“with nothing less than Irish economic sovereignty on the line”

Another informative entry from the Irish TimesArthur Beesley’s European DiaryIf 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authorities cannot be trusted given their tendency to dismiss warning signals “as irrelevant archaic residuals of an outdated framework”.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]

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  • Driftwood

    Sam says much the same thing..

    http://www.telegraph.co.uk/news/worldnews/europe/ireland/8039759/Irelands-austerity-programme-was-bogus.html

    Do they celebrate halloween in the republic?

    Should be an absolute cracker this year.

  • Seymour Major

    I see that coming out of the Euro is mooted again.

    I imagine that if Ireland went out of the Euro now, the punt would collapse and cause mayhem with trading. Maybe the UK Government led by the Conservative Party, which has never believed in the Euro being good for Europe, should start to plan a support package to tempt Ireland out of it in a couple of years time. With British financial institutions ultimately owed in excess of £200bn by indebted Irish Banks, I suggest they can not sit idly on this problem and just hope it will go away.

    As for an over-priced property market being a warning sign of a banking crisis, that is consistent with the finding of George Osborne when in opposition.

    The relevant link has unfortunately gone from the Conservative Website but I preserved the following quote on my old blog from a Conservative party press release in Feb 2009

    http://torystoryni.wordpress.com/2009/02/03/osborne-right-that-bank-of-england-should-look-at-asset-inflation/

    “George condemned the idea that the only goal of macroeconomic policy should be to keep consumer price inflation near target”

    “We believe government should take a view on asset prices and seek to manage the overall level of debt in an economy. Our proposal is to put the Bank of England in charge of that task”.

  • GoldenFleece

    Sure Major, you could also say that the independent ireland “experiment” has failed and ROI should seek back in the union again lol lol – might as well.

  • pippakin

    There is some talk of leaving the Euro, mostly by those outside the immediate sphere of influence, but I would like to see a realistic assessment. Not all the doom and gloom/it’s the only thing to save us opinions.

    Is it likely the banks, especially the British banks would ‘foreclose’? Would it be so difficult to borrow again, would our export markets, as a result of ‘independence’ disappear or grow?

    Argentina, having suffered the expected immediate repercussions, appear to have surfaced, more or less unscathed, and banks lend to borrowers, therefore is it not true that they will lend where they feel the market is worthwhile.

    So, if Anglo falls does it really hurt Ireland or just Anglo customers, whoever they are…

  • John East Belfast

    pippakin

    “There is some talk of leaving the Euro, mostly by those outside the immediate sphere of influence, but I would like to see a realistic assessment”

    i attended a lot of conferences etc in the run up to European Monetary Union – the general view then was it was a One Way street – there is no exit strategy.

    Think of the most fundamental problem.

    Your liabilities are in Euros – your mortgage, national sovereign debt, corporate borrowings etc. Remeber the majority fo credit in the ROI was borrowed outside the ROI and that is where it would remain

    At the minute your assets are in Euros – your house, pension, bank deposits etc.

    If Dublin decided that it wanted to ressurrect the Punt then overnight your assets (reclassified in Punts) would go into free fall – however all the people you owe Euros to will still expect to be paid in Euros. The Punt would continue to fall after you had made your conversion.
    It would be a classic case like the many problems facing Poland where most of the country took our Euro Loans to buy Zloty houses. A fundamental rule of corporate finance is you should avoid mixing your asset and liability currencies.

    More importantly can you imagine what would happen if a whiff got out that the ROI was about to leave the Euro – there would be a massive run on the banks with people trying to get their Euros out and get them into a Euro bank account in Newry – that alone would collapse the ROI banking system.

    I have said before on here that there may be a half way house for the ROI – rejoin sterling – exchange your Euros for an equally hard currency (with a floor0 that who has a similar economy to your own and is more likley to provide the kind of Monetary policy the ROI requires.
    However I doubt the BOE and the UK Govt would want the ROI I am afraid now.

    The big problem for the ROI is the blood bath that is going to occur when the ECB starts ticking up the ECB bank base rate in fear of inflation in Germany and France

  • absolutely. london rule replaced by berlin.

  • pippakin

    John East Belfast

    So not a good idea, but that begs the question: why do so many seem to think it is?

    The UK is not big enough to take on Irish debt. At the moment sterling works but for how long? It is not a, I think, a currency with a future.

    Thanks for your assessment.

  • John East Belfast

    Pippakin

    It isnt a good idea and technically i cant see how it will work but that does not mean it wont happen if the stresses and strains become so huge.

    The reason being that many in the ROI want to take back control of their own monetary policy and of course there could be pressure from the other end if German taxpayers want to kick you out – along with Greece.

    However I recall the run up to EMU very well and it was simply inconceivable that a break up could/wopuld occur – it used to be dismissed when anyone asked the question.

    Anyhow they thought covergence had occurred and there was no reason to believe that divergence could occur again between member states

  • Pete Baker

    The IMF, via the EU special fund, will be called in before Ireland would even contemplate leaving the euro.

    That particular [euro] exit ain’t going to happen.

    Other options being suggested are mere [political] distractions.

  • Comrade Stalin

    Berlin ?

  • John East Belfast

    Pete

    That has always been my view as technically I cant see how it would work – it would be the ultimate car crash.

    However the implications of a rising ECB Rate for those countries (like the UK) requiring a close to zero base rate could become simpy intolerable

  • Alias

    Leaving the euro isn’t an option for a country that no longer has the level of sovereignty needed to operate outside of it, e.g. government emergency measures that would be required such as declaring that debts denominated in euro are to be re-denominated in punts; writing-off sovereign, measures aimed at preventing capital flight, etc, would all be declared unconstitutional by the Supreme Court.

    All of the treaties are now consolidated into a single constitutionally ratified treaty so the only way the state can abrogate the terms of it without sanction by the Irish or European courts is to hold a referendum to remove it from the Irish constitution and to return this sovereignty to their own government, i.e. to withdraw from the EU.

    As JEB said, EU integration is a one-way street with the state now being constitutionally committed via the Treaty of Rome to promote “ever closer union”.

    In theory, while you give your sovereignty away, you have the sovereignty to take it back but in reality you don’t. The Irish gave the last remnants of their sovereignty away when they voted for the Lisbon Treaty, and many folks warned them about that.

    It took less than 10 years of eurozone membership to bankrupt the Irish state. Not bad going, really. The only comparable is ratifying the treaty setting out the Common Fisheries Policy in, I think, 1973. That piece of europhila only cost the Irish economy circa 250 billion worth of unprocessed fishing stock from its territorial waters and decimated the fishing industry whereas this piece of europhila has racked up an external debt of 1.67 trillion…

  • Seymour Major

    I am not one who subscribes to the view, held around capitals around Europe, that the Eurozone should be defended at all costs. The cost of defending the currency on an incremental basis, as is happening now, will not only have to be paid for in cash (by the Germans eventually) but in the form of many years to come of economic stagnation across Europe. This is not just my view. It is held by some leading economists. The UK can not just sit back and hope the Eurozone economies sort out the problem.

    So the idea that the UK can not nor would not do a deal with Ireland to take them out of the Eurozone, with the view of breaking the political will to preserve the Euro is not entirely fanciful.

    What I believe the UK Government should do is start to develop options for Nations to break out of the Euro. At the very least, it will act as leverage against the Germans to get a proper deal for the struggling nations that would given them the opportunity to prosper, as the price of staying in the euro.

  • another

    “Qu’est-ce que la souveraineté?

    The real issue here is what is sovereignty, who exercises it, and is there any left?

    In simple terms, heavy indebtedness provides economic leverage to the buyers of a government bonds and serves to erode the exercise of national sovereignty (that is, that which was left after having joined the Euro).

    It is fair to say that Ireland is no longer a soverign state, but wrong to simply conclude that its sovereignty was handed over to rogue politicians in Brussels. Rather, its soverignty was sacrificed on the altar of homegrown crony capitalism.

    The death of sovereignty raises some serious issues for the purist track suit wearing dissident class; a little bit like having to come to terms with the fact that there is no self (for which see Metzinger “The Ego Tunnel.”).

    But then, in so far as these people are seemingly engaged in blowing up British Banks, that played a leading part in undermining the British economy, in order to undermine the British economy, one must conclude that this argument may be slightly above their heads….

  • Neville Bagnall

    I can’t see how the breakup of the Euro will help anything. Ireland and Greece exiting means more than just an attempt at “beggar-thy-neighbour” economics, it means default. There is no way the Irish economy can sustain the debts it has incurred with a devalued currency and shrunken GNP. If you think Lehmans caused a credit crunch imagine what defaults by many of the PIIGS would do.

    Further, its not clear that a “beggar-thy-neighbour” policy will work. The economies with developed consumer markets are all frantically trying to avoid a double dip. A second credit crunch, triggered by a Euro breakup, is likely to see most of the G8 back in recession. We can only devalue-and-grow if someone is buying what we have to sell. The most likely scenario after a Euro breakup is surely that the big buyers out there will be China and India. Not our natural markets. So we will have to redirect our export industry (which mostly isn’t ours) in the midst of what will likely be a depression for Ireland at least.

    For our export economy the Euro delivered pretty much what it promised. Its our domestic economy we screwed up. And we had plenty of warnings. Whether we could have successfully run a counter-cyclical fiscal policy given our politics is open to question. In the end, we didn’t even try. But as has been pointed out, we’re not the first to believe in “the end of boom and bust” or that “this time is different”.

    Ireland could default. It would be painful for us, but we’ll either emigrate or start from scratch. Parts of eastern europe did it after the soviet collapse. What we can’t determine is the effects of a chain reaction. The european peace of the last 60 years is not guaranteed. Parts of eastern europe also descended into genocide. And we no longer have an external threat to hold europe together.

    I still think the devil we know is better than the devil we don’t. Ireland is too small to cause real damage internationally, but it could trigger a chain of events that would be impossible to control.

    I have a gut feeling that what we need is a private debt restructuring, followed by a sharp improvement in (enforced) competitiveness that still leaves greater personal liquidity. How that is achieved while maintaining lender liquidity, I have no idea.

    What seems inevitable is that the price of our stupidity over the last decade will be a long debt hangover. No quick cures available.

  • joeCanuck

    Parts of eastern europe also descended into genocide

    ? Do you mean the Balkans or did I miss something?

  • interested

    UK have also signed on to Lisbon Treaty

  • interested

    taking in account that the real challenges now lie in the global arena and we must overcome internal European difficulties if the region is to have any chance in this global arena

  • interested

    “leverage against the Germans ” rather how to engage their cooperation in solving the internal European problem as IMF to engage China in solving the global balance.

  • interested

    only economic soverignity-who needs national government anyway?
    Belgian newspapers today hold out another prospect for resolution of the difficulties between the socialist Wallons and the nationalist Flemish towards forming a government.
    However as they have not had a functioning government now for a while(mabye 18 months?) it doesnt seem to matter-everyone continues to go about their daily business as usual.

  • interested

    yes joe would like to hear more from Neville on this after that very clear input and just in an attempt to get a response I suggest that a major difference to current events was that EU enlargement was a managed process-all were clear about the nature and direction of the required economic reordering and that it would have an end result, not so with the present situation which is further complicated by uncertain global financial turmoil.