Showing posts with label Trichet. Show all posts
Showing posts with label Trichet. Show all posts

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.

Sunday, August 28, 2011

Fiscal Union


























In economics, fiscal matters relate to revenues and expenditures, as opposed to monetary matters, which have to do with the relative value of the currency and all that it depends on, such as interest rates and money supply.

In the Euro zone, which comprises of the 17 EU member states that use the Euro as their unit of exchange, the European Central Bank (ECB) has responsibility for monetary matters. It has declared its primary objective in managing monetary policy to be the control of inflation or, to be more precise, inflation expectations. Each individual Euro zone member state is responsible for its own fiscal policy.

If fiscal policy is about revenues and expenditures, then the most important aspect of this has to be decisions about how taxes are raised, which in turn include questions about the activities that should be taxed and at what rates. The other important element of fiscal policy is how money is spent, which means how national budgets are prepared and executed.

At the extreme, full fiscal union would mean that fiscal strategy in the EU would be centralised, just as monetary policy is at present.

For Ireland, under the current bailout agreement with the ECB and the IMF, there is already an element of what might be called fiscal cooperation in place, as both these bodies now have oversight of Irish budgetary provisions. This, however, falls well short of full fiscal union. The most serious block to fiscal union is the determination of the Irish government to hold on to its favourable corporation tax rate of 12.5%, which has been a significant factor in motivating Multi-national Corporations to locate, and in many cases establish their European headquarters, in Ireland. There are well founded fears that fiscal union would result in a rise of the Irish corporation tax rate to a standard, Euro zone wide, percentage. Many other EU states maintain that the relatively low Irish rate confers an unfair advantage in the attraction of Foreign Direct Investment (FDI).

In addition to the above there are many commentators in Ireland who maintain that fiscal union would mean an effective loss of sovereignty for the Irish state. This is surprising, as we have already, and long since, effectively ceded sovereignty by accepting EU directives under legally binding treaties, by convention named after the cities in which they were formulated such as Rome, Maastricht, Nice, Lisbon and even Dublin, in areas of social policy, anti-discrimination measures, consumer legislation and the penal code, to name but some.