What happens when you shop too much and save too little…

Okay, in news from elsewhere… Willem Buiter with what we should and should learn from Dubai… In comparing Ireland the UK in a basket of other countries he identifies the greater independence of the ECB from Irish government control as a positive factor in favour of Ireland’s chances of a credible recovery:

From Dubai to Iceland, Ireland, Greece, Hungary, Italy, Portugal, Spain, Japan, France, the UK and the USA, the sovereign debt burdens have been at current levels during peacetime only on the way down from even higher public debt burdens incurred during wars. Watching the public debt to GDP ratios rise to levels likely to reach or exceed 100 percent of GDP by 2014 is deeply worrying, especially with structural primary (non-interest) deficits as high as they are. The political economy of fiscal burden sharing, inside nations and between nations, will be a major field of enquiry for economists and political scientists during the years to come. I am pessimistic in that regard about countries characterised by deep polarisation and political gridlock. This includes nations as different as Greece and the USA.

It is clear that nations whose public debt is mainly denominated in domestic currency and whose central bank is either not very independent or can be make dependent by the government of the day are likely to choose inflation and exchange rate depreciation over default as a way out of fiscal-financial unsustainability. That category would include the USA and, to a lesser extent, the UK. Because the ECB faces 16 national governments and national ministries of finance, the power and independence of the ECB are much greater vis-a-vis any Euro Area member state than the power and independence of any central bank facing a single national government and Treasury. That is regardless of the formal independence criteria laid down in laws, treaties or constitutions.

So the very thing that is likely to maximise pain in the short term in the Irish economy is likely to deliver real recovery in the medium to longer term… And that’s not even factoring in the predominance of the short termist mentality in form of the City and Wall Street in the UK and US respectively… Otherwise known as ‘retail therapy’…

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  • Dave

    That argument is completely stupid, and only a europhile would make it.

    But this part is worth quoting:

    [i]For small peripheral European nations, the threat of sovereign insolvency is therefore a real one, unless EU fiscal solidarity can be relied upon to bail them out. When Ireland was about to be swept away by a wave of global financial mistrust triggered by the Irish government’s decision to guarantee effectively all liabilities of its banks, the then German Finance Minister Steinbruck made the amazing statement (which he obviously had not checked with his coalition partners, his Chancellor or his voters) that the Eurozone countries would not let one of their own go into default.

    The year that has passed since then has made this implicit commitment to a Eurozone, let alone an EU cross-border sovereign bail-out rather less credible. All EU sovereigns are, to varying degrees, in fiscal dire straits. We may well see in the next few years the first sovereign default by an old EU15 country since Germany defaulted on its debt in 1948.[/i]

    As was pointed out at the time, the ECB has no authority to ‘bail-out’ member states since all dents are sovereign. Indeed, the idea of the Germans being landed on the hook for Ireland’s debt by any expedient was entirely fanciful when you consider that no major German bank has a leverage ratio under 50 (Bank of Ireland, by contrast, seems overcapitalised with a leverage ratio of 22).

    Will the Irish government and the media now apologise to the Irish people for deliberately creating the false impression that the ECB would bail their economy out of the dire straits that its policies created if they voted for the Lisbon Treaty a second time round?