Is there really a crisis in the Eurozone?

(This is an unedited version of yesterday's Sunday Business Post column).

Is there really a crisis in the Eurozone? If you look at the behaviour of the system, clearly there isn’t. Greek Finance Minister Yanis Varoufakis was in Paris this week discussing new economic thinking and he didn’t appear too stressed out about the impending bond payment to the IMF which his country didn’t seem to be able to pay—right up until it did pay. How? The European Central Bank agreed to increase the ceiling on emergency liquidity assistance to Greek banks by 1.2 billion euros to 73.2 billion euros.

Yet again, everyone got excited about the prospect of a Greek exit, the Greek banking system’s collapse and the possibility of contagion. Yet again, nothing much happened. I’m not minimising the work that goes into maintaining the status quo—when you’re running to stand still, you’re still running—but no earth-shattering, life-redefining moments have taken place since Mario Draghi spoke the magic 3 words: whatever it takes, in 2012. So is there really a crisis? European stocks are at a 15-year high, thanks to Mr. Draghi. The weaker euro is also easing the threat of deflation. Instead of a collapse and a dramatic redefining of the European project, we have seen a very gradual expansion of the institutional architecture of the Eurozone, from its initial bailout mechanisms to a full banking union and the adoption of a much larger supervisory role by the ECB in Europe’s largest banks, all the way to the roll out of quantitative easing in recent months.

The reaction to the crisis has meant we are edging towards a United States of Europe. This makes a lot of sense as the flawed design of the links between national governments and the system of central banks within the single currency is primarily responsible for the crisis. In a sense, the route out of the crisis is pretty simple: the countries with a large, or let’s be fair, giant, trade surplus like Germany need to spend more and help the deficit countries grow faster. That’s what Keynes talked about when thinking about how countries should help one another balance things out when exchange rates aren’t there.

Asking Germans to spend more is a bit like playing tennis against a curtain. It just doesn’t matter how hard you try, it just ain’t going to happen.

Nothing in this diagnosis helps Greek politicians square the circle that right now, today, their state is deeply indebted to a set of institutional creditors who are less helpful than they should be, and probably more helpful than they legally can be. Confidence among industry, retail, and services has collapsed since the newly-elected Greek government took over in January 2015, as the graph shows. The tax take there has fallen, making repayment of any debt more difficult. Investors are not investing the Greek economy. Any reforms predicated on the economy generating a surplus of taxation revenue over government expenditure is now in jeopardy.

Confidence indicators by sector in Greece. Source: European Commission

Confidence indicators by sector in Greece. Source: European Commission

Concretely, the Greek economy needs short term financing combined with deep structural reforms to unlock yet more funding. Let’s parse that. It’s really important that we understand what the short term liquidity is desgined to achieve. It keeps the banks’ doors open. Nothing more. So in Paris, Minister Varoufakis admitted:

“in order to create the liquidity which is necessary to see these negotiations through hopefully to a sustainable solution, I have to make the same request that we are allowed to issue T-bills over and above a certain limit to create the liquidity necessary to see us through to the end of the month or the next month or June, so as to be able to redeem payments to the former troika -- to the IMF in this case.”

That’s nuts. The ECB has allowed more than 73 billion euros of emergency funding to keep the doors of the banks open, and not much else. It hasn’t much chance of seeing it back.

Beyond the short term financing, we should know that ‘Structural Reforms’, whatever form they might take, is French (or German) for pain. The word ‘reform’ in Greece is a dirty word. It means a Greek pensioner will lose their purchasing power, Greek unemployment will increase, and a generation’s potential will be lost. The Greek state is certainly to blame for these debts being run up, but its people will bear most of the brunt of the adjustment.

So is there really a crisis? The debts the Greeks owe to the IMF, ECB and other official funders are only being paid back with money created by the Greek central bank that the ECB allows. The circularity of this transaction is obvious. So don’t worry about it. Worry about exhaustion. First, the exhaustion that will come from the impact of structural reforms on the Greek people, and the exhaustion of the authorities in Europe, tired of dealing with a country it sees as recalcitrant and unwilling to change. The crisis might turn out to be a crisis of patience.

Why we won’t see reform of the public service unless we change the model we use.

(This is an unedited version of my Sunday Business Post column from yesterday)

Why do you pay your taxes? One school of thought says you pay through gritted teeth because if you don’t, you’re in trouble with the Revenue Commissioners, and you really don’t want to annoy them. Another school of thought suggests you understand you need the services the government provides, you get at some level that these services don’t come for nothing, and so you pay taxes, probably while grinding your teeth, as the price of social services and a cohesive society.

Imagine this. You don’t pay your taxes and the government suspends its role in protecting your private property. So Stephen Kinsella defaults on his obligation to the state and the police force simply say sorry, we are not enforcing this guy’s property rights. Someone can now walk into my house and take, by force, whatever they want, up to and including the house itself, if they have enough force. It’s obvious society wouldn’t work too well if the fundamental rules like the provision of property rights went out the window if we didn’t pay our water charge bill.

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Read.

(Here's the text of a piece I wrote for the booklet for the BSTAI event I mentioned in the last post. Fun times.)

What choices will you make to live the best life you can? The next few years for you will revolve around answering this question. Beware: People might dress it up in fancy phrases like ‘maximising your potential’ or something like that. Ignore them. You’re smart enough to know you’re probably being sold something.

There’s no doubt you have to make a series of choices, and these choices will help determine the course of your life. So those choices are important.

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Contradictions, Choices, and How to Embrace Them

(This is the text of my speech to the KBS/BSTAI Awards a few weeks ago. It was a lot of fun and thanks to the organisers for inviting me to speak).

A contradiction happens when opposing ideas are combined.

In 1519 Hernán Cortés journeyed to what is now Mexico. He caused the fall of the Aztec empire, using guns, germs, and steel. Cortés did that for gold. The Aztecs could not understand why Cortés wanted this useless soft metal. He told them he had “a disease of the heart that could only be cured with gold”.

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Why yes of course you can buy an election

(This is an unedited version of my Sunday Business Post column from yesterday)

Today’s Red C/Sunday Business Post Poll shows us one uncomfortable truth: when you’re the incumbent, you can buy an election. Look closely. The results are stark. Fine Gael and Labour are experiencing a bounce in their fortunes as more and more people feel a bounce in their pay packets. Despite the Taoiseach’s approval ratings falling faster than the price of a pint of crude oil since he took office, 42% of respondents trust the government to stabilise the public’s finances, up from 37% in 2011. Almost half-47%-of respondents are worried a change in government would actually stall a recovery.

And this is before the real giveaway begins.

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Dullards rule the roost

(This is an unedited version of my Sunday Business Post column from last Sunday).

You know you’re living in interesting times when central bankers are objects of fascination. Normally so boring they send valium-dependent accountants to sleep, central banking is where modern monetary policy is being made at speeds that would give previous generations nightmares. The key problem is how interconnected every asset class, every currency, and every banking system is today. Complexity, contagion and the problems of coordination

The economies of the West are either stagnating or in danger of stagnating, and the Eurozone is falling slowly into deflation. The yields (or percentage return) on the sovereign debt of the periphery and core of the eurozone look very, very odd at the moment. Have a look at the chart showing yields for major and minor countries. It really shouldn’t look like this. In many cases the yields are actually negative, meaning if you invest 100 euros into the short term, 2 year, debt of a country like Germany, you’ll get something like 98 euros back. In Switzerland, you have to lend their government money for more than 9 years before you’ll see any positive return on your investment. The only places you’ll earn a positive return on your investment of any kind is the European periphery. That’s nuts. You have sophisticated investors queuing up to lose money. That’s nuttier than the stomach of a nut-loving squirrel with an appetite. And yet this nuttiness is a persistent feature of the economies of Europe.

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The political perils of good economics

(This is an unedited version of my Sunday Business Post column from yesterday.)

'To be Irish is to know that in the end the world will break your heart.' You can usually tell a lazy opinion writer by the number of pithy quotes they use. But it’s worth breaking my rule this one time because Daniel Patrick Moynihan’s words give me pause when thinking about Ireland’s recovery.

I live in Limerick and I can hear the chest thumping from the government all the way down here. “Ireland is the fastest growing economy in Europe, yes it is”. Thump. “We did that”. Thump.

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MABS Keynote Slides

My slides from Friday's keynote address to MABS in the Marino Institute are here. A video will be up later and I'll pop that up here too.

Many thanks to everyone who participated in the event, particularly the Minister for Social Protection and, of course, the graduates themselves.

Social Dialogue?

(This is an unedited version of my Sunday Business Post Column from yesterday).

Nothing is ever learned for long.

It has been denied so strenuously by all and sundry so we can take it as read the collective wage bargaining arrangement known as social partnership is back as part of a new national social and economic dialogue process. The influence of the Juncker Commission in reviving the process at the European level is important to note, but we need to see the details of this process as it will work in the Irish context. Will it be a forum for constructive dialogue, a talking shop, or a veneer for collective wage agreements of old?

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Politicians show why they shouldn't own an airline.

(This is an unedited version of my Sunday Business Post Column from yesterday.)

International Airlines Group’s bid to purchase Aer Lingus is bringing out the worst in the political classes and showing precisely why ownership of state assets should be externally monitored and all divestitures examined for conflicts of interest. Chests are being puffed up to harvest-frog levels as Ministers and TDs in shaky seats whose constituents have a chance of being effected by any change line up to bash the bid. IAG’s Willie Walsh had a bit of a grilling at the Oireachtas transport committee, but let’s be fair, it was like watching someone getting mugged by a band of squirrels. Lots of noise, little real impact, lots of nuts.

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New Working Paper: Experiencing financialisation in small open economies: An empirical investigation of Ireland and Iceland

Our new FESSUD Working Paper is here. 

Abstract

We examine the macroeconomic factors associated with financialisation in Ireland and Iceland from the perspective of international capital flows. To understand financialisation in the two countries we construct three ARDL models using three aspects of financialisation: financial depth, credit growth and deposit liabilities of the financial sector. Focusing on the current account, we find that financialisation is associated with an increase in foreign rentiers’ profit due to excessive international borrowing. Our measures of financialisation indicate that trade openness, also a measure of globalisation, has a negative relationship with financialisation in Iceland, while in Ireland the relationship is positive. Our results also suggest that both countries experienced an increase in the wage share along with rapidly increasing household debt in Ireland and increasing non financial corporate debt in Iceland. We conclude that institutional differences played a vital role in the solutions to the crises which destabilised the economies of Ireland and Iceland. We use the institutional differences between the two economies and suggest policy prescriptions to limit the scale and scope of similar crises in small open economies.

Greek Crisis, Redux

(This is an unedited version of my Sunday Business Post column from last week).

If you are a 20 year old Greek man, Greece has been in a depression for all of your adult life. You have never had state-sponsored health care. More than 50 percent of your generation are unemployed. Greece has now endured more austerity and economic misery than Germany did after World War 1.

There is now no comparison which can be made to the sacrifices the Greek people have made in service of a large primary budget surplus to pay off its creditors without invoking wars. That should tell us something.

Greece is an economy with an unsustainable stock of debt. Everyone knows that. All of the parties involved have done their analysis of the sustainability of Greek debt. Every independent analyst’s spreadsheet has ground out a big fat Greek ’no’ to the question of whether this tiny, embattled economy can ever hope to pay off its debts.

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Ireland's way or Iceland's way?

(This is an unedited version of my Sunday Business Post Column from yesterday.)

Iceland knows how to deal with bankers who commit illegal acts in the course of their duties. This week, four former bank officials from the Kaupthing bank were sentenced to between four and five and a half years in prison, and asked to pay their full legal costs of close to €700,000. Ouch. The same bankers face further charges of fraud and market manipulation. Corporate malfeasance meets personal consequences for those who break the rules.

Iceland is an outlier in its treatment of bankers, as it is in many things.

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Is there a property market bubble?

(This is an unedited version of my Sunday Business Post on the 8th of February)

Credit. Economies can’t live with it, and can’t live without it. Credit greases the wheels of the economy, gets investment going, changes household and firm’s expectations about the future. Credit also blows up economies on a semi-regular basis. As a nation of 4.58 million reformed credit junkies, we should know our limits when it comes to using this potent stuff, but, in the end, nothing stays learned for long, and we’re back asking for more before we’re really ready for it.

A property market bubble shouldn’t be able to start without access to lots of credit. But that might be happening in parts of Ireland right now.

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