Another informative entry from the Irish Times‘ Arthur Beesley’s European Diary. If you were wondering what the European Commission has in mind for those problem PIIGS, including Ireland, you could try the EU economic and monetary affairs commissioner Olli Rehn’s recommended reading… From the Irish Times
As the cost of the banking bailout approaches €50 billion, general government debt is set to rise to 98.6 per cent of GDP this year. As recently as 2007, it was 25 per cent.The upshot is that Ahern’s successor, Brian Cowen, is coming under massive pressure from Rehn to take emergency action to regain control over the public finances. This will play out in the coming weeks, with nothing less than Irish economic sovereignty on the line as the Fianna Fáil-Green administration faces a moment of truth.
Whatever the outcome, the debacle raises inevitable questions as to what can be done to insulate the system against another catastrophe. Reinhart and Rogoff argue that the answer lies in improving international institutions so they can take account of warning signs.
For banking crises, they argue, real housing prices come close to the list of reliable indicators of distress. Although monitoring will not pinpoint the exact date at which a bubble will burst, they say it can deliver valuable information as to the presence of “the classic symptoms” that emerge before severe financial illness.
“If the rules are written from outside and in advance of the next crisis, failing to follow the rules might be seen as a signal that would enforce good behaviour.” The critical point here is that national authorities cannot be trusted given their tendency to dismiss warning signals “as irrelevant archaic residuals of an outdated framework”. [added emphasis]