Euro crisis: “This requires a political as well as an economic understanding of the dynamics in play at European and national levels”

In identifying three alternative European solutions, rather than the “lethal injection” of unilateral action by Ireland, Paul Gillespie in the Irish Times highlights the wider issues in play.

IRELAND BADLY needs a strategy to handle the euro zone crisis, rather than reacting defensively to all its latest twists and turns. This requires a political as well as an economic understanding of the dynamics in play at European and national levels.

Most economists here are ill-equipped to provide this because they take too little account of the politics involved and often grossly underestimate the social costs of unilateral action. They gain the limelight because alternative approaches are rarely proposed or debated. [added emphasis]

These should involve analysis of the crisis, proposals to tackle it differently and ways to create EU alliances of those with similar interests. Inevitably this draws in left/right politics as well as the interplay of national interests. Both dimensions need to enter the debate on Ireland’s growing indebtedness, how it links up with that of the euro zone as a whole and what are the best ways to create an alternative strategy.

Read the whole thing.

Better hurry up though.

Because it’s “squeaky bum time” ahead “in government buildings all over Europe”.

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  • Zig70

    I don’t claim to be any expert but when I hear arguments for leaving the euro, I’m generally convinced. Not so much by taking on an impossible huge debt. Time for self interest.

  • wee buns

    Too depressing to mention almost, but it would seem evident by now, that there will be no sane or logical response.
    More likely default…by default.

  • Pete Baker

    Zig70

    “I don’t claim to be any expert but when I hear arguments for leaving the euro, I’m generally convinced.”

    And then what?

    Oh, I forgot, you’re not an expert…

    wee buns

    Read the “squeaky bum” link.

  • Framer

    Must be the first time anyone got to the end of a Paul Gillespie article.

  • Alias

    “Three alternative European solutions deserve political support from Ireland: a Eurobond system to pool a proportion of EU state indebtedness and thereby collectivise the risk of exposure to speculative markets; a dedicated tax on financial transactions that would yield valuable new sources of revenue and act as a disincentive to such speculation; and a sustainable continental investment programme to regenerate employment.

    A Eurobond system as proposed by the economist Paul de Grauwe and several leading EU political figures would take 60 per cent of state indebtedness on to the books of the European Central Bank and allow it to issue bonds based on that security.

    This would have the stronger economies protect the weaker ones, substantially reduce interest rates, and create a new international bond market to soak up excess liquidity.” – Paul Gillespie

    Just as the eurozone is a political project that has been deliberately and fraudulently designed to maquerade as an economic project, the proposed eurobond is more of the same:

    “…there appears to be little willingness in Europe today to take drastic steps towards a political union. Thus, if the euro is to be preserved, a strategy of small steps towards more political integration will be necessary. I will argue that a common Eurobond issue is an important first step towards political union.” – Paul De Grauwe

    Since that medicine has poisoned almost half of the eurozone patients, there is no reason to assume that more of the same will provide the cure. Political convergence would require the destruction of those economies not suited to monetary and macroeconomic policies that were designed for the dynamics of the German economy, so Ireland was always fated to be a victim of its own europhilia. What occured was predicted long before it occured, and long before the Irish were led by their europhile political class to ignored the laws of economics and move toward “ever-closer union” with the EU.

    Gillespie doesn’t seem to realise that the ECB doesn’t have any money of its own, being funded entirely by its shareholders (the member states) who remain laible for all of its debts. Therefore, shifting debt from states to the ECB via a bond does not actually remedy the EU’s problem of a massive excess of sovereign debt. Further, the ECB is itself massively overleveraged and undercapitalised. It’s latest balance sheet shows that it is itself in need of a bail-out!

    The deluded notion that the “stronger economies protect the weaker ones” is the type of europhile tripe that Garret Fitzgerald and ilk spew. This europhile delusion holds that the larger states subjugate their own interests in order to promote the interests of the smaller states, so it is wise to ‘pool’ sovereignty with them and to put their interest before the national interest.

    In reality, the larger states will use their influence over the EU and its institutions to ensure that EU policy promotes their interests – particularly under one-size-fits-all policy – for the exclusive benefit of the larger states. The EU is happy to comply and promote the economic and political interests of the states that generate most of its revenue. Hence we have a small state such as Ireland forced to underwrite the debts of reckless German eurosystem lenders since German banks – being the most overleveraged banks in the world – are in no position to absorb those losses.

  • I quite agree, Pete Baker, that a much bigger picture view is required for leadership, which is missing, to appear and deliver prosperity to the masses, rather than, as present elected sub-prime representatives are doing, defaulting on their mandates to the public and trying to force feed them an imposed austerity.

    And the first post here, … http://amanfrommars.blogspot.com/2011/05/110514.html … which is in regard to a parallel, not at all unrelated matter, is that which needs to be considered, for it is ….. well, the system itself, which is terminal meltdown and constant attack which needs to be addressed/changed/reorganised, is it not, for the problems are not going away, you know?

  • Zig70

    drop out of the euro, then you have more tools to deal with the debt. The punt will devalue, as will the debt. The uk and usa have both used quantitive easing to manage their debt issues and the uk owes more than greece. The cost of living in the south will go up but at least there is a path out that has been travelled before. This current debt is new territory. So Pete, where’s the folly?

  • DC

    The euro is finished because there is just too much national/personal debt out there for the little guy to put up with and accept.

    Unless the EU can find a way to delegitimise the incorrect and improper decision making of EU financial services who lent too much money to national banks and citizens it will go down as a political fad confined to the dustbin of history in the face of hard economic realities.

    EU politicians need to write off the debt rather than legitimise it through enforced bailouts and national repayments – the decision making was wrong inside the financial services sector, they messed it up. I’ve never known poor lending practices to be stood over by governments in this way? This is financial absolutism gone mad!

    It was the fault of financial services, proof of that lies in the many massive bank bailouts, needing bailed out because the way these institutions structured debt failed and collapsed inside financial markets. The credit bubble burst. The fault does not lie with the people.

    I remember reading a book about living in Europe prior to WWII, the writer said that he didn’t realise just how much change was about to happen – it all just seemed so normal – this may well be the same situation.

    Add to that the problems with unmanaged migration and the rise of new ethnic minorities in working class areas lacking employment and this brew of financial insecurity and job uncertainty becomes all the more toxic.

  • DC

    I imagine the EU could look at its own bureaucracy with a view to shifting public money away from administration costs into recapitalisation funds instead?

    (People that live in Belgium bemoan property prices in Brussels because of public money – EU subsidies – skewing the housing market in the same way London has been priced out of reach for the many thanks to the few in the free market – city financiers, Russian oligarchs etc!)

    For instance where has Cathy Ashton been throughout the Libyan war or Von Rompuy? These are key players in the EU bureaucracy and not a peep, is this money well spent?

    If Ireland is to repay this money to the ECB, perhaps the EU should scale itself back in administrative terms so that membership fees are greatly reduced, this could be done by perhaps focusing on trade, and ditching all other expansionist projects like foreign policy?

    Is the EU’s bureaucracy fit for purpose at this time – at times of crises should it come out looking the same way as it did before it entered the financial storm?

    The EU needs reformed as well in much the same way as other public sector organisations are being reformed and scaled back for ‘austerity’. Suck in time for all – salaries belonging to EU officials must come down as well given that the EU appears to have lost some of its wealth, because of the indebtedness of its members.

  • DC

    Personal message to Messrs Ahern and Cowen – if I had technically bankrupted my country (either through commission or omission) I would have reached for a handgun and blown my brains out, failing that – I would’ve apologised and handed back my state pension and perks and fooked off into the night for good, never to be seen again!

  • DC

    You must be one of those individuals cursed with a sense of honour, duty and responsibility, rest assured Messrs Ahern, Cowen et al are not even nodding acquaintances of such or any principles.

  • DC

    @Pippa

    You are almost right – replace honour with humour – but keep the other two in place.

    Seriously though how can it be right for Ireland’s leaders to go out on perks whenever the country is bankrupt. Classic minimum effort maximum reward strategy at play here – I’m not certain Bertie and Cowen have any love for the Irish people, perhaps they just despise them less than others, they seem to have been allowed to exit the stage in a manner which shows complete contempt to people that elected them to do what was right for the country!

    You guys need to stand up for yourselves better and remove the cancer at the heart of Ireland’s electoral politics. That is to say bankrupting your country and being allowed to go out on a – relative – financial high.

  • Cynic2

    “The punt will devalue, as will the debt.”

    Doh. The debt is in Euros. So as the Punt devalues (dramatically) the debt soars in punt terms. Indeed, with that debt burden, what price the punt?

    There are of course a few wee consequences of this Punt inflation:

    * rampant inflation in Ireland
    * the beggaring of Irish savings (including any pension monies based in Ireland)
    * the flight of external investors who will not want to manage a hugely swinging exchange rate
    * soaring unemployment
    * huge drop in real value of state salaries, pensions, benefits
    * the challenges of trading with hacked off former Eurozone partners
    * beggary

    You are simply searching for some magic pixie dust that will make the debt go away. there isn’t any. Ireland has to trade its way out of this. It will take 25 to 30 years

  • DC

    You are simply searching for some magic pixie dust that will make the debt go away. there isn’t any. Ireland has to trade its way out of this. It will take 25 to 30 years

    Or it could deflate – taxpayers money is being used as a bridging loan of sorts in place of proper economic growth and this is keeping the economy at around 2007/08 levels whenever it should have been allowed to deflate.

    This is manipulating the economy, which has nothing to do with trade. To me the essence of the problem is the way credit was structured which – temporarily – allowed a lot of credit to be handed over to national economies and to the public. This credit structure failed and collapsed through its own incompetence – so too should repayments. The real value of house prices have been exposed today, they have collapsed yet the general economy is still at inflated levels thanks to the taxpayers cushioning the depression and providing the money upfront which should have come from the natural economy instead.

    Basically, too much credit was lent out and it has turned into toxic debt because the natural economy is not there to support the lending – or the amount lent out and needing repaid at levels too high for the natural economy of Ireland to sustain. Poor decision making by banks driven on by seemingly bogus credit has created toxic debt, to make it into normal debt much of it should be written off to levels that are sustainable.

    The governments are trying to inflate their way out of this problem using the taxpayers. Some argue that this is keynesianism, but it is what it is – just taxpayers money being used to keep the economy inflated. If it were proper keynesianism would it not go into real economic growth such as SME/businesses and into exports.

    This is the truism – that financial services have little social use other than lend out money plus interest – which just drives inflation, but returns a lot of wealth to financial services in the process.

    The whole credit process was flawed – CEOs took massive yearly bonuses on the basis of mortgage deals most of which can only be guaranteed as sound leding once 25 years have passed – the date of final repayment! The ratio 1:25. There’s your pyramid.

    Of course in America the ninja mortgages collapsed and never reached the 25 years, but sure by that time financial services CEOs had received and pocketed hard cash on on the back of loans and mortgages that were really only of nominal value.

    Nice job if you can get it!

  • Alias

    “You must be one of those individuals cursed with a sense of honour, duty and responsibility, rest assured Messrs Ahern, Cowen et al are not even nodding acquaintances of such or any principles.” – Pippakin

    Bertie Ahern has been appointed as chairman of a multinational company that makes its money from the forrestry industry.

    One of the Irish state’s prime assets is forests. It owns over 1 million acres of them (circa 7% of its land mass).

    An Bord Snip Nua recommended that state agency Coillte should be sold. So it is one of the assets that are to be stripped in order to hand its monetary value over to eurosystem lenders whose debts the ECB forced the state to underwrite. Of course, the stooges will spin it as being sold to fund pubic expenditure rather than as being asset-stripped by the EU.

    The International Forestry Fund, the company where Bertie been appointed as chairman, wants to buy the 1 million acres if it can get it on the cheap.

    That is why the fixer has been appointed as chairman. That’s what you get for electing ‘pragmatic post-nationalists’ to public office.

    “The debt is in Euros.”

    The debt would be re-denominated into punts. Simples.

    “Is the EU’s bureaucracy fit for purpose at this time – at times of crises should it come out looking the same way as it did before it entered the financial storm?” – DC

    No, and the EU is increasing the amount it takes from its member states, not reducing it. The EU is progressed through crisis, so it uses them (and even engineers them) as a means to advance its federal agenda, not constrain it. Whatever the provlem is, the solution is always more EU. That’s how it works.

  • Zig70

    I did qualify it by saying I was no expert. Though I do have more qualifications than an SF finance spokesman. The debt is in euro’s but your would devalue it in euro’s and convert to punts after devalue. Jes, I’m crap at this but I was hoping for a better bitch slap.

  • wee buns
  • “IRELAND BADLY needs a strategy to handle the euro zone crisis, rather than reacting defensively to all its latest twists and turns”,

    Very few are likely to disagree with like that. The start of any strategy is making an analysis of (a) what is at stake for all of the players? and (b) how the crisis is likely to pan out given the policies adopted so far and those likely to be adopted. Every time you go through this process, you gravitate towards the political commitments and problems of the Germans and how they are reacting to the crisis.

    One might feel frustrated by the way that the Germans are handling the crisis. Every time they make a move, it does not seem to be enough, yet it you look at what has happened in the last couple of years, the Germans have moved rapidly and radically. Unfortunately though, they seem to be reacting to markets, rather than leading them. The bailout of Greece is now almost a complete failure with that country’s position now worse than before the original bailout package was put together. 10-year yileds on Greek bonds have now reached 16%. Default by that country looks inevitable as it becomes clearer, by the day, that it is incapable of re-paying its debts. Debt forgiveness for Greece is now inevitable unless the Europeans are happy to see Greece leave the European Union. Whatever happens, the Germans will be forced to make a very unpaletable decision, one way or another.

    If Greece was the only country in trouble, debt forgiveness would be a relatively easy option but then there iare Ireland and others who could end up in a similar position.

    At this point, I suspect, only guesses can be made about how much money would be needed to fix all of Europe’s debt problems once and for all. This is where strategy comes in.

    What the Irish Government should now be doing is holding talks with all of the other European Countries that are in trouble with a view to presenting pan-European debt forgiveness packages which the indebted nations know they can afford.