great. Except, its not. The essence of this deal (which has delayed funds since may..) is a maturity extension and a rate reduction on existing and new Greek debt. This will reduce the present value of greek debt and make it easier to repay. There will also be a bond buyback from private investors, which might or might not succeed. It is all useful stuff, if a little hopeful, and might well give a breathing space to greece.

 

In the Irish context there is however little to cheer. Recall that the only significant chunk of debt which we hold which is in play is the wretched promissory note for the whirlpool of debt that is IBRC (the zombiestein that is Anglo and INBS). This is 30b euro which is structured in a complex way to ensure that each year for a decade more we pay over 3.1b (the total amount of the budget austerity package to be unveiled 5/12/12) to the Central Bank of Ireland and they ….destroy it.

No interest relief is relevant here: this has been well parsed by among others Karl Whelan. An extension of the repayment schedule would help, in that instead of the CBank destroying 3.1b each year it might destroy 1.5, or .75b. This of course is to accept the lunacy of the whole project. From the greek debt deal, and greece is in  a much worse place than we, it seems that maturity extensions and interest relief is the only game in town for official creditors.

Expect little relief for the Anglo promissory notes, the most toxic legacy of the FF/GP folie de grandeur. Expect what little relief we get to be spun like a top. Expect the media to swallow said top with glee. Expect all that but dont expect any meaningful relief.

Lazy stereotropes, lazy greeks

So. The problem it seems with greece is not its unsustainable  150% debt to GDP ratio, or the habit many of its wealthier citizens have of being creative with tax. No …. its that they are lazy olive botherers who simply dont work hard enough. That lazy stereotype, a trope of the crisis, comes round every while. The greeks are simply lazy.This we know to be true (sic) as the germans, sorry, the Troika, demand that they work harder, perhaps six days a week 13h per day. No, really.

Well, no, not really.

First, lets see where the money went – it didnt go to keep the average greek in the lap of luxury.

So. Maybe they should work harder, after all, as we in ireland know , bondholders must be paid off. It sounds better in Finnish….

Well, they do kinda work hard.  Harder than, ooh, say, Germany. Or Ireland. (data from http://stats.oecd.org/

Well, maybe its because its too hard to fire people in Greece . After all, the Troika have suggested that greece deregulate its labour market and are especially worried about unemployment becoming structural (because perhaps in addition to greek workers being unifireable they are more comfortable on the dole). Hmm.. higher numbers = more restrictive in the chart below..

As for the incentive to say on the dole once you have gotten there…lets see. A very recent (german) research study published just a few months ago (Pfeifer, 2012 International Journal of Social Welfare , V21) says this about Greece

Depicting European UB and SA systems with indicators of expenditure, generosity, problem pressure and social rights yielded a classification that partly corresponds to earlier typologies. We found Scandinavian type welfare states with very generous provision and relatively high spending in both areas (Denmark and The Netherlands), and we also identified a core group of two southern European countries with scarce benefits and extremely low spending (Italy and Greece).

Yes, quiet…

Well, if its not the lazyness, what is it (apart from the tax…)

Greece is simply not terribly productive.  Its about half as productive as Ireland and 2/3 as productive as Germany.

Now, there are reasons to why that is the case but thats for another blogpost. Lets just note that productivity is a function of capital and labour. Clearly the problem in greece is not so much that they work too little, its that they are not somehow transmuting that via interactions with capital (which can be physical, social, human etc) into output.

Back to debt. Greek debt is unrepayable. Everybody knows that and the present posturing is only delaying the inevitable. Countries default, and get debt written off. Germany, amongst the Eurozone members, has been proportionally the largest beneficiary of debt write-off, with debts close to 400% of GDP being written off one way and another, allowing it to reenter the economic and political life of europe after WW2 with an effective clean slate.  Eaten bread is soon forgotten it seems.

The Tin Ear of Dr Sinn

One of the great masterpieces of world literature is Gunther Grass’ The Tin Drum, cataloging how Germany fell into the abyss of madness. The eponymous drum is pounded upon by Oskar, who survives the horrors of war and gains fame only eventually to be consigned to a secure institution. Its as much a discussion of the perils of taking oneself too seriously as it is on the perils of taking others so. Modern Germans labour, unfairly it may be, under the yoke of the dreadful history of their great grandparents. And yet, outside Germany we are often more reluctant than perhaps is helpful to accept that that is part of their (and our) shared history and that the context therefore is unavoidable. We are all too much at times like the Noel Coward song…Here in Ireland we are all too aware of the context of the past, and while at times it can be a massive evasion “blame the brits” sort of awareness, it at least exists. Its not therefore too much to suggest that others might want to cultivate this awareness in their speech.

Dr Hans Werner Sinn has waged an increasingly lonely campaign to convince anyone, everyone, that Germany stands in massive danger, that German capital is being starved and German money sucked to the periphery through the Target 2 interbank settlement system. Despite devastating critiques of this view by amongst others Karl Whelan Dr Sinn holds fast to the notion that it’s a massive danger. It’s not, unless and until the euro zone breaks up and even then it’s much more an accounting exercise than a real issue. As head of the ifo , the major german economic think tank, Sinn is a major player in the German economic and political sphere. Topflight german magazine Der Speigel has a fantastic takedown of Dr Sinn, which portrays him as an intellectual bully, a man possessed of absolute certainty (in a world where most economists have at least rid themselves of that) and obsessed with publicity and the media, a man whose views have remained slow to evolve.

Yet, he remains a most influential man. And bearing his media savvy and his acknowledged influence in that regard one of his statements quoted in Der Speigel makes one wonder. He has long regarded the bailouts of the periphery as dangerous. He now states “Our children will be forced to go to southern Europe and get our money back” . This is to my mind and ear inflammatory stuff, by a man who knows or perhaps now we see does not but should know his history and his geopolitics. At best its crass bluster, at worst can be read as a oblique reminder of the invasion and occupation of Greece and  Italy in WW2. One hopes that this time the children of Germany will be armed with lawyers writs and bond calculators.  It is similar to the head of the ESRI musing on the usefulness of ANFO in bond negotiations when in the financial district of London (riffing on the IRA Bishopsgate and Canary Wharf bombings) . The euro crisis has done enough harm to intra-euro national solidarity. People of influence should know enough to not fuel this any further. Its a pity that the certainties of Dr Sinn do not extend to a knowledge of the past context and present realities.

The real problem country in Europe….

This is an extended version of an opinion piece published in the Irish Examiner Saturday 25 May 2012

So another European summit concludes inconclusively, with the poor ole can again booted down the road, hopefully avoiding the fork that said road will take when, as seems probable, Greece departs the euro. To be fair, while inconclusive in terms of its outcomes there was a clear sense that the ground has shifted, away from the coordinated austerity for all pushed by Germany for the last two years towards a more balanced approach. Perhaps we should recall and amend the words of Churchill, substituting European for American and noting that Europeans will do the right thing only when all other alternatives are exhausted. Eurobonds, where a central or pooled treasury issues bonds and then doles out the cash to members of the pool, are at least back on the table, there is a recognition that growth needs to be at least as much a focus as fiscal discipline and there is an acceptance that bank recapitalization costs cannot fall only on the taxpayer.

However there is still a massive problem. Europe is mired in recession. Recent PMI indices, indicators of future economic activity, are all pointing recently to a deep slowdown. Spanish banks are treading the same dreary path as did Irish banks, with each deep look at the depth of the damage caused by its property boom revealing deeper and deeper holes, and the state adopting sequentially more and more drastic action to stem these holes. At least so far they have avoided a NAMA or bank guarantee fiasco. Meanwhile Greece continues to fester and the dreadfully dangerous precedent of an exit from the monetary union (which would render it no more than a fixed exchange rate zone, and we know how the last one of those in Europe ended) inches closer.

There can be no doubt looking at the economic history of the last decade that the biggest winner from the adoption of the euro was and is Germany. It has achieved massive relative competitive advantages over the other nations, mainly it must be admitted by the less than optimal actions of these countries, but also by reducing the labour share of the German cake. From close to 70% in the 2000 period employees compensation as a % of GDP is now closer to 60%, and German net exports to the Eurozone rose nearly fourfold in the ten years to 2006. A very crude characterization of the euro might be that the core lent money to the periphery that bought core goods and now the bills have come due.

The reality is that in this environment sides, the core and the periphery (which now seems to be everybody bar Germany and Finland…) are locked in a symbiosis. Coordinated austerity is not going to allow the peripheral nations to grow and in not growing they will neither consume core goods nor indeed repay core credits advanced to stem the losses arising from the credit bubbles or to shore up fiscal ssytems that were not fit for purpose.

The sad reality for Europe is that we have a weak german leader in a strong german economy who for too long was propped up by an even weaker French leader in a weakened france. The European experiment, of which the euro is the latest embellishment, is predicated on france and Germany being strong and democratic and working together to keep each other in check and at peace. In that it has succeeded but the reality now is that to get Europe out of the mess Germany is the only feasible paymaster. It will have to pay in one or more of four ways. First, there is a debate on an arcane interbank settlement system called Target 2. In essence there is nothing to be worried about absent a break in the euro, but were that to happen then Germany would be left with a large hole in the bundesbank. While that might appear problematic it can equally be argued that the net cost would be minor. But that would in any case be unthinkable to the money hawks in the German economic apparatus. A break of the euro would entail the return to the DM, which would result in a massive appreciation, resulting in lower German exports and lower German economic growth. While Germany has shown that it can survive and even thrive with a hard currency the dislocation would be large. Again, a break in the euro would also result in massive losses to German financial institutions, running potentially into hundreds of billions of euro, which would have to be recapitalized by the German taxpayer. The alternative to these is some form of Eurobond (which is constitutionally difficult and politically anathema to Germany) resulting in a rise in German borrowing costs, or a fiscal union including transfers from Germany and eventually France. . The latter in particular would insist that there be tax harmonization in some guise as a condition of entry.

Thus, we face more weeks of high political economy drama and economic highwire acts . Germany and to a lesser extent France need to accept that the costs of saving the Eurozone are going to be (short run and ongoing) high, and weight these against the incalculable disruption and losses of it collapsing. A Greek exit would be in my view an irreparable damage, as it would show that the Eurozone is not a monetary union. For Ireland the question will arise sooner than later: what are we willing to give up to remain in the enhanced European system, or do we take our chances on the outside. The stakes could hardly be higher.

For Europe as a whole and Germany in particular we might do well to recall the words of that most supreme political operative, Cicero , who stated :

“Six mistakes mankind keeps making century after century:
Believing that personal gain is made by crushing others;
Worrying about things that cannot be changed or corrected;
Insisting that a thing is impossible because we cannot accomplish it;
Refusing to set aside trivial preferences;
Neglecting development and refinement of the mind;
Attempting to compel others to believe and live as we do.”

Germany under Merkel has committed most of these follies, insisting that only german management of the economy is the right way (6), that there must be no increase in money supply regardless of the pressing need (4), that Eurobonds or debt monetization are so anathema to them that they are impossible (3), that if only the rest of Europe were German then there would be Germanic economic ordoliberalism prevailing (2) and that we must all simultaneously engage in austerity while exporting to each other (1, 2, 4 and 6).

At least German culture remains as refined as ever. Maybe we should reach into the shared common stock of European culture and recall the words of Voltaire, as echoed by Uncle Ben Parker in Spiderman, who noted that with great power comes great responsibility. It is time that Germany took that responsibility as seriously as its power demands.

What will be the Feta Greek-Irish economic relations…..

So Michael Noonan, our finance minister, apparently is unconcerned about Greek exit from the Euro, joking last week at an investment conference that we didn’t actually import anything from Greece much, apart from Feta Cheese. So that’s ok so…. I suppose the analogy of the Greek economy with a crumbly animal byproduct that is an acquired taste and not really very popular was too tempting to avoid.

It was still rather a bizarre statement. If Greece were (when it does?) leave the Euro, the effect will be to make Greek exports cheaper and imports to Greece more expensive. Ceteris paribus we would expect to see the trade balance between Ireland and Greece shift in Greece’s favour. We would export less to them and import more from them. While that is all very helpful to Greece it is less so to Ireland and makes the blithe insouciance of the finance minister puzzling. I suppose its about confidence….

The other puzzling element is that its not even true. We export several hundred million dollars worth of goods to Greece each year, which in a grexit will be much less competitive. And we import a small amount, its true, but Feta isnt even the largest amount.

The import/export profile of Irish trade with Greece is as below (in $). FWIW there is a nice tool here from the OECD that allows one to look at bilateral trade

total Imports  38,673,897
Exports  406,650,122
 367,976,226
Food and Live animals Imports  7,513,252
Exports  42,917,508
 35,404,256
Beverages and Tobacco Imports  5,455
Exports  8,835,026
 8,829,571
Crude Materials, Inedible, Excluding Fuel Imports  384,758
Exports  25,762
-358,995
Mineral fuels and related Imports
Exports  122,750
 122,750
animal and vegetable oils fats and waxes Imports  144,984
Exports
-144,984
Chemicals and Related Imports  16,950,172
Exports  314,978,978
 298,028,806
manufactured goods Imports  4,480,229
Exports  2,147,716
-2,332,514
machinery and transport equipment Imports  2,434,467
Exports  17,761,196
 15,326,729
Miscelleaneous Manufactured articles Imports  6,030,702
Exports  16,051,474
 10,020,772
Commodities and transactions not eslewhere specified Imports  729,877
Exports  3,809,711
 3,079,835

The Fiscal Compact and Ireland

I was asked to address the Oireachtas Subcommittee on European Affairs on the issue of the Fiscal Compact, and did so this morning (18 May 2012). Below is the briefing note which I forwarded to the members. We were asked to be succinct and to talk for 5 minutes prior to questioning, hence the rather stripped down nature of the material.

I have previously expressed my concerns on the fiscal compact in a number of fora, including my blog and my fortnightly column in the Irish Examiner. We are in effect being asked to incorporate into our constitution an econometric concept in order to become more Germanic. It is as Davy Stockbrokers put it in February “an abstract theoretical economic concept that cannot be observed with certainty.” We are therefore asked to support the immeasurable in pursuit of the unattainable. The only rational argument to support the compact is one of utter expediency : as we will require access to ESM funds from 2013 onward, whether we call it a ludicrous word such as “bailout” or a mere technical extension of the present “bailout”, and as such funds are as of now contingent on the fiscal compact, we need to think long and hard before rejecting it.In the context of the committee today, I have a number of points.

  1. Ireland as a state is broke. This is not an ideological but an arithmetic matter. We are forecast to have a net exchequer balance of -€21b in 2012, which is in the largest part made up of current expenditure running at €51b while current revenue reaches only €38b. Thus any proposal that can hold out a prospect of reducing this towards zero, especially on the current side, is to be carefully examined. That is not to say that I welcome the Fiscal Compact unreservedly- I do not. It has many issues which I would like to see modified, changed, dropped or better phrased. As the focus here is on the effect of the treaty were it to be adopted let me concentrate on that.
  2. Trajectory of debt. The fiscal compact states a maximum permissible deficit of 0.5% of GDP. It is easy to work out that with modest growth of nominal GDP the deficit rule will result in a long-term debt to GDP ratio of extremely low levels. The stable steady state debt/gdp ratio converges to d/g, where d is the average nominal deficit as a % GDP and g is the average nominal GDP growth. Since 1980 the average deficit has been 4.1% with average GDP growth at 8.2%. The figures since 2000 are 2.8% and 4.8%. We will if we wish to achieve the 60% debt to GDP figures have to achieve a nominal growth rate of at least 2% while keeping deficits at 1% or less. We are forecast to have a structural deficit of 5.5% in 2012. To move to a 0.5% deficit therefore is a massive multibillion-euro demand shock. To move from the forecast 2015 115% debt/GDP ratio to the 60% permissible is to remove some 90b in debt from the stock of Irish government debt, or the equivalent of the entire national debt as of 2010. To do this will require that we run structural surpluses (or find somehow that austerity does in fact lead to growth in nominal GDP). Demand effects aside, one has to wonder if this is within the capacity of the state to achieve such a massive transformation?
  3. An area of the treaty that has received scant analysis, surprisingly so, is the effect which it will have on bond markets and Europe.As noted we can amend the ratio of government debt to national income by decreasing debt and/or by increasing wealth. The focus of the compact is on the former. Europe as a whole is significantly over the 60% limit. As of 2011 eurostat figures the majority of individual countries are also over. Thus the adoption of the compact suggests a prolonged massive de leveraging of the European sovereign bond market. The euro 17 countries as a whole need to reduce debt/GDP ratios from 85% to 60%. At present terms that is a reduction of some 2.3 trillion euro. That is a massive fiscal drag to pose on Europe and compact is that if it succeeds it will gravely damage the sovereign bond market. Even well run countries such as Netherlands ( 2012 debt/GDP forecast 65%, 2012 GDP growth 1%, Unemployment 4.5%) and Austria ( 2012 forecasts Debt/GDP 73%, , Unemployment 4%, GDP growth 1%) will be required to retrench. This is not a recipe for growth in Europe, and given that exports are forecast to be the entire contribution to any GDP growth we may see will see the stifling of demand in one of our major markets. This point has been reiterated in the Financial Times which stated on Tuesday 17th in its editorial “A fiscal compact worth its name would have matched belt-tightening in deficit countries with expansion in surplus countries. Universal austerity will instead erode the gains from fiscal discipline by stunting the economic output from which public and private debt can be serviced” It has also been critiqued by a wide variety of other market and academic economists (see this Reuters article for a synopsis of the argument) . Swabia housewives alone cannot reinvigorate Europe. Nouriel Roubin has statedWithout a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will not be restored, and the recession will deepen. And, without resumption of growth – not years down the line, but in 2012 – the stock and flow imbalances will become even more unsustainable. More Eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union.” Such policies are the direct opposite of what we now see, with strict money and frontloading of austerity. He further stated The trouble is that the Eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming. A large (but not overwhelming) stock and flow of relatively low risk assets are required to support pension and investment funds. A shrunken market will be less able to fulfill that role. The fiscal compact therefore requires that over time trillions of euro of assets are removed from consideration of investors. The consequence of this will be an intensified move to safe haven assets such as the (to be radically shrunken) German bund market, driving down further German interest rates. Investors will have to accept radically lower long-term returns. Alternative investment classes seen as safe havens such as gold, or denominated in currencies such as the Norwegian kroner or Swiss franc will also attract investors, with knock-on consequences. The effect on Europe of a perpetual low cost of capital in the core and higher costs in the periphery cannot but exacerbate the existing core-periphery problems. In addition, low nominal rates lead ro negative real rates, a form of “financial repression” . Faced with a growing pension timebomb the shrinking of the pool of safe assets seems not sensible. Mercers 2011 Asset allocation survey indicates that most pension funds including Irish desired to increase not decrease their absolute and relative investment in domestic government bonds. There are plans to market up to 2b in domestic bonds to pension funds for annuity purposes. How these will be squared with decreases in the asset pool is unclear
  4. The fiscal treaty contains not just a set of macroeconomic thresholds but also under the Alert Mechanism Report looks at a series of more detailed ‘warning signs’. (See below). The first of these came out in mid February and as one might expect these show Ireland (as well as Greece and Spain) as being problematic. The warning indicators are shown below (courtesy of a CitiBank report). In the February report Ireland was shown to be in breach of 6 of these ( also shown below). What is interesting in the recent Citibank report (see http://ftalphaville.ft.com/blog/2012/04/16/962221/return-of-the-stability-and-growth-pact/ ) is that while the Irish economy in the boom years would have shown relatively good adherence to the headline fiscal treaty requirements, there is some evidence that the indicators below would have triggered concern. Ireland began to exhibit significant numbers of breaches in 2004 onwards, mainly due to house prices, private sector debt, labor costs and real effective exchange rates. However, these were all a consequence of the credit boom. While a procedure now is available to fine countries that, having been found to be severely imbalance do not take steps to adjust towards balance, this fine is only up to 0.1% GDP . We are all now painfully aware of the political reaction that was evident (and voted for enthusiastically) when people were ‘cribbing and moaning’ as one Taoiseach so memorably put it. One can easily imagine the same Taoiseach cheerfully explaining how a fine of ‘eh, a few hunnered million’ was a small price to pay for the continuation of our unique way of achieving economic success. In other words, the flaw in the fiscal treaty is that it concentrates on trying to achieve political economy aims by exclusively economic means. Is there now and will there be in future the political will in Ireland to face down domestic calls for the ignoring of warnings?
  5. There are a host of other issues with the compact that bear on domestic competency. First, we will need to ensure that we have domestic capacity to estimate independent credible (from a technical sense) structural budget estimates, in an economic environment where there are no set rules on how this is to be done. To do otherwise will be to force us to rely entirely on the commission. This will be a net additional resource requirement for universities, the fiscal council, ESRI or a new body. Below we see (courtesy of Davys http://www.davy.ie/content/pubarticles/fiscalcompact20120227.pdf and Dr Constantin Gurdgiv http://trueeconomics.blogspot.com/2012/03/2532012-irish-gdp-and-structural.html) how IMF and EU commission estimates of the structural deficit can differ wildly, and in the context of a strict limit this mattera. Is there willingness and resource to spend on this? Second, and following on from this, is there sufficient technical knowledge in both economic and negotiation skills in the government to argue the case where as is inevitable there will be divergence between the commission and the domestic estimates? Third, there is no mechanism that I can see whereby on re-estimation of the models countries that were previously deemed in deficit are now deemed in surplus (or vice versa) are ‘reimbursed’ for the mis-estimation de jure, and again will there be sufficient skill sets for such an argument? The experience of Ireland with regard to the promissory note saga suggests to me that we have demonstrated neither the technical nor the negotiation skills that would be required under either of the last two questions. Fourth, the present fiscal compact is one leg of a stool, and as such while it can work it will be a precarious balancing act. The interaction of government with society in the economic space consists of fiscal and monetary policy. We do not have government control at a European level over monetary policy, and again one can see the way in which this leads to direct countervailing of purposes where increased austerity over and above the domestic requirement is imposed in pursuit of a flawed monetary vision. This treaty will provide a (Germanic ordoliberal) common spending policy. What is missing is a common tax policy and a common policy on transfers. Is there domestic will or competence to open up the latter two as a European aim, with the certain knowledge that for compromise on one (transfers) compromise on the other (tax) will be demanded?

Macroeconomic Imbalance Indicators

Estimates of Structural Deficit

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