It’s a commonplace that the Celtic Tiger died in the early noughties, when real growth was replaced by false growth based on inappropriately low interest rates, an over-stimulated construction sector, and excessive pay increases for all sectors.  At the same time, the public sector and its various agencies grew stale and bloated.  Proper management skills withered on the vine, as the solution to every problem became the throwing of money at it.  Those who shouted loudest, or who had an inside track, got an even greater share of the spoils.  Welfare benefits began to outstrip those available almost anywhere else.

And now that the tide has gone out, we see that the State’s finances are in ruins because we have an inflated public sector cost base and welfare budget, but our tax revenues have shrunk dramatically (the bank bailout is not the main reason we are bust).  The fiscal gap will have to be closed by higher taxes, lower public sector costs and decreased welfare benefits, and the process has started.  It is a condition of the bailout deal that we travel down this road, but most of what we are going to do would have to have happened even without the bailout.

We need to look back to a time before things went pear-shaped, to a time when tax rates and yields were sensible, when we got reasonable value for money from our public sector, and when welfare benefit levels were appropriate to our real standard of living as a country.

Realistically, this would be sometime around 2002.  At that time, we hadn’t yet experienced a prolonged period of low Euro interest rates which was to prove such a part of our problem; we hadn’t seen the worst of the crazy pro-cyclical property incentives and unnecessary tax cuts; and the three-card-trick of public sector bench-marking lay in the future.

Did we feel poor as a country in 2002?  Were welfare recipients marching in the streets at the low level of benefits available?  Were civil servants and politicians noticeably underpaid?  Were there PAYE marches as there were in the 1970s?

No, no, no and no.

So let us turn back the clock, fiscally speaking, and revert to a position that is acceptably fair and is affordable.  This will involve further big cuts in pay, pensions and benefits, combined with additional tax increases for all taxpayers, including a substantial annual property tax.  Let’s do it, and do it quickly.   While we are at it, we need to get smart with our policy on the statutory minimum wage by re-setting it every 6 or 12 months at the average of the currently prevailing minimum wage in a “basket” of competitor countries.

And let us be prepared to resist the shouts and roars from politicians, the media, NGOs and commentators that we are being savage in our treatment of this sector or that sector.  After all, all we are doing is trying to reconstitute the sort of economic and fiscal conditions that applied in 2002.  We thought we were doing all right then, and we were.  The social fabric was certainly not collapsing then, in fact we had a bright future ahead of us and, in contrast to the present national mood, optimism was the order of the day.

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Bini Smaghi at it again

13 April, 2011

In today’s FT our “friend” from the ECB, Lorenzo Bini Smaghi,  is saying that Irish taxpayers shouldn’t complain if they have to bear heavy burdens which arose from failures in local financial regulation.   This is the same tune we have heard him singing before: ‘Ireland’s meltdown is the outcome of the policies of its elected politicians’

Just because it’s true doesn’t mean he has to keep rubbing it in….

There has developed a popular theme (meme?) in Ireland of late: namely that Germany, France and other countries must share the pain with us because it was their banks that lent boatloads of money to our banks to throw at property developers.

It certainly suits the Irish case (and character) to maintain that others must share responsibility, and only the very hard-hearted (which no doubt includes Lorenzo) would see no merit whatsoever in that argument.

But it’s a bit like the argument as to whether a bar owner bears any responsibility if he keeps selling drink to a clearly inebriated customer who then smashes himself up in a drink-driving car accident.  Is the drinker fully to blame, or does the bar owner have any legal (or moral) liability? 

In most States of the USA, under what are known as dram shop laws, a bar that lets an obviously drunk customer drive away can be held financially responsible for damage caused by that customer.   The principle has yet to be established, or legislated for, in Ireland.

Nevertheless, perhaps the Irish taxpayer should mount a lawsuit against the ECB to establish that they share responsibility for the damage caused by the Irish Government’s and Irish banks’ fiscal drink-driving.  If it would shut Lorenzo up, it might be worth a try.

The most recent post on the blog of BBC Newsnight’s economics editor Paul Mason is called “Timetable of the euro-showdown” and is very informative, albeit slightly worrying.

 As an aside, it includes this quote: “So the difference in this phase of the crisis is that what is driving the problem is not economic collapse and abject political mis-accounting (as per Greece) nor the collapse of a kleptocratic banking and property elite (as per Ireland), but collapsing confidence in the Eurozone’s authorities.”

Interesting to see Auntie Beeb’s man describing what we had as a kleptocracy.

OK, so I’m not a professional economist, or a qualified lawyer, but fools rush in …..

Firstly, do the EU Treaties, and Article 125 in particular, really prevent a bailout of Greece, as we see/hear said frequently?  I don’t think so, but it depends what you mean by bailout.

Article 125 of the TFEU (post-Lisbon Treaty) states: “The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume …… etc etc”.

So, despite what some commentators have said, there is no prohibition on lending money to Greece; what can’t happen is for the EU or any Member State to take over its loans, or give it “free money”  And I would think that, as long as the interest rate charged is not unreasonably low, there would be no problem.

Secondly, almost regardless of what interest rate the Eurozone members charge Greece , I expect to see a challenge brought in the German Constitutional Court to the German participation in the loan facility.  I have already commented on that Court’s robust attitude to all EU matters, and the way it jealously guards what it considers is its ultimate right to decide if Union activities are ultra viressee this post

In a famous case in 1993, a Eurosceptic member of the FDP Liberal party took the Maastricht treaty to the German Constitutional Court in Karlsruhe, claiming that the abolition of the deutsche mark (as part of the creation of the Euro)  was unconstitutional. The court only agreed to permit the ratification of the treaty by Germany on the basis that currency stability would be as well protected by the European Central Bank as it had been by the Bundesbank.  There has, in effect, been a threat hanging over the ECB and the Eurosystem that at any time the good judges in Karlsruhe might seek to trump their actions; this would bring to a head the unresolved issue (at least in the minds of the German judges) as to who, in law, gets to make the final determination as to whether an action of the EU is ultra vires, and goes beyond the legal authority conferred by Member States in the various EU treaties.

Thirdly, a question: why is the Euro being hit so badly by the fiscal woes of Greece and other delinquent states, when the value of the dollar is apparently not affected by the budget deficit and debt problems being experienced by (for instance) California?

Fourthly, if Greece defaults (and some observers believe this is very likely), might the resulting grief suffered by that country’s citizens be a help to the Irish government in its battle with our public service unions?  Maybe Greece needs to be the sacrificial victim, pour encourager les autres?

There is now a prospect of Germany and other Euro members co-ordinating a bailout of Greece’s finances, supposedly to support (rescue?) the Euro.  I wonder if this is an example of political pride get in the way of sound political economy.

I didn’t see the US Federal Government, much less individual US states, stepping in to bail out California’s finances after they got into a mess.  Where was all the talk about intervention being needed in California so as to protect the US Dollar?

So why not let events take their course in the Eurozone?  Eventually, the cost to Greece of raising new debt would become sufficiently high that it would be forced by the market into massive expenditure cuts, just like California. The standard of living in Greece would fall to what is justified by their national output. Just think West Virginia.

I don’t think German taxpayers should permanently subsidise the standard of living of badly-managed Eurozone countries, at least not to any great extent.

If you say to me that expenditure cuts couldn’t happen in Greece because there would be civil unrest and political collapse, then I suggest that it would be better if Greece were not in the Euro zone in the first place.

I don’t think the above is special to Greece, by the way – it applies to any PIGS member. (Is Ireland still a PIGS member?)

There was an interesting comment piece in the Financial Times  a few days ago called “Why Greece will have to leave the Eurozone”.  The writer was Desmond Lachman who is a Resident Fellow at the American Enterprise Institute.  The AEI is conservative think-tank, whose Board of Trustees is graced by the presence of Dick Cheney, amongst others.

As a commentator, Mr Lachman doesn’t appear to be a loose cannon or a right-wing nutcase.  He is a former managing director and economic strategist at Salomon Smith Barney and also served as deputy director in the IMF’s Policy Development and Review Department.  And the FT is hardly a fringe publication.

The thrust of Mr Lachman’s article is set out in the first paragraph, Read the rest of this entry »