Friday, 3 July 2015

The Greek Crisis: Lessons from Ireland


Jim Stewart: The Greek crisis and tragedy is a seminal moment for the Eurozone and the EU.

The Taoiseach has stated “For Greece there is a lesson from Ireland” (CNN news March 4th 2015). There are certainly lessons for Greece from Ireland, but the improved Irish economy is not one.

The deep recession in Ireland was largely of our own making, but Troika policies exacerbated and prolonged the recession. An important part of economic improvement has been due to the devaluation of the Euro against the Dollar and especially the Euro devaluation against Sterling, given the unique influence of the UK in the Irish economy.

At the same time the US and UK experienced robust recoveries. In contrast the Greek economy has not been able to benefit from Euro devaluation. Valuable lessons may be learned by Greece from Irish interactions with the Troika, especially the ECB. No doubt Greece has also much to share with other Eurozone citizens.

Testimony by Kevin Cardiff (former Secretary General at the Department of Finance, available at https://inquiries.oireachtas.ie/banking) to the Committee of Inquiry into the Banking crisis illustrates much of Greek Government complaints about the anti-democratic nature of the Troika programme, its irrationality and self defeating nature in terms of hindering economic growth and the stabilisation of public finances.  Some examples:-

The Central Role of Liquidity Provision

Irish  Central Bankers and others recognised early on in the crisis and on the night of the bank guarantee (29/9/2008), the urgent need for access to short term liquidity and that funds available “were not sufficient to make large  loans to Irish banks outside the framework of the European System of Central Banks” Cardiff Testimony p. 8), and at the same time the President of the ECB (Trichet) stated that “each government should protect its own financial institutions and should not let them fail” (Cardiff Testimony, p. 15), in other words the ECB was refusing to act as the main function of a Central Bank - a lender of last resort. The liability of the Irish State for all banking liabilities was formally stated in a  letter (20th November 2010) from Mr. Trichet.

At the same time because ECB rules for acceptable collateral were diverse, arising as they did from each individual member of the European System of Central Banks (ESCB) the ECB by default rather than design, provided substantial liquidity to the banking system in different Eurozone member states.

However the ECB attempted to curtail this valuable liquidity provision. Cardiff states (Testimony Appendix 2, p. 30) that a record of a telephone call (on Sunday 28th September 2008) with Mr. Trichet  states that a request to widen collateral was dismissed. On other occasions threats were often made that Irish banks would be charged penal interest rates on ELA borrowing  (Emergency Lending Assistance) or that the rules or their interpretation for accepting collateral from Irish banks would be changed (Testimony, appendix 2, pp. 105-106).  Cardiff states “that at any time the ECB can block ELA at national level or change the rules under which the banks can access funds at the ECB level” (Testimony, appendix, 2, p. 109).

Interest rates on loans from the EU and European Financial Stability facility were initially at penal rates as were loans to Greece, although rates were subsequently reduced.  The ECB also requested that these high cost bailout funds should be used to repay ELA low cost lending from the ECB (Cardiff Testimony, appendix 2, p. 141) .

Under such circumstances ECB policies could be seen as adding to instability rather than as their remit requires, ensuring stability.

The Role of the ECB is ‘Price Stability in the euro area’ – Not Fiscal Policy

The ECB and officials from the ECB Jurgen Stark and Klaus Masuch were inappropriately involved in discussion on fiscal policy which is not within the remit of the ECB  (Cardiff states “The first part of the meeting was with the European Commission only, maintaining for a brief moment the fiction that the ECB was to deal mostly with banking matters” Testimony appendix 2, p. 96 and 99).

It is strange that the Commission did not seek to ensure that ECB intervention was in accordance with its remit. The shallowness of their fiscal policy analysis is underlined by  Mr. Stark of the ECB, who states that:-

 “the Greeks were able to continue accessing ECB funds only because they were in an EU/IMF programme, which gave the ECB some confidence in getting its money back” (Cardiff Testimony , appendix 2, p. 99).

From October 2008 Cardiff comments that:- “at every point of contact between Irish authorities and the ECB it was clear that the tone and content of ECB comment on Ireland was becoming more strident and panicky. In this period started what I regard as an increasingly hectoring tone on the part of the ECB.  They would make assertions of their policy position that seemed to be based on their own assertions of how the world should operate than on the Treaty and the law” (Testimony, appendix, 2, p. 105).

The ECB can be criticised for inappropriate economic policies, for example failing to act as a lender of last resort, attempting to accelerate fiscal retrenchment (along with Troika partners) and at the same time reducing bank reliance on ECB funding.

Much more serious however, is that the ECB acted  in a way that was illegal and in a threatening and arbitrary manner.  This poses considerable risks to members of the Eurozone especially those that do not have economic power.

The Role of the Competition Authority

The ECB was not of course the only EU institution that created difficulties for Ireland. The Competition Commissioner is reported as opposing the banking guarantee (Testimony, appendix 3, p. 64).

It is also well known that the Competition Commissioner (as well as the ECB) also argued for what would in effect have amounted to a fire sale of assets by banks. Kevin Cardiff testimony refers to “constant pressure” from the Troika  to “rush the sale of assets” (Testimony appendix 2 p. 181).

Rules that are ‘Kafkaesque’

Given the emphasis on  “rules” and  frequent references to  conform strictly  to and enforce rules, it is interesting to note  from the Cardiff testimony (appendix 2, p. 26) that the “ECB would say that “legally no agreements on anything were possible” and “sometimes they seemed .. . to fail to make good on the non-promise that had not really been made, or to make good much later than expected”.

Nationalisation of a failing bank may be the only stability option available yet the ECB insisted that a bank nationalised by the State (because it was in difficulty) would be seen as being part of the State and hence any ECB funding was interpreted by the ECB as being a potential breech of Treaty provisions on monetary financing  (Testimony, Annex 2, p. 109).

The nationalisation of the former Anglo-Irish bank thus involved legal and other contortions that added to cost and uncertainty.

The absence of rules can be contrasted with the detailed rules the Troika seeks to impose, as in the case  of Ireland (http://www.finance.gov.ie/sites/default/files/euimfrevised.pdf).  Some of these rules are irrational such as the proposal to raise the VAT rate on tourism sector activities in Greece

Accountability?

The recent event organised by the IIEA (30/4/2015) is one of the most bizarre attempts to attempt to ensure the accountability of the ECB.  The arrangement was that Trichet would speak at an event organised by the IIEA to an invited audience on the topic ‘Governance of the Eurozone: Past, Present and Future’ (See more at: http://www.iiea.com/events/governance-of-the-eurozone-past-present-and-future#sthash.q3EG9guP.dpuf).

There were  two other speakers, and Banking Inquiry members were permitted to ask Trichet questions from the floor (https://inquiries.oireachtas.ie/banking/banking-inquiry).

There is  in particular damming evidence that Trichet was in part dissembling at this event.  In particular Kevin Cardiff, states that while there were “a few misleading points that might be put down to the vagaries of memory or lack of familiarity with every aspect of the ECB’s operations”, but Trichet’s  statement that the “ECB simply gave advice on this issue” [entering the bailout] is comprehensively refuted.

Cardiff states “When the ECB gave advice in relation to joining the EU/IMF programme, the implied ‘or else’ was very clear from Mr. Trichet’s letter of 19 November 2010: if you don’t do this, your banks will lose access to ECB and even national central bank support with disastrous consequences for your economy” (Testimony p. 29).

It is also interesting that  Mr Trichet’s successor Mario Draghi also claims that Ireland was not forced into a bailout by the ECB (Arthur Beesley, Suzanne Lynch, Irish Times, November 14th, 2014).
   
Other attempts to seek accountability for ECB actions have also failed.  One of the better known and publicly available examples is the attempt by television journalist Vincent Browne (to obtain answers in relation to ECB policies in relation to the bank bailout from ECB representative Klaus Masuch (available at:- https://www.youtube.com/watch?v=HAf7J4a_T1g).

The Role of the Eurogroup

The Eurogroup of Finance Ministers is the key decision forum for discussion of matters dealing with the Euro area.  It is described as “an informal body where the ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro” (http://www.consilium.europa.eu/en/council-eu/eurogroup/).  Its main tasks is described as “to ensure close coordination of economic policies among the euro area member states”.

There is no doubt that this is an influential body.  The German Chancellor has described the Eurogroup meeting of 27th of June as of “decisive importance” (https://euobserver.com/tickers/129314)

Yet according to the Greek Minister for Finance a key intervention was made by Michael Noonan to the effect that ”ministers had not been made privy to the institutions’ proposal to my [Greek] government before being asked to participate in the discussion”.  This may indicate that some members of the Eurogroup are better informed than others.

The Eurogroup meeting of 27th June proved seminal in many respects.  One reason was the decision that 18 of the members excluding Greece would issue a statement basing the burden of the “impasse on Greece and the 18 would reconvene later to further discuss these issues”.

The Greek Finance minister sought legal advice from the secretariat on whether a statement can be issued that is not unanimous and secondly whether the Eurogroup can convene without a member state being present.  Despite the powerful nature of the Eurogroup the reply given was that:-

“The Eurogroup is an informal group. Thus it is not bound by Treaties or written regulations.  While unanimity is conventionally adhered to, the Eurogroup President is not bound to explicit rules” (source:- http://yanisvaroufakis.eu/2015/06/28/as-it-happened-yanis-varoufakis-intervention).


Some implications 

The Greek crisis is a seminal event for the European Union.  It may also be seminal for other institutions.  It is the first case of a ‘developed country’ and a European country being in ‘arrears’ in the history of the IMF.  This will not have gone unnoticed by all IMF shareholders. Could this result in an AMF (Asian Monetary Fund) to match the AIIB (Asian Infrastructure Investment Bank) ?

The main four banks in Greece are supervised directly by the ECB.  ECB regulation guidelines emphasise “early  intervention” and use of “resolution mechanisms” (ECB Guide to Banking Supervision, principle 9).  It is not clear if exit from the Eurozone ends this supervisory role, or indeed the role of supervisors in shutting Greek Banks and imposing restrictions on capital outflows.

One could argue for or against the Greek Government tactics.  The strong  impression given is that there were far more robust exchanges with the Troika than in the case of Ireland and perhaps stronger tactics would have reduced Ireland’s debt burden.

Yet a group (such as members of the Eurozone Finance Ministers) who firmly  and collectively believe ‘the earth is flat’ or in a more contemporary setting that ‘Elvis Presley is still alive’ will not have their views changed by a new member with alternative views. Rather expulsion from the group - regime change or what some describe as a “coup d’etat” in the case of Greece (see Suzanne Daley  New York Times, 2, July 2015), is a more likely outcome.

But the main implications of the Greek crisis for other eurozone members is for democratic principles and the widening gap between EU citizens and EU institutions.  Given institutional irrationality and relative absence of democratic checks and balances, smaller countries, with low economic power are likely to be recipients  of policy directions rather than influencers. In this context it is not clear what strategies they should adopt that are in the best interest of their citizens.

We can thank the current Greek Government for the transparency associated with the negotiation process, for example negotiating documents that were made available via the Financial Times and other media.  A transparency with which the Commission eventually partly reciprocated.

But the main contribution the Greek Government has made is to an emphasis on democratic values.
Failure to put democratic values, accountability and evidence based policy making at the forefront of EU reform for example  in the  Five Presidents Report (http://europa.eu/rapid/press-release_IP-15-5240_en.htm) is likely to ensure that this report remains just that, a report.






Wednesday, 1 July 2015

Call to Europe on Greece: The European Progressive Movement must and will play a crucial role

Prof. Stephany Griffith-Jones, Ernst Stetter and Vassilis Ntousas: There is still time to reach a fair and equitable deal with Greece, a deal that ensures the country’s fiscal, financial and debt sustainability and that offers a clear pathway out of the crisis.

At the same time, the lessons learnt from the Greek crisis should lead the Eurozone to greater institutional convergence.

The underlying assumption of this convergence, which would comprise of concrete steps towards stronger governance, enhanced common fiscal and investment instruments, debt mutualisation, and more shared sovereignty, is the sense of common responsibility that must be gradually strengthened amongst the Eurozone’s member states in how they address future challenges in the global economic and financial arena.

Monday, 29 June 2015

What the Danish Election tells us

David Begg: The extraordinary success of the populist, anti - immigration, anti EU, Danish People’s Party (DPP) last week continues a trend in Scandinavia. The Progress Party in Norway and the Finns party in Finland have all upset the established political order and, it would seem at first sight, delivered a body blow to social democracy in a region famed for its combination of economic efficiency and social cohesion.

Friday, 26 June 2015

Solving the Greek crisis – by making inequality worse?

James Wickham: It seems the Eurozone finance ministers - and behind them the IMF – are rejecting the last proposals from the Greek government. These proposals attempt to reverse the trend of the last years where the crisis has exacerbated inequality – and the poorest are asked to solve the crisis by accepting even further cuts in living standards.

In Greece the crisis has meant growing inequality in terms of disposable incomes.  

Thursday, 25 June 2015

Do we want the fewest public services in Europe?

Cormac Staunton: One of the key indicators in TASC's analysis of economic inequality is the level of taxation and government expenditure.  We have argued that Ireland is trapped in a 'low-tax triangle' with low taxes leading to lower public service provision, leading to a higher cost of living, leading to calls for tax cuts. This is a downward spiral that ultimately exacerbates economic inequality.

Recent data confirm that there is no plan to reverse this and that Ireland will continue to have a low-tax, low public service economy. Indeed by 2019 we could end up with the lowest government expenditure in the EU.
Chart 1: Expenditure as a % of GDP in Europe (2014). Source: NERI 

Tuesday, 23 June 2015

UN Committee Response to Ireland on Economic, Social and Cultural Rights

Cormac Staunton: The UN’s Committee on Economic Social and Cultural Rights, in its concluding observations on Ireland’s third periodic report, makes a number of very interesting points. The report of the Committee is based a number of written and oral responses by both the State and Civil Society groups to questions raised by the Committee.

The Committee welcomes a number of recent developments in Ireland including: The establishment of the Low Pay Commission in 2015; The Adoption of the Irish Human Rights and Equality Act and the establishment of the Irish Human Rights and Equality Commission in 2014.

In the area of economic inequality, as well as welcoming some key recent developments, there are a number of 'subjects of concern' and recommendations. Here I quote some of the observations that relate to the issue of economic inequality with some additional comments.

Monday, 22 June 2015

No inflation due to low wage rises

Paul Sweeney: There has been no rise in overall prices in seven years! In fact, prices today are a little lower than they were at the peak - which was in June 2008. That was the year of the crash and prices fell substantially then – by almost 8% in a period.  Then prices rose a little they have stabilised over the past three years and are still lower than when the Crash occurred, as the graph shows.

A major reason why there has been no rise in inflation is the low or no rises in wages. Workers will now demand a share in the rising economic growth. Irish growth is very strong and the fastest in Europe. Most of the benefit is going to the owners of capital.


Wednesday, 17 June 2015

Lets start a race to the top: IMF on Inequality

Cormac Staunton: The IMF have released another staff paper on inequality with some very important findings for our understanding of both the causes and consequences of economic inequality.  It also contains some suggestions of policies to reduce inequality.

Most strikingly the research shows that economic growth declines if the share of income held by the top 20% increases.  On the other hand, a growth in the share of income at the bottom 20% leads to higher economic growth. The research also provides further insight into why inequality affects growth.


Tuesday, 16 June 2015

There are no jobs on a dead planet

David Begg: German Chancellor, Angela Merkel, appears to have achieved something of a victory in persuading the G7 group of leading industrial nations to embrace a serious initiative on climate change last week.

They agreed to back the recommendations of the IPCC, the United Nations’ Climate Change Panel, to reduce global greenhouse gas emissions at the upper end of a range of 40 % to 70 % by 2050, using 2010 as a baseline, by phasing out the use of fossil fuels by the end of the century.

This is an important development in the lead in to the crucial UN summit in Paris in December 2015. If followed through this could presage a green industrial revolution. What does this mean?

Thursday, 11 June 2015

Pensions Research Conference

The Pension Policy Research Group Annual Conference will be held on Wednesday 17th June 2015 in the School of Business Trinity College Dublin.

The conference aims to promote discussion on current pension policy issues. It is intended for pension providers, regulators, trustees, advisors, academics and members of pension schemes.


Wednesday, 10 June 2015

The American Nightmare

Book Review of Our Kids: The American Dream in Crisis, by Robert D Putnam.

James Wickham: Some social changes come with trumpets blaring, promoted by self-serving entrepreneurs, hyped by snake-oil gurus and official pundits: think for example of the claims that we now live in the “knowledge society” of a connected digital world. Others come more slowly, advancing almost imperceptibly until we suddenly realise that the world has changed, changed utterly. So it is with the transformation of the United States of America into a society more divided by social class than any other Western democracy.

Monday, 8 June 2015

Tsipras may still have a card to play

David Begg: In a joint article published in a number of European newspapers last week a German and a French politician set out an audacious plan for completion of the European Integration Project. Sigmar Gabriel, Leader of the German Social Democratic Party, and the French Economic Minister, Emanuel Macron, proposed a Eurozone treasury with its own finance chief, single budget, tax raising powers, pooled debt liabilities, a common monetary fund, and separate organisation and representation within the European Parliament.

Wednesday, 3 June 2015

I'm a poor, poor farmer...

Cormac O'Grada: The website that is causing the IFA so much grief is both interesting and, from an equity standpoint, very disturbing.  Analysing the data properly would take some time, but here are a few extracts.

Single Payments in 2014: Numbers and Amounts

Tuesday, 2 June 2015

Critique of Knowledge Development Box

David Jacobson and Jim Stewart: The idea of the Knowledge Development Box (KDB) is to provide tax incentives to firms to locate their R&D activities in Ireland. In a recent submission to the Government on the KDB, we argued that it is just a substitute for the “double Irish” tax loophole, which is in the process of being removed following EU and OECD pressure.

We also argued that although encouragement of innovation is indeed an important part of a rounded industrial policy, the KDB proposal is not an appropriate way of encouraging innovation.

Thursday, 28 May 2015

Equality for All - Really?

David Begg: The high turnout and the active involvement of so many campaigning groups, especially the engagement of young people, in the referendum on gay marriage conveys a strong impression of active citizenship and undoubtedly enhances Ireland’s image as a modern progressive democracy. By coincidence this theme of citizenship and how it measures up to the ideals of 1916 featured at a conference organised by the Wheel, an NGO support organisation, in the week before the referendum.

TASC exists to challenge inequality and to promote the concept of a flourishing society. This is the context in which any discussion of what citizenship is about needs to be located.

Wednesday, 27 May 2015

Good News on Jobs

Paul Sweeney: There is good news on the jobs front. But we should never have had such a collapse in the economy and jobs. The job of economists and policymakers should be to make economic performance boring.

Employment should match population changes, economic development should meet our material and social needs and provide equitable taxation to fund great public services.

There should never be the rapid rises and falls in growth, in unemployment and in taxation and consequently in public services.


Tuesday, 26 May 2015

TTIP is not a conventional free trade agreement

David Begg: Since the collapse of the DOHA round of multilateral trade negotiations the focus of global trade policy has shifted towards regional or 'plurilateral' agreements involving groups of countries.

The United States is the main driving force behind this initiative with the aim of being at the centre of an integrated trade zone, covering nearly two-thirds of the global economy and almost 65 per cent of US goods trade, according to the US Council of Economic Advisors (Wolf, 2015).

Tuesday, 19 May 2015

Employers' Social Contributions in Ireland

Paul Sweeney: Here on Progressive Economy, we have been examining the evidence for tax reform in recent months. In my last Blog I looked at employees’ social insurance and here I examine employers’ social insurnace.

Is Ireland “the best little country in which to do business”? It has the lowest corporation taxes in the EU, no corporation taxes for some multinationals who chose to use aggressive tax planning and very low social charges on employers.  And we had very low average income tax rates though they were increased – but only to the OECD average since the Crash of 2008.


Social Contributions in EU as % of GDP (source Eurostat) from Cherishing All Equally

Wednesday, 13 May 2015

Capital Markets Union – The Risk of Short-Termism

David Begg: The European Commission believes that European Capital Markets are underdeveloped. It considers that this is an aspect of the single market which needs deepening and more integration. Commissioner Katainen said recently that the goal of policy would be to create a Capital Markets Union in which the flow of capital will increase allowing business to expand and providing more options for people to save for their old age, and strengthen financial stability. With a still fragile banking system carrying €900 billion of uncertain debt this makes perfect sense, or does it?

Friday, 8 May 2015

A Polanyian double movement in Europe? Too early to say

David Begg: On Tuesday 5th May Professor Eduardo Silva, from Tulane University, New Orleans, delivered a lecture in Maynooth University on the topic ‘Learning from Latin America: Lessons from the periphery in a time of austerity’. Professor Silva was in Ireland as part of the University’s distinguished visiting scholar’s programme. The core message from the lecture was that neoliberalism and austerity, if pushed beyond certain limits, can lead to social mobilisation and the rise of the left. This is the message from Latin America and Professor Silva challenged his audience to reflect on whether this could happen in Europe, or is Europe different?