A Fractal Omnishambles and the ECB

It’s little wonder that the Irish government has not pressed harder against the European central banks approach to the Irish banking crisis. The reality seems to be that both are very similar, in at least one key characteristic. Both seem unable to accept that a mistake, once made, should be acknowledged as such, and that this does not have to represent a humiliating climbdown but rather evidence of a learning organisation.

We saw this again this week in relation to both Irish water and to the toxic legacy of the banking crisis.

Let’s take the Irish water shambles first. It has now become, if possible, even more of an omnishambles than it was previously. It seems, in fact, to be what we might term a fractal omnishambles. Something is said to be fractal when, the matter how closely you look at it, there is more and more complexity. The coastline is fractal, no matter how closely you appear at the coastline, or no matter how far away you look at it, you see a wavy, indented, coastal landscape. Irish water is like that. whether you look at it from on high, or any one particular part, is a shambles. Irish Water is the Mandlebrot Set of shambles, containing within it deeper and deeper levels of shambles.

Tom the Dancing BugLet’s recap. The reason Irish water exists in its current form is so that it can, if possible, borrow money and interest that in upgrading the water system. Everybody agrees that needs to be done. The only way which this can be done off the government balance sheet is of Irish Lotto receives more than 50% of its income from commercial activity. As the weeks have progressed, and as the political crisis has mounted, it has become clearer and clearer that the charges are going to be reduced. It is now unlikely that this 50% threshold will be met, in even the medium term, which leaves the government in a dilemma. Any borrowings that will be made will be understated balance sheet. So the government will have to either continue to allow the water system to limp along, in the mistaken belief that the international bond vigilantes will see investing in essential infrastructure as a bad thing, or bite the bullet. But if the state is  anyhow going to be on the hook for borrowing the money, why do we need irish water? In any case, even if Irish water were to try and go to the markets, a reduction in its income flow reduces the amount of money that it will be able to borrow, the borrowing being securitised on the income flow. The result of this, if the state was to push the borrowing through Irish water, would be to reduce the infrastructural investment. It is not beyond credibility to imagine a situation where we have Irish Water, but no improvement in the delivery of irish water.

pick_pocketThere’s also been a hardening and the tone of the government, in relation to charges. Again let’s recap. The money issues aside the principle of charging some amount of money for water makes sense if one considers it as an incentive to reduce usage. Irish water, being the dictionary definition of an omnishambles, had abandoned this principle out of the gate. The charging structure was likely to be such that as usage fell so the price would rise. We now see a situation where there is talk of bringing revenue into the collection of charges, attachment of earnings, and a host of other criteria which, no matter how sensible in terms of collecting income, make the charges more and more reminiscent of just another tax. Making a conservation charge work is possible – look at the plastic bag tax – but this is not the case here.

irish-coastal-reports-4-390x285Throughout all this the government has been clinging steadfastly to the idea that the matter how bad the individual components of Irish water might be the edifice as a whole is Peter perfect and is not for changing. Political pride is at stake, and damn the consequences. Fine Gael are quite capable of continuing to mess this up so badly as to allow Sinn Fein into Government for the first time.  Pride, we are told, comes before a fall. With Phil Hogan off in Brussels the government have a well remunerated exile to blame. As a good party man, Phil will take the blame if asked.

 

36-ProfileSomething similar is evident with regard to the ECB. The publication this week of the letters from Jean-Claude Trichet shed little light on what happened around the end of 2010, when we were moving towards the bailout. The ECB did not push Ireland into a bailout. That was going to happen anyway. To me the most interesting issue about the letters is how the ECB, whose mandate is on monetary and price stability, was deeply involved in real , as opposed to monetary, economic activity. We have seen an experiment run over the last half decade. Faced with a common crisis the Federal reserve and the ECB have taken different approaches. The Fed, which has a wide brief including not just price stability but also general economic conditions, has been generous in how it has interpreted this wider brief. The ECB, with the price mandate only, has been stingy in how narrowly it has interpreted this brief. The results, not entirely down to the two central banks, are quite different nonetheless. The USA has recovered, and is powering ahead, as the Eurozone remains mired in a deflationary depression. If in 2010 however the ECB was concerned about the fiscal and structural components of the Irish economy, as it manifestly was from the letters, one presumes it was similarly concerned about these issues in other economies. There is a link, regardless of crisis, between real economic conditions in financial/price stability. The ECB in 2010 was very clear that in order to maintain financial stability, in Ireland and elsewhere, the Irish government had to undertake real economic change. This was probably correct. What is galling however is that having done this, by means of blatant interference in the democratic processes of a sovereign state, the ECB has continued to in effect turn a blind eye to the deflationary depression, a real and financial crisis, that is manifest across Europe. Having decided to intervene in the real economy in 2010 it should have had the courage of its convictions and continue to do so with the toolkits that it had. The ECB has made a mistake, it has not been active enough, nor swift enough, nor broad enough in its interpretation of its remit, nor courageous enough in facing down its own hawks. Like the Irish government it should admit this mistake, and promise to do better.

euro_2027232cOne way in which the ECB could be helped with its learning is the Irish government to make it very clear that, now the cat is out of the bag in relation to the threatening tone of the ECB in relation to the ultimate destination of the Anglo bailout, it sees no moral obligation to continue the slow extinguishers of the Anglo bonds. It should suggest that instead, these billions be devoted to essential national infrastructure such as fixing leaky water pipes. It may be too late to do this, but it’s worth a try. A public statement on this would be useful. It seems from all discussions that the government has not even asked about how to reschedule or otherwise deal with these. It would save the government face here, show strength and solidarity with the people who ultimately elected and to it is ultimately responsible, and would allow the ECB to admit that it had made a mistake in how it handled the crisis. Irish water, the gift that keeps on giving, if we allow it. A fractal set contains infinities. Within that must be the possibility of  a win-win for all. Before-he-was-Governor Honohan , in 2009, opined on the need to be sensible in relation to debts incurred on Anglo. Five years on he should be asked his views.

 

This is a expanded version of a column published in the Irish Examiner 8 November 2014

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2 thoughts on “A Fractal Omnishambles and the ECB

  1. John Latham

    Since the government can almost certainly borrow more cheaply than Irish Water, it makes no real sense to move water into Water for the purposes of borrowing. The balance sheet argument may appeal to macro accountants, but since the purpose of debt/GDP limits is to constrain claims on future disposable income that benefit doesn’t stack up in the real world. We’re so far from 60% that surely a few billion here and there aren’t significant. Balance sheet gymstastics aside, at the heart of this is the belief that the private sector can more efficiently and effectively run a monopoly than the public sector, but even free market fundamentalists would be repelled by that notion. The whole semi-state approach to utilities is self-defeating, layering regulatory burden on top of private-sector profit taking, with efficiencies effectively imposed by regulatory diktat. If we can command an enterprise to be efficient, why can’t we do it with a public sector institution? This is all just too depressing. Everyone looks bad: private sector, public sector, unions, the lot. It’s a societal failure.

    Reply

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