Thursday, 24 May 2012

Fiscal treaty is a social, political and economic threat

I humbly draw your attention to the Irish Times today, in which the Tasc Economists Network is mentioned at the end.


Paul Hunt said...

So is the Tasc Economists' Network converging on a rejection of the Fiscal Pact? I gather some have aligned themselves unambiguously with the 'no' campaign, but not set out the reasoning here. Some have advanced some pretty tendentious and disingenuous stuff about Ireland's funding options in the event of a 'no' majority. Others have highlighted 'perils' without coming off the fence. For example, Tom O'Connor's op-ed has been dissected by Seamus Coffey here:

Tom McDonnell has hinted that there are valid reasons for voting 'yes', but we haven't heard them. The ICTU seems to be struggling and looks like falling back on the so-called ESM 'blackmail'. Voting 'no' could put the remaining bubble-era gains at greater risk of depradation. It's a tough call, when you're sitting pretty.

And as for the argument advanced in this op-ed, Chancellor Merkel is insiting on fiscal and economic governance becasue that is the very least German voters require before they will consent to further institutional and procedural changes in the Euro project. All perfectly reasonable and it's wonderful to see this over-riding requirement to secure informed democratic consent re-emerging - when it had been ignored for so long the EU's Grand Panjandrums when estanlishing the Euro project (even if it will slow the resolution of the crisis).

Although they promised they wouldn't, some members of the club broke some windows - and it's raining in on everyone. The members who didn't break windows, quite understandably, wish to make sure there are rules in place to prevent any more window-breaking by the miscreants.

And as for 'outlawing Keynesianism', apart from the EU creditor nations, many member-states overdosed on various mixtures of public and private 'Keynesianism'. Some 'cold turkey' is required, but it needs to be counterbalanced by the creation of new asset classes to fund long-term investment in infarstructure and utlity services that will be backed by the state but off its balance sheet.

My comment on the previous post provides an outline. But this doesn't sit well with the 'raid, tax and spend' brigade.

Nat O`Connor said...

@ Paul Hunt

I should note that neither TASC nor the Economists’ Network as a whole are taking a stance on the Treaty. PE is a forum for debate in which individual members of the Network are welcome to post their views.

On your point about "the creation of new asset classes to fund long-term investment in infarstructure and utlity services that will be backed by the state but off its balance sheet". How would you envisage that working?

I think there is no doubt that if there is a systematic reduction in the availability of government bonds as an investment vehicle for pension funds, etc. that there will be a pressing need for alternative relatively secure investments.

Also, are you sure it is possible under existing treaties for EU states to create/back such "off balance sheet" vehicles?

Paul Hunt said...

@Nat O'Connor,

Many thanks for your response. It often gets a bit lonely here.

I take your point about the distinction between Tasc and the Economists' Network, on one side, and this forum/blog, on the other. But since the former present a reasonably coherent, if occasionally, in my view, misguided, stance on social and economic policy that contests and critiques that advanced by Official Ireland - even if some participants also have a leg, as it were, in Official Ireland, I find it a little surprising that a stance is not being taken on the Treaty.

Since the EU is based, and operates on, the fundamental principle of representative democracy, it is a measure of the governance dysfunction in Ireland that ordinary voters are being asked to decide on matters that they would be forgiven for expecting their elected, full-time, paid representatives to address and resolve. But the people are being asked and it is pretty clear that many are confused and would welcome guidance based on facts, evidence and analysis.

It's clear if this is a case of 'won't' or 'can't' - or some combination of both, but I can see how it might be difficult for Tasc or the Economists' Network to arrive at a consensus that would come down on one side or the other. There is, however, a sense that there is a broad measure of support for a rejection of the Fiscal Compact, which, of course, is not surprising given the stance on social and economic policy.

Wouldn't it be in the public interest for this assumed majority, collectively, to give voice to and reasons for their rejection - and to allow the likely minority to register their dissent. I, for one, would welcome a post here outlining the case for voting 'yes'. In addition, it has not proved difficult previously to assemble a large number of leading 'progressive' to publicly express their opposition to the Government's fiscal policies.

I see this as a dereliction of duty when it is clear that a large number of voters would welcome reasoned guidance.

As to the other questions you raise I am very pleased that you have made this observation:
"I think there is no doubt that if there is a systematic reduction in the availability of government bonds as an investment vehicle for pension funds, etc. that there will be a pressing need for alternative relatively secure investments."

That has to be the sensible and rational starting point. I presented a very high level outline in my comment on the previous post - and you raise some pertinent questions.

My thinking in this area has been influenced by engagement with a number of economists addressing these issues internationally, but it has also been influenced by developments. For example, Britain is struggling with the debacle that a half-arsed mix of 'liberalisation' and privatisation has created in the electricity and gas sectors.

The UK Government is planning to establish a System Operator to manage a Capacity Market (how oxymoronic can you get?) and to embed this in the electricity transmission business, National Grid. Some details here:


Paul Hunt said...

The role of gas in the electricity market will be determined largely by the mix of capacity effectively commissioned by this entity.

Presumably the UK Government is confident that all of this is compliant with the Third Legislative Package. Despite the inanities and imbecilities of what the Government is planning to do, this opens up a new avenue.

Is there any reason why the state (or a statutory body) could not commission capacity directly - and this could be any type of capacity (generation, import and re-gas, electricity and gas transmission)? The regulator would determine the annual revenues - balancing the interests of owners/investors and those of final consumers represented collectively - following full regulatory hearings. On gas pipelines, for example, shippers would reserve and pay for capacity, presumably on a relatively short-term basis. If there was under-recovery of revenue the state, as the capacity commissioning body, would be on the hook.

This is the risk of penalty the state has to incur for introducing full retail access and dispensing with LDCs - with the result that retail suppliers are only prepared to reserve capacity on a short-term basis. On the other side the state, by providing an assurance of investment recovery, gains the benefit of a lower cost of capital and the timely provision of capacity. And it means the regulator can go back to being a regulator - rather than being a counter-party in these ill-defined and incomplete - and excessively short (5 versus say 40 years) - contracts for capacity.

I cannot answer you question on the EU's possible reaction to this approach, but it has become quite adept recently at using off balance sheet SPVs! In the normal course of events the state would not have to make any payments because users of the capacity would reserve and pay for the full amount offered. It would simply need to establish a reserve which might never be called on. In fact it could oblige market participants to reserve and pay for all the capacity available, but this might give rise to unintended consequences.

This thinking is very much at an early stage of development. I welcome your interest. And I would be keen to develop it further.

Nat O`Connor said...

@ Paul Hunt

I'll address the TASC referendum Yes/No issue first.

There are legal restrictions that prohibit charities like TASC from seeking to influence the outcome of an election or referendum.

We can - and do - contribute to public information and debate on the substantive issues, but as an organisation we can't advocate a Yes or No vote unless we register as a 'third party' under the Electoral Acts (which bodies set up to campaign on referendums have done). The rules for Third Parties are here:

The main problem for us is that third parties face similar restrictions to political parties about raising funds from any one source. This is (quite rightly) meant to close off the possibility of someone trying to 'buy' an election or referendum by pumping lots of money into a third party organisation. But it does muddy the waters for charities and their legitimate role in advocating for social justice and other causes.

Revenue is the body that grants and renews charitable status (CHY numbers). The Charities Act 2009 provides a clearer framework under which Revenue might make such a ruling, as it defines ‘charitable purpose’ for the first time (Section 3). But that Act also describes an ‘excluded body’ to include “a body that promotes a political cause, unless the promotion of that cause relates directly to the advancement of the charitable purposes of the body”.

TASC’s purpose is “the advancement of education”. While this allows us to engage in public education about democracy, public policy, economics and so on, it stops short of allowing us to seek to influence (rather than simply inform) the public when it comes to referendums and elections.

Paul Hunt said...

@Nat O'Connor,

Thank you. I can see how Tasc itself might be constrained, but I would love to see how the 60 odd 'progressives' who recently co-signed a letter criticising government fiscal policies are lined up on this issue. The logic of their stance on that matter would indicate that they would be opposed to the kind of restraint on fiscal policy the Fiscal pact would impose.

But no matter. Your thoughts, when you might have some time, on this 'new class of assets' would be very welcome.

Nat O`Connor said...

Having explained why TASC will not campaign for a Yes or No vote, we certainly have looked at some of the arguments and evidence about the substantive content of the fiscal treaty. Various blog posts on PE have addressed aspects of it and I won't rehearse those points again here.

My personal problem with this particular referendum is that, more than usually, the vote affects issues that are not in the text of the treaty. Historically, our European treaty referendum campaigns have ranged far and wide on issues that are not actually contained in the various treaties (Lisbon, Nice, etc.) This is a pity, because I don't think many people (myself included) know enough about what exactly was agreed in those treaties.

The very short fiscal treaty is technically about giving permission for the Government to institute a 'debt brake'. I think the Citizens' Information service has produced an accurate description of the content of the treaty in a supplement to its periodical Relate:

Unfortunately, the Irish referendum vote is caught up in EU politicking. It is likely that the EU and our fellow member states want Ireland to remain in the Euro. In fact, it is in their interest for Ireland to prosper (based on a more sustainable model of economic growth than a debt-fueled property boom). So, they are likely to lend us money in some form regardless of our treaty vote; although it is plausible that they might not lend us as much, or on as good terms. Moreover, they too have to face their voters. Their voters may vote No to helping Ireland (albeit indirectly by electing far right politicians, as we've seen in waves right across the EU in recent years). That's part of the risk of voting No, that short term political reasons in different EU states might lead EU governments to make short-term decisions that harm Ireland, even though it is in everyone's long-term interest to show solidarity and to rebuild all of the broken economies of Europe, including Ireland, Greece, etc.

Eurobonds and so on, now being championed by President Hollande, are a mechanism that will permit that solidarity to practically manifest. But Eurobonds and other ways of fostering growth are not in the treaty text, which is actually about whether or not we should have a debt brake.

Nat O`Connor said...

I'm constrained by time from dealing substantively with the 'new class of assets' question. Also, it is off-topic for this post.

Could you send us in a guest post on it for future discussion, even if it is more or less the same sketch you give here?

Paul Hunt said...

Thanks, Nat. You're quite right to focus on the debt brake. It might be possible to drive a developed economy without one in this era, but my sense is that it's neither prudent nor sensible.

I agree that this asset issue is off-topic. I'll flesh out my ideas and may send them on some time in the near future.