Friday, October 28, 2011

The Euro zone rescue deal - "them and us"

The announcement of the Euro zone rescue package, which included a 50% loss on Greek bonds for those banks that held them, led to a number of reactions here in Ireland. One was from Mr. Peter Brown of the Irish Institute of Financial Trading, who said, on the RTE news on Thursday 27th. October:

“If they’re that keen on keeping the Euro intact, Ireland needs a deal”.

Who are “they”, in this context? The ECB? Angela Merkel and Nicholas Sarkozy? The European Commission? Ireland is a member of the ECB and the EU Commission. France and Germany are our comrade states in the entity that has given us massive social, equality and consumer legislation improvements at home and free access to a market of over half a Billion consumers, not to mention significant capital transfers through the EU Common Agricultural Policy and the Structural and Cohesion funds.

Our membership of the Euro zone provides us with protection from speculative raids on what would otherwise be our local currency, such as that which cost the Bank of England an estimated £3.4 billion in 1992. As a result of Irish government attempts to protect the Punt at the time, interest rates on Irish mortgages reached a staggering 16% at one stage.

We have vitally important price stability through the determined and consistent actions of the ECB, although we undo some of that by our own inflationary actions here at home. Our most recent crisis has shown that use of the Euro gives us access to technical and monetary assistance from those other member states, such as Germany, The Netherlands, Finland and France, that have the discipline and experience to be able to deal with low interest rates and increases in the money supply, and to impose adequate regulation on their financial institutions. Our recent property related bubble and its subsequent bursting has shown that we in Ireland are still only in the learning mode with regard to these matters.

An important consideration for travellers is that the Euro gives us the convenience of a common currency as well as valuable transparency in pricing throughout those states that use it.

And being in the Euro zone is yet another asset to go along with our educated workforce, our status as the only English speaking state in the zone and our competitive corporation tax rate to help us attract Foreign Direct Investment (FDI).

In a nutshell, when Mr. Brown talks about “them” he really means us - in order to make good on the implication of his remark, Ireland would have to be prepared to leave the Euro zone and, in so doing, jeopardise the whole EU project. In the light of the benefits we have and can continue to expect from remaining in, this would constitute the greatest example that can be imagined of cutting off one’s nose to spite one’s face.

Sunday, October 16, 2011

Euro-zone inflation and a new scandal in Ireland

In an interview with Bloomberg television (see above) to mark the end of his mandate as president of the European Central Bank (ECB), M. Jean-Claude Trichet spoke about his experiences. He gave an interesting insight into the way he and his colleagues found themselves confronted by the recent global financial disaster and subsequent recession, which he says has represented the worst global crisis since World War II.

M. Trichet has always been very clear on what he perceives the duty of the Central Bank to be - price stability. By this is meant only one thing: control of inflation. The target is an average rate of annual consumer price rise that is less than, but very close to, two percent. This has been clarified even further by explaining that the ECB tries to “anchor price rise expectations” at this level.

In the Bloomberg piece the retiring chief states that this is especially a requirement of the most vulnerable members of the European population.

It is a measure of the importance that is placed on the anchoring of price expectations that the ECB has recently been raising interest rates in order to maintain its inflation target, even in the face of strong evidence that this could lead to further recessionary pressures and against the trend in the USA, Great Britain, Switzerland and Japan, which between them constitute the lion’s share of the global economy outside of the Euro zone.

Since the inception of the European common currency price stability has indeed been achieved. The year-on-year inflation rate in the Euro zone over the last decade has been exactly 2.0 percent.

There have been mutterings in some sections of the media to the effect that the ECB, at the insistence of Germany in particular, is fixated on price stability. The argument goes that this is due to a kind of folk memory of the situation that existed at the time between the First and Second world wars, known in Germany as the Weimar Republic, when inflation reached such a level that wheelbarrows were required to bring the money needed for even the smallest purchases to the shops.

These modern commentators reckon that a bout of inflation now could be just what is needed to pull us out of recession. For one thing, it would enable tax increases by stealth, where the value of the money diminishes but effective tax bands remain the same. And such has, indeed, happened before.

I believe this is nonsense. It is not for nothing that the Germans are the financial overlords, not just of Europe, but of the world. They have managed their own economy since the last war in a way that has allowed them to become, initially, a global economic powerhouse, then to absorb the former Communist East Germany into the Federal Republic - no small feat after years of central party mismanagement on a grand scale, and now to be the locomotive that will pull the rest of Europe, or at least that part of it that uses the common currency, away from the disaster that originated in the recklessness of the world’s banks and the policies of 'benign neglect' of financial industry oversight practiced by many governments in the past, not least our own.

As Jean-Claude Trichet points out in the Bloomberg video, price stability, while not a sufficient prerequisite for economic recovery, is an absolutely necessary one.

All this brings me to yet another scandal that is growing on our own shores here in Ireland. Certain parties, in situations that are obviously not sufficiently open to competition, have started to abuse their positions by imposing price rises that are many multiples of the rate of inflation. Two in particular have forced themselves on my consciousness in the recent past. The first is none other than that august body, the Gaelic Athletic Association (GAA). The cost of all stand tickets for the recent hurling and football All-Ireland finals were increased from €70.00 in 2010 to €80.00 in 2011. Those for terrace tickets went from €35.00 to €40.00. These represent rises of over 14% and 18% respectively. It’s no wonder that, for the first time this writer can remember, there were empty seats in some of the stands at the hurling All-Ireland between Kilkenny and Tipperary.

The second example is in health insurance. The premium for our family of four, none of whom has ever had a claim, has risen this year by an eye watering 30% percent, or fifteen times the rate of inflation. Yes, I know there was an increase in the government health insurance levy in late 2010, but this amounted to just under 11%. What justifies the additional nineteen percentage point rise?

Our health insurance is with Quinn Direct and there are two other providers in Ireland, Aviva and Voluntary Health Insurance (VHI) Healthcare.

So we decide to shop around.

You can guess what’s coming…

We have here what economists call an oligopoly – not exactly a cartel as there is no evidence of collusion, yet each and every one of the so-called competition has premiums that are equal to or in excess of those of our existing insurance company.

That such things can happen in the present economic situation is, indeed, nothing short of a scandal. This is because the people effected have already endured salary decreases and, in many cases, loss of employment. These and other austerity measures are imposed by the ECB, along with the IMF and the EU Commission, as a condition of advancing vast sums of money to rescue us from the errors of those who used to be in control of the economy. If the ECB is aiming, simultaneously, to alleviate people's hardship by controlling inflation it is simply intolerable that providers of goods and services can get away with the kind of behaviour that blows this level of relief completely out of the water.

Tuesday, October 11, 2011

The scientific method

The recent news that scientists at the CERN European Organisation for Nuclear Research in Geneva might have observed a sub-atomic particle that was capable of travelling at a speed greater than that of light has given some ammunition to those who would attack science, and scientists, in the interests of furthering their claims for religion. For example, Mr. Gregory Shenkman, in a letter to the Financial Times on Saturday Oct 8th 2011, has written:

“…science changes its mind about many things quite frequently. When it does so, it does not admit it was wrong before, it simply hands down a new tablet of stone. However, the current speculation at the facility at Cern as to whether certain subatomic particles can go faster than the speed of light demonstrates the need for science to keep an open mind”.

The discovery of anything that was capable of travelling at greater than the speed of light would, indeed, throw Einstein’s famous Theories of Relativity into disarray.

But theists, such as Mr. Shenkman, are being selective. For a start, they’re conveniently ignoring the fact that it was scientists who made this news public. That shows they do, in fact, have open minds. As for changing its mind, science is in a constant state of flux. In relation to scientific models that are still with us, such as the First and Second laws of Thermodynamics, Darwinian Evolution, The Germ Theory of Disease, and Special and General Relativity, any modifications that have been made since the original discovery was published have been in order to refine the model, never to negate it, and always on the basis of new evidence. One gets weary of hearing claims that “Darwin has been proved wrong” whenever something like punctuated equilibrium, the assertion that evolutionary changes are not constant over time, but occur in bursts, is postulated on the basis of new fossil discoveries. This is adding a new detail, guys, it doesn’t do anything to discredit the original theory.

There are theories we no longer hear about but which were strongly believed in at one time, such as the existence of the “luminiferous ether”, a substance that was supposed by scientists in the 19th century to occupy all of space. It was believed that it must exist, in order to transmit light waves, in the same way that air is needed to transmit sound. Its existence was disproved by the Michelson – Morley experiment in 1887. We now understand that most of the Universe is composed of a true vacuum.

The Michelson Morley experiment was believed at the time to be a failure because it did not detect the ether, which was part of the belief system of many eminent people who had devoted their lives to science. But it was not a failure. It simply gave us more information than we had before.

And the fact that the scientific community was able to come to terms with its results is therefore a triumph for the scientific method and for evidence based, as opposed to faith based, belief.

And so it goes. There might have been something faulty with the CERN experiment. Or perhaps Einstein was wrong. If he was, that fact will be embraced when all the evidence is in.