Monday, November 14, 2011

Nouriel Roubini thinks Ireland 'has a chance'

Nouriel Roubini, the US Economics professor who has gained fame for predicting the housing bubble, the disaster that would come of poorly understood mortgage backed securities and the eventual recession, and who is now best known for his brutally frank judgements on current economic matters, actually had some kind words for Ireland recently. He believes that we are “in with a chance” because of our long standing policy of attracting high-tech foreign direct investment.

You can hear what the professor has to say in the video above, which was recorded during a discussion on the margins of an economic conference in Australia.

For what it’s worth, the Dutch far right also seems to give Ireland the benefit of the doubt, even if by default. They have been quoted as calling for the expulsion of Greece, Italy and France from the Eurozone, the first two because they have blotted their copybooks and France because Nicholas Sarkozy is seen by them to be interfering too much in the economic affairs of other nations. To illustrate that logic or consistency was never a far-right area of strength, they say nothing about Germany, whose Chancellor has, if anything, been even more prescriptive to her Euro neighbours than the French president.

Should we be worried that the Dutch far right has not singled out Ireland? What are we doing that would please them, or can we hope that they just forgot we were members of the GIIPS group (this is the format I will be using for this group of countries – acronyms that make up pejorative terms are not only intellectually lazy but also fail to add anything helpful to the debate)?

One way or another, the Euro story keeps on rolling.

Friday, November 11, 2011

18 yo boy racers get control of Ferrari

A piece by John Waters in today’s Irish Times seems to claim that Ireland’s acceptance of the Maastricht treaty, which gave us Euro entry along with low interest rates and which tied our economy to those of Germany and France, is the root cause of the fiscal and monetary problems we suffer from at present.

This is a nonsensical, disingenuous argument. France still enjoys triple A ratings on its government debt and Germany has one of the strongest economies on the planet. For a while Ireland, too, had money to burn. Unfortunately, burn it we did.

John is right, though, when he talks of collective amnesia. If we didn’t suffer from it we would remember that, at the time of Euro entry, each country joining had to convince the EU that it had its finances in proper order, by having national debt and budget deficits within set boundaries. It is reasonable to presume that they were meant to stay that way. That the common currency meant we no longer had the ability to devalue our way out of high inflation is not new news. It was drilled into us, over and over again at the time, that this was going to be the case.

It seems central Europe took it for granted, or was convinced by our negotiators, that the Irish government, its Finance department and their economic advisors understood these fundamental economic principles. But it appears they did not.

What happened in practice was that the good old Republic of Ireland went ahead and took advantage of all the nice things that Euro entry had to offer, such as significant trade benefits, defense against speculative attack on our currency, very low mortgage rates (which we abused), elimination of currency exchange costs and risk for travelers to the rest of the Eurozone, pricing transparency for same, an additional incentive for US foreign direct investment into Ireland - and ignored the responsibilities it brought, the most important of which was to control our inflation.

To illustrate the point, imagine what it might be like if a group of eighteen year old boy racers were given control of a souped up sports car, for example a Masarati or a Ferrari, after having convinced the provider that they were actually mature, fully trained, experienced professional drivers.

The sports car in this analogy is the highly tuned European economy that German (and Dutch, and Nordic) prudence and efficiency had nourished over the years since the last war, and which was well known to be predicated on the control of inflation so that it is positive (deflation is also bad) but low.

The supplier is the European Union and you can work out for yourself who the boy racers are.

We broke every rule in the book. 120% mortgages, lending for everything from property development to foreign homes to whatever you’re having yourself. Spending went completely out of control. State capital projects routinely came in so far over budget that the numbers were shocking. We had a banking compliance system that became a global joke. We had a government that bought its way through successive elections without any regard for, and it seems now, no understanding of what an inflation differential between us and central Europe would eventually lead to.

All is not lost, however. We do seem to have woken up and, as everything is relative, we actually now start to look good by comparison to the most errant Euro member, Greece. With a bit of luck this present crisis will allow us to learn by bitter experience.

With a bit more luck we will be allowed to stay in the Euro, despite our demonstration of an embarrassing immaturity when it comes to the most basic economic principles.

And by the way - entering into a mutually beneficial multinational, legally binding agreement, that the other parties expect your country to adhere to, does not constitute loss of national sovereignty, no matter what the venerable Olivia O'Leary says, as quoted in John Waters’s article.

Wednesday, November 9, 2011

Democratic deficit - what democratic deficit?

In the beginning there were 17 separate currencies where there is now only one, the Euro. This currency unit was set up as a result of the Maastricht treaty, which was democratically tested in Ireland by means of a referendum. The agreement, voted on and passed by the Irish people, included that the common currency would be monitored by the European Central Bank, now known as the ECB.

Monitoring means, and was always understood to mean, ensuring as far as possible the continued viability of the currency and the setting of the interest rate that would be attached to it, which affects most particularly the rate of inflation in the Euro zone and the exchange rate of the Euro against other global currencies.

Sixteen other states of the European Union have a stake in all of this. They were, and are, entitled to assume that ratification of the Maastricht treaty would mean that all member states would abide by the rules by which the common currency was set up, and that all members would accept the oversight of the ECB, which was specifically charged with that task in the Maastricht treaty.

In the olden days if a country found it had allowed its inflation rate, and therefore its competitiveness, to exceed what was prudent, its currency could be devalued either explicitly, or stealthily by market forces. This solution was not available, and was never going to be available in terms of their economic relationships with the other Euro zone states, to those countries that had signed up for the Euro.

All this was known at the outset. It was understood, or should have been understood, by the economists whose job it is to advise the finance ministers and compliance agencies in the various countries. And the same economists would not exactly need to have been qualified to the level of Nobel Prize winners to be able to come to grips with this principle.

What has now happened is that a number of member states of the Euro zone have taken their eyes off the ball to the extent that they have allowed inflation to increase well beyond the rate that has been achieved in some other Euro countries, most notably Germany, so there is now a serious imbalance in competitiveness within the Euro zone. Not only that, but a number of these same countries have either borrowed more than they can afford to repay or have allowed their banks, as in the case of Ireland, to lend too much, cause a property bubble which has burst, and then have their unsustainable wholesale loans guaranteed by the state.

These developments have a direct and serious bearing on the viability of the Euro. Default on sovereign debt by a Euro member state would be devastating for it. However, those Euro zone countries that have been able to keep their inflation rates and borrowings at acceptable levels, such as Germany, France, The Netherlands and Finland, and are now clamouring for the ECB to do its job and bring pressure to bear on these errant members to rectify the situation by living within their means and in other ways acting responsibly, are being accused of contributing to what has come to be characterised as a “democratic deficit”.

I’m afraid I don’t see it, this democratic deficit. Even when Nicholas Sarkozy lashes out at politicians in Italy and Greece in his frustration at seeing some of their number playing local political games with the Euro crisis, it hardly qualifies as an all-out attack on the sovereignty of that state. It might be a call for all concerned, even at this late stage, to live up to their legal and moral obligations as representatives of a country that freely, and democratically, signed up to the Maastricht treaty, and were happy indeed to take advantage of the very significant trading, foreign direct investment inflow, low interest rates, elimination of currency exchange overhead, reduction of exchange rate risk and the pricing transparency benefits of the monetary union that have been there since its inception, and which the prudent and compliant members would like to see continue. Instead of castigating them, we might take a leaf from their book.

Mr. Fintan O’Toole, c/o The Irish Times newspaper, please take note.

Thursday, November 3, 2011

Ireland is not Greece

Mario Draghi, the new president of the European Central Bank, having taken over from Jean-Claude Trichet, has put the current debate about the possibility of Ireland getting a discount on the financial responsibilities it has assumed for the debts of its banks nicely into context.

We are indebted to Laura Noonan of the Irish Independent for asking the question, at Draghi’s first regular monthly press conference as ECB president, as to whether or not the Greek example, where banks with exposure to Greek sovereign debt have been persuaded to take a write-down of 50%, could be used as a precedent for Ireland. His answer was as follows:

“One has to keep in mind that the Greek situation is exceptional and unique - and unique. The sovereign signature, in spite of the recent turmoil, remains a pillar of financial stability, in the Euro zone and in the rest of the world. We are confident that the Irish government could comply with the measures announced, and the Irish government itself said it will do whatever it takes. So one has no reason to doubt about the commitment of the government”

In other words, Ireland has the opportunity to make a serious and very valuable contribution to resolving the current crisis in the Euro zone, and in so doing reassume its position as a member of the core, committed group of European Union member states. It can do this by reinforcing the value that has always been placed on a guarantee by a sovereign state, and in this case one that also happens to be part of the Euro zone. Greece’s misfortune is not that it does not want to do this; it is that it cannot.

Those of the Irish political opposition who are calling for a unilateral default by the government, whether it’s on Anglo Irish bank bonds or on Irish sovereign debt, either do not understand the consequences of what they call for or, much worse, are prepared to cause serious if not fatal damage to the European project, of which the Euro currency is a major component. Theirs is a desire to achieve a short term gain at a cost that represents extremely serious long-term damage. This damage is not even related to the regard or otherwise in which we would be held by our fellow Europeans, but rather to what would result from a grave setback to, or failure of, the European Union. See this previous StackSix entry to get a sense of the material significance of the EU to Ireland.

The historical, political and philosophical importance of it goes much, much deeper than that.

Also see this Financial Times article on "Why it's worth keeping the EU dream alive". Then read the comments for a lively debate on the issue.