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.

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.

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.

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.

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.

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.

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.