Wednesday, 19 October 2011

Abandon hope all ye who enter here

Tom McDonnell: Martin Wolf has an excellent and honest appraisal of the chances of the Euro crisis being successfully resolved in a way that is sustainable in the long term here.


Paul Hunt said...

@Tom McDonnell,

I wouldn't underestimate the strong intent of Germany (and similarly disposed countries such as the Netherlands, Austria, the other smaller EZ members (Slovenia, Slovakia and Estonia) and (outside the EZ) Sweden and Denmark to impose more effective democratic governance over the banking and financial system. It's simply that, faced with a Bundestag election in 2013 and a disgruntled electorate, Chancellor Merkel is complelled to pursue her policy of 'small steps', while avoiding revealing to her voters that she, her colleagues in government, her erstwhile partners in the previous grand coalition and her predecessors have lied consistently to the voters about the Euro over the last 10 to 15 years. This will take some time.

Martin Wolf, as usual is astute; I suspect he had a major role to play in the UK Independent Banking Commission which recommended a separation of 'wholesale' and 'retail' banking. But he seems to miss the point about how an 'internal devaluation' might be engineered in an economy such as Ireland's.

It seems to be assumed, unthinkingly, that a reduction in the domestic price level is automatically accompanied by reductions in salaries and wages. This may be true for many other developed economies, but it is not true to the same extent in Ireland. Since the late 1990s Ireland operated a 'low taxation/high 'point-of-use' charge' model. We can argue all day about whether or not pay levels in Ireland were/are higher than those in other EU economies, but there can be no argument that Irish workers sought higher pay levels because they were paying more than those in other countries for a lot of basic and necessary services. Some prices have fallen in the tradable and more exposed sectors, but that has not been the case in the sheltered private, public and semi-state sectors.

Reducing these prices while maintaining pay levels is extremely difficult becasue the knee-jerk reaction is to reduce pay first or as well. But it is possible and would increase most real incomes. The problem is that there are deeply embedded and powerful vested interests - doing OK with the current arrangements - that are blocking the road. They would rather have the whole economy go down the swannee (because they would be able to maintain their relative positions with the associated power, profits and prestige) than to accept the refroms that would benefit the majority of citizens.

Tom McDonnell said...

Hi Paul,

I know you have been following costs and competitiveness in the professions closely.

What is your sense of the Government's resolve and possible success in dealing with costs in these areas? Will we see a difference on the ground?

Paul Hunt said...


Can't say I've been following 'the professions' closely. But I have a few observations. There clearly was a political requirement for some balance with the NewERA concept for the semi-states. They couldn't go after the sheltered semi-state sector without going after some players in the private sheltered sector. But other than how it might have played with the focus groups and private polls I'm not sure why the lawyers, medics and pharmacists were selected for the firing line when there was such a huge rogues' gallery from which to select.

The Legal Services Regulation Bill seems to be creating three more quangos for capture by the lawyers. We haven't seen anything much yet on the medical and pharmacy front, but there seems to be this naive idea that having people shop around for services is the solution to all problems. This is total and utter cobblers. I suspect it's all a bit of an optical illusion to give the impression that the Government is beating up on these naughty professions, but it'll be business as usual when the dust settles. I expect they've been tipped the nod that they got the short straw when some professions were being selected to balance the NewERA restructuring of the semi-states, that nothing much is going to happen to them and that, if they just make a few yelps and groans without going to hard opposing things, it'll be back to business as usual in two shakes of a ram's tail.

On the other hand, the NewERA effort is shaping up to be an unmitigated disaster.