Thursday, December 29, 2011

Legal Services Regulation Bill 2011

http://www.oireachtas.ie/documents/bills28/bills/2011/5811/document2.pdf

The Legal Services Bill is a major overhaul of how legal practitioners are regulated in ireland. It includes: the creation of a new regulator that will take over a number of functions from the Bar Council and Law Society; a new system of processing complaints against legal practitioners; a new system of regulating legal costs charged by legal practitioners with the aim of protecting consumers; a loosening of the rules as to what legal practitioners can and cannot do in business.


I am very pleased with a number of aspects of the Bill:
-the functions of the authority as outlined
-the extremely robust powers of investigation of the Authority
-the formation of a new Authority, completely seperate from the Law Society/Bar Council
-a mandate to redraw codes of practice
-the treatment of excessive costs as misconduct
-a simpler, more credible complaints procedure
-scope for a seperate profession of conveyancing
-multi-disciplinary partnerships
-direct access to barristers


However, no mortal thing cannot be improved, so I will also point out a number of things which I believe could be revisited.

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The memo to the Bill and press releases from the Dept say that the Bill empowers the new Authority to regulate/licence educational institutions to train legal professionals (other than the law society and kings inns). However, I do not believe this power is actually contained in the Bill itself. Section 9 of the Bill is the only reference I can find to training institutions. Section 9(a) says that the Authority will keep legal education under "review". This is a very strange word to use, I have never seen it used like this in a piece of legislation before. To my mind, requiring the Authority to keep the provision of education under review, does not imply any power to determine or even influence the provision of education. It appears that far from empowering the Authority to licence new educational institutions (which I believe is a condition of the EU/IMF deal) or regulate existing ones, this Bill only requires/permits the Authority to observe the provision of education by the existing monopolies. The Bill also requires the Authority to draw up a report on legal training, but there is no obligation to follow up this report with action. This I feel is a mistake. The power to regulate the provision of legal education/training must be a fundamental part of the Authority's authority. We are leaving its role in this area unclear for years while reports and new legislation is drawn up (or indeed may never be drawn up). We should state in law right now that regulating/licencing legal training is a function of the Authority.

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There has been much comment about the independence of the new Authority from ministerial control. I understand the Dept.s desire to have a lay majority, but I must agree that the model proposed does seem to give a great deal of power to the Government of the day. It is not an insult to the present government to say that it is undesirable to give ministers too much control over the judicial system -there have been less scrupulous governments in the not very distant past that misused organs of state for their own ends (Phonetapping, intimidation etc)-it is not a good idea to give the Minister this level of control over the Authority, regardless of how trustworthy the current Minister is.

Instead, I would propose that only 4 members of the Authority be nominated by the Minister and the remaining 3 be appointed by some other power. Perhaps the Competition authority could have a seat at the authority. Personally, I would like to see the President send at least a couple of nominees to the authority -independence of the judicial system is after all a constitutional imperative and therefore a fit role for him to involve himself in. Furthermore, his national mandate and independence from Government would give this arrangement independence and legitimacy at the same time.

Likewise, the power under section 8(12)(d) to remove a member should be exercised jointly by the Minister and another power -perhaps an Oireachtas Committee or the Authority itself. Again, this is not a criticism of the current Minister, but it is prudent to prevent any one office having control over this authority.

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The Bill leaves the door open for further legislation to create a seperate legal profession of conveyancer. Given the problems related to conveyancing, in particular the accumulated cost of multiple malpractice cases, and the expensive insurance premia for practicing legal professionals, it is very imporant to get this right. Reducing the risk exposure of the profession to unscrupulous practitioners will reduce insurance costs and radically alter legal costs. A seperate profession of conveyancing would be of benefit, but I believe we should go one step further and create a clearing house for property. In financial markets, clearing houses are heavily regulated conduits of property between individuals. They transfer ownership and payment between the parties, and do so reliably, cheaply and safely. The same cannot be said for the practice of conveyancing in the property market by solicitors. The current system has seen several solicitors behave recklessly at the expense of clients or their fellow solicitors. If a clearing house for property could be established, then solicitors could carry out the due diligence/negotiating functions they currently perform, but then the actual transaction could occur through a central authority (perhaps attached to the Land Registry) which could be relied upon not to run a client account deficit. Of course, solicitors would lose out on the interest payments from handling client funds -but they would also benefit from reduced insurance premia. I believe this is an innovation that would dramatically improve conveyancing and legal costs while actually improving the exercise of property rights. It could also become a source of information to the Revenue.

Friday, December 16, 2011

Self-driving/Automated car

I strongly believe that the next great leap in productivity/industrialisation will come in the form of automated transportation (driverless vehicles). The technology for driverless vehicles already exists (though it's scarcely perfect at present), and though many people are sceptical or even scared, I am sure they will be on our roads within the next decade. The convenience, reliability, endurance and above all the cost of driverless vehicles is likely to prove irresistible.

Think of
-the convenience of having your car drive you to work, while you read the papers, then drive itself home to park until 5 o'clock.
-the safety of knowing that your car will never tire, daydream, speed or drink.
-the efficiency of a truck that can drive itself, without reststops, or a paid driver. Delivering goods quicker and cheaper.
-agricultural vehicles that can spray, spread, mow, harvest fields unattended, while the farmer attends to other work around the farm
-a rubbish truck that can drive/load/empty itself without a crew being exposed to the harmful waste
-a postal truck that collects, sorts and distributes post all day and night and at the weekends.
-busses that can run all night, cheaply, regularly and reliably


Indeed, once you start thinking about it, it's obvious that automated vehicles are such a boon to the economy and society that all apprehension about giving control over to the vehicle will be steamrolled once they gain a foothold in any particular area (probably agriculture).

Agriculture seems the most likely sector to adopt driverless vehicles first. The simple driving patterns, in open spaces with only infrequent obstacles seems perfect for automated vehicles to make a breakthrough. Once this happens, it will not take long for the technology to develop and freight and utility companies to adopt the technology.

I personally, don't expect them to become common in personal vehicles for a long time to come (although PSVs may be ahead of the curve). The cost of the technology is easily justified where it does the work of a paid driver cheaper and better, but in most family cars, automation will simply be liberating the driver from driving -desirable, but hardly worth the cost.

Friday, December 9, 2011

It seems the ECB is as sceptical of the Council's plan as the rest of us

http://www.independent.ie/business/european/market-rout-as-ecb-dashes-bond-hopes-2959300.html

Mario Draghi's sensational comments from last night, pretty much explode the notion that the proposed Fiscal Union will be enough to entice the ECB to ease the monetary situation. Even though he delivered a rate cut last night, as well as promising liquidity to banks, it seems the ECB is far from opening up the flood gates of liquidity.

I cannot blame them for their scepticism. Even if this deal was agreed and followed, it does nothing to prevent private asset bubbles occuring in future and requiring further Central Bank interventions. They do not think this fiscal Union will prevent further crises and they are right.

Nonetheless, I think the ECB is interpreting their mandate extremely narrowly when they think they can simply stand idly by as the Euro literally crumbles in front of them. They may be charged with safeguarding price stability, but how true are they to their mandate if they cause the Euro to collapse?

Quantitative Easing is desperately needed in the Euro Area, and the sooner the ECB begins to take responsibility for maintaining the currency, rather than simply price stability -the better for everyone. Yes, this fiscal union is a farce -but how does that change anything?

Thursday, December 8, 2011

Why neutrinos travel faster than light and the universal speed limit has been wrong for years.

The concept of a universal speed limit depends on the idea that massless particles can travel extremely fast without needing massive energy to move them. As energy and mass are relative and functions of a constant (E=MC2), there is a trade off between the two and all matter falls somewhere on a spectrum between being highly energetic with low mass, and being massive without energy. It has been assumed that light travels at the maximum possible speed as it is unburdened by mass.

However, it has been known for some time that light does indeed have a mass, it is effected by gravity (albeit only slightly). Furthermore, it can impart kinetic energy (the concept behind lightsails).

It therefore seems obvious to me that if light has a mass, it is not pure energy and cannot move at the universal speed limit. Perhaps nothing does, but if recent observations are anything to go by, seemingly neutrinos come closer than light.

The "crunch" Eurozone deal will destroy what little hope is left for saving our currency.

As I write, Europe's leaders are gathered in France and Belgium to agree fiscal restraints, in the hope that this will encourage the ECB to finally come to the rescue with sufficient liquidity to make a difference.

However, their plan is fatally flawed. I do not disagree with fiscal restraints in principle, but in the common currency Eurozone area they are going to end what chance the currency has of surviving. The Eurozone's problem is not that certain countries have been profligate, rather it was the wrong countries that were profligate. In the run up to the present crisis, those countries at the top of their economic cycle were running balance of payments deficits and those countries which which were struggling under economic adjustments were running balance of payments surpluses. This is a natural feature of human nature: when times are bad you want to work to improve your situation, when times are good, you feel confident to let things go a bit.

But imposing a fiscal straight jacket on EZ countries is not the solution, our members are locked into an inappropriate monetary policy and only have fiscal measures to compensate. The ability to borrow "appropriately" to stabilise economic cycles is not necessarily a bad thing.

The one size fits all monetary policy of the ECB meant that the boom countries could not rely on monetary policy to rein in their economies, just as the slower-growing countries wanted a more liberal monetary policy. We effectively removed a tool of economic adjustment. If we had been wise, we would have used fiscal policy to compensate for these stresses, but that's all history now. But now, we are proposing to impose restraints on our fiscal policys, limiting the only remaining tool for intervening in the economy. How this is supposed to make the Eurozone more stable is a mystery. This can only work if state profligacy was the problem all along. In some boom countries, state profligacy did occur, but it was the result of inappropriately loose monetary policy. Fiscal union is the correct solution for profligacy, but profligacy is not the problem. This plan is the answer of those who do not really understand what has happened.

In other peripheral countries, where fiscal profligacy was eschewed, the result was massive private borrowing, fuelling asset bubbles (such as Ireland and Spain). Public spending in these countries, was if anything more restrained than in the core countries that have come through this crisis best. By imposing rigorous fiscal rules on all EZ countries, we will avert future Greeces and Italys, but because we fail to address the real problem, we will spawn a series of Ireland's and Spains. This proposed plan will spell the end of the common currency within a generation.

This policy may serve a political purpose, but it does not fix the eurozone -nothing but a transfer union can fix the Euro. I personally don't want to see this and think we should seek to leave this currency at the first opportunity. Though I'm a europhile, I think it's time to kiss goodbye to a common currency.

Friday, December 2, 2011

We are Church

In recent weeks, a new group has sprung up in Ireland. We are Church is a group of reform minded, lay catholics, present in several countries. They criticise aspects of church doctrine, but crucially they do this as practicing catholics.

http://we-are-church-ireland.org/

Though this can hardly be described as a revolution in people power, nonetheless this is a very positive form of criticism which the church would do well to listen to. These people are not doctrinally or ideologically opposed to catholicism, they are not intent on damaging the church -rather, they are committed to the church's wellbeing and are voicing concern about harmful aspects of current doctrine which are not rooted in fundamental tenets of catholicism, needlessly harming the church and its members.

Their fundamental aim is to involve the lay in decisionmaking, and to this end they have avoided defining their stance on many issues (it would make no sense to combat doctrine by creating a new doctrine for their members) -yet they have managed to agree broadly amongst all their members on a limited number of issues they intend to collectively campaign for.

1.The equality of all the baptised where decision making is actively shared by all, with appropriate structures for this.
2. Full participation of women in all aspects of church life, including priesthood.
3. Removal of the obligation of clerical celibacy.
4. A positive attitude toward sexuality and recognition of the primacy of an informed conscience.
5. An inclusive church, open and welcoming to all, which does not marginalise its own people i.e. divorced, in second relationships, those who are gay or lesbian.



Reading this list of very reasonable reforms, I can't help feeling that this group is very badly needed. None of these problems of life inside the catholic church is based in scripture -they are all inferred from a selective interpretation of the bible and an overreaching catechism that is based more on mortal opinions than divine will. These problems stem from mortal prejudice rather than divine intolerance.

That these problems can drift on unaddressed is an indictment of the way doctrine is made. Successive Ecumenical Councils have added more and more mortal norms to catholicism that have nothing to do with the religion left by Christ. Many of these mortal norms are now outdated and discredited, they damage the church but they drift on unaltered. The reason these problems have gone unaddressed is because nobody that counts is opposed to them. We are church could be the start of a forum to make the church authorities sit up and take notice that their followers are upset with their insistence on arcane rules that are not really related to the faith. I wish this new group all the best in their broad endeavour to claim back the catholic church for all the faithful. A simpler, narrower interpretation of christian living that is based exclusively on scripture, rather than ecumenical interpretation is the objective. The Beatitudes, the Gospels and to a lesser extent the wider new testament should be the only basis for doctrine.

Apostolic succession is probably the main obstacle to the success of a group such as We are Church. If catholics are to believe that the church authorities are appointed by divine will, then there is no scope for them to oppose church authorities. But if this notion is challenged (and implicitly this seems to be embedded in their first issue regarding the equality of all catholics in decisionmaking for the church), then the flood gates of reform could burst open. I wish them well, I wish the church well.

Wednesday, November 30, 2011

The IMF's role/roll

I am extremely relieved that there is now finally, serious talk of allowing the IMF come into the Eurozone (EZ). Up until now, our policy efforts have been to do everything possible to avert the IMF coming into the EZ. We have even gone so far as to develop a mini-IMF within Europe (EFSF/ESM) to perform the necessary tasks without giving over control to this global institution. (Note: despite their involvement in the bailouts of Greece/Portugal/Ireland, the IMF is not in control of these programs, it is merely providing technical support and limited funding).

However, I have always thought this was a mistake. I have written to countless heads of State, Commissioners etc. expressing my disbelief that they have gone to such lengths to prevent the IMF coming in and performing the necessary tasks. They have built up mighty institutions, destroyed countless billions of wealth and worst of all wasted precious time for reform in their efforts to stave off the IMF's advances.

I can remember clearly the first person to rule out IMF involvement -Jean Claude Trichet; he said that having the IMF intervene in a Eurozone country would be a humiliation. I did not think then and I do not think now that that was appropriate language for a central bank governor to use -emotive, unengaged, and truculent. I regard it as the key mistake made at a European level. I have since written to countless people trying to highlight the absurdity and vainglory of what we are trying to do. Only Olli Rehn took the trouble to respond to me, simply saying that the IMF had insufficient funds to rescue Greece (which seems absurd, when you think about the resources we have given to the EFSF since).

The real reason for all of this dissembling, was that European leaders know, that the first thing the IMF will do is tell the countries in severe debt that they must first write down a great deal of it. This will cause losses to private investors throughout the region, many of them institutional investors such as pension funds. I fully understand the reluctance to expose these institutions to losses -however, after 3 years of this farcical dancing around the IMF, can anyone seriously say that going to the IMF would be worse? Furthermore, by now, the truly vulnerable institutions such as pension funds, deposit banks etc. have sold their stakes in these bonds and the current bondholders for the PIGS are mostly high-risk investors -such as hedge funds. Defaulting on these will not cause the cataclysm our leaders fear.

I am delighted to hear that finally, people are talking of the IMF taking control of this process, instead of this Frankfurt group which has grown up in recent months. The IMF has the expertise, the credibility (and with ECB support, the firepower) to fix these multiple crises. It will look at solving the problem and will not have to look over its shoulder at national bondholer interests or coalition partners. I hope this suggestion gathers momentum.

My father used to tell me that if you get the economics right the politics will look after itself. I have come over the years to invert this wisdom -once you get the politics right, the economics fall into line pretty quickly. We need to get rid of this dysfunctional system of politicians from other jurisdictions deciding what is economically best for the troubled countries. The IMF is no more democratic or accountable than the Frankfurt group, but at least their agenda is not set by bondholders or domestic elections. If they come in, then we can really start to work at putting all this horror behind us.

Eurozone crisis non-solutions

A broader mandate for the ECB is not just the most desirable resolution to this crisis -it is by now the only solution to the crisis.

The ongoing debate about the way forward to resolve the Eurozone crisis is being hampered by a series of non-solutions that are being flogged by different parties. These false solutions do not help with resolving the crisis, but instead reflect existing national bias'. It is a toxic brew of lazy thinking and flippancy.

I intend to address a few in turn. Eurobonds; closer budgetary scrutiny; treaty change.



EUROBONDS.
Many commentators have spoken for Eurobonds, claiming that they will extend the creditworthiness of the Eurozone as a whole to each country, allowing those currently locked out of the markets to borrow. There are well rehearsed and real problems with this, in particular, that it will reward the profligate at the expense of the prudent and encourage further bad behaviour. It will in fact return us to the same pattern of misaligned incentives that amplified the problem in the first place. This alone should be enough to rule this approach out of consideration (though Ireland, typically unsure what to do, is actually supporting this daftness), but it is moot as far as I'm concerned, because apart from the problems of agency -it just won't work.

The Eurobonds idea creates an ultra safe investment asset for MSs to sell, up to the value of 60% of their GDP. It also accepts that national bonds sold after this are potentially defaultable (though why it would be more acceptable for this to happen after common European debt has been issued as opposed to now is a bit of a mystery). As most of the troubled countries have existing debts far greater than 60% of GDP, as they borrow, they will be making their existing debts increasingly risky, and expendable. In effect, Eurobonds will put an end to national bonds, only Eurobonds will be sellable, and once troubled MSs have sold 60% of their GDP's worth of Eurobonds, they will be unable to issue national debt to refinance their remaining loans -we will be back to square one. Eurobonds are a red herring.



CLOSER BUDGETARY SCRUTINY
I am not opposed to closer European budgetary scrutiny. Indeed in Ireland, it would be refreshing to have any budgetary scrutiny at all. However, this plan will not help the current crisis. Firstly, it presupposes that the external controls on national budgets will prevent financial disasters such as happened in Ireland and Spain. Given the excellent fiscal status of both Spain and Ireland in the years running up to the crisis, it is difficult to see what budgetary scrutiny would have changed. Low debts, high surpluses -just what are we to believe budgetary scrutiny would have done? In Greece, the statistics were falsified to obscure the truth -what would scrutiny have achieved here? Indeed, the countries that have come through this crisis best are those which consistently ran deficits in the run up to the crisis. It may perform some political function to allow central European politicians sell the upcoming losses to their electorates, but it serves no real purpose in the current crisis. Closer budgetary scrutiny is a red herring.



TREATY CHANGE
Treaty change is quite impossible in a useful timeframe -furthermore, the ratification process will introduce a new aspect of uncertainty into an already volatile situation. In particular, the likelihood of the UK passing a referendum on closer economic cooperation with the dysfunctional Eurozone is remote. Significant treaty changes will lead us into a world of pitfalls that we must avoid. Treaty change is a red herring.



QUANTITATIVE EASING
I have been quite a fan of quantitative easing in the US and the UK. I have a long standing belief that a small amount of inflation is a very healthy thing as it prevents money hoarding and compels wealth to be invested productively and profitably. In short it prevents depressions. Quantitative easing involves the Central Bank printing money, and then using this new cash to purchase government debts. The new liquidity released into the system creates a stimulus and prevents deflation. In a highly leveraged economy (such as Ireland), deflation is the path to disaster.

Nonetheless, at present in the Eurozone, inflation is running at over 2%, so deflation is not a problem except in certain localities. This does not bode well for the consequences of QE.

However, this will not last for long as forced austerity is probably going to descend on the continent once national budgets are agreed in December. Inflation will likely tick downwards as austerity bites, and perhaps then Quantitative Easing can be used to ease the money supply and relieve the debts of Greece. Finally, it must be made clear that this is a once off, and we must convince markets, funds etc. that the next time there is a sovereign crisis in Europe, they will have to eat their losses. A first step towards this would be to prevent financial institutions from using sovereign bonds as Tier 1 capital. Increasing their risk exposure to these assets should concentrate minds.

However, that is not an end to it -Quantitative Easing poses particular problems in the Eurozone. As it is a common currency, all holders of Euros across the Eurozone will lose wealth as the supply of money expands, while all indebted persons will benefit from the reduction in the value of their debts, and the proceeds from this money printing will be used to relieve the national debts of just a handful of highly indebted countries (or probably only Greece). This is undoubtedly unfair. It rewards personal and national bad behaviour and could be seen to give encouragement to the profligate.

However, unlike the other solutions currently being discussed -it will work. It is not a red herring, it is a real solution, and therefore, for all its lack of appeal, I support this approach. Combined with a coordinated austerity drive to balance Eurozone budgets, Quantitative Easing will increase the money supply, relieve the debt burden of Greece cause only modest, controllable inflation and save the Euro.

Thursday, November 24, 2011

Average debt of Irish worker

Loans to Irish residents outstanding (Sept 2011) 253bn
National debt (sept 2011) 163bn
Total 420bn in debt nationally.

1.8 million workers.

Therefore, the average Irish worker is supporting debts of 233,000 Euros. Around a quarter of a million euros each.

Bummer

Sean Quinn -from hero to zero

Sean Quinn is rapidly consuming his stock of goodwill in this country. Yes, he may have kept his business interests near to home, but all this carry on with IBRC is unacceptable: claiming to have only €12K in the bank; filing for bankruptcy in the North; transferring assets out of his name. Who does he think he is? I've come to the conclusion that for all the plaudits he has won over the years -he's only a bum behind it all. Another of those puffed up assholes that seem to rule the roost everywhere in this country.

Wednesday, November 23, 2011

Letter to Ajai Chopra

Dear Mr. Chopra,
I am writing to you about the Irish Government's intention to present a draft programme of asset disposals to the IMF, the ECB and the European Commission. Specifically, I am writing to you about the regulatory steps required for the sale of the ESB (the publicly owned electricity provider).

At present, the electricity grid in Ireland belongs to the ESB, however its operation is contracted to another publicly owned company -Eirgrid.

The Government's intention is to sell a stake in the ESB without first seperating the grid from it. I believe this is a serious mistake for 2 reasons: it will undermine the good governance of an already competitive electricity market; and it will undermine any chance of the State receiving fair value for the asset.

The arguments for decoupling grids from electricity providers are well rehearsed across many jurisdictions and I will not go into them needlessly here. Sufficeth to say, it gives the largest player in the market power over their competitors.

However, in Ireland's case, selling a bundled asset could be uniquely harmful, as the right to operate the grid is not vested with the same company that owns it. Therefore, I believe by selling a stake in the ESB, we are expecting investors to pay full price for their share in the grid, without allowing them the chance to operate it (as Eirgrid has the mandate to operate it). Clearly this is pie-in-the-sky, as no investor will want to pay full value for an asset they will not be allowed to operate. We are dooming the Irish State to accept a vlaue below the true value of the asset if we sell the grid in this manner.

If the sale of the grid is indeed crucial, then I suggest ownership of it be transferred to Eirgrid and a stake in this company be sold as well. At least in this way, a sensible, attractive package can be presented to potential investors and they will be buying both the asset and the right to operate it. This seems to be the only way to safeguard the value of the asset in any sale.

Finally, I want to bring your attention to some surprising correspondence I have had from some politicians in Ireland in regard to this matter. After writing to many politicians to alert them to what I believe is a dramatic mistake that will undermine the functioning of the electricity market in this country, one responded to me to say that the objective of selling the ESB bundled with the grid is specifically to create a dysfunctional system. I will not name him, but he explained that by leaving the grid bundled, this will make it impracticable for future governments to sell the remainder of the ESB and will instead create a regulatory incentive to renationalise the asset. He expressed satisfaction that this approach would achieve our programme targets, but encourage a policy reversal at a future time.

Personally, I have no distinct preference for public or private ownership, but it seems clear to me that if we are to part-privatise the ESB we should make an honest attempt to create a functioning post-privatisation electricity market. Instead, it seems the intention is to sabotage the privatisation process to bind the hands of future governments -for crude ideological reasons. Instead of being the transformational event envisaged under the programme, the intention is to technically comply, but in a manner that ensures a reversal at a later date.

I urge you to examine this proposal extremely carefully when it is presented to you. I recommend you seek the seperation of the Grid from the ESB, to either remain in State ownership, or else to be transferred to Eirgrid and that company be part-privatised also. The current proposal is ham-fisted, seemingly intentionally.

Wednesday, October 12, 2011

Letter to sundry TDs

Dear Deputy,
I am writing to you about proposals to dispose of ESB, and also Aer Lingus. In particular, I would like to argue that any sale of these assets should not include the electricity grid or foreign landing slots in the ownership of these companies.

Firstly, the electricity grid: the current proposal is for the grid to be sold along with ESB, with Eirgrid retaining the contract to run the grid. For 2 reasons this seems a bad idea to me. Firstly, the ownership of the grid should not be in the hands of a private company. The problems this creates in regard to long term investment decisions and the maintenance of competition seem insurmountable. Secondly, and perhaps more importantly, if the grid is sold in this manner, with Eirgrid operating it, we will almost certainly fail to achieve the true value of the grid. What investor, when buying the ESB, will be prepared to pay full price for an electricity grid they cannot even operate? Clearly, to sell the grid bundled with the ESB is to doom us to accept a price below real value. If we are absolutely determined to sell a share of the grid (which I hope is not the case), then we should at least transfer it to Eirgrid first and then sell a minority stake in Eirgrid along with the grid. Noone will be interested in buying the asset without the right to operate it. This is a daft plan.

Secondly, the landing slots owned by Aer Lingus really are the envy of many nations. These slots have been accumulated because the State identified early on the importance of air travel to an island nation with a tourist industry. These considerations remain valid today, and we must safeguard our connections provided by these slots. To me, the slots should never have been sold along with the airline. Rather they should have been retained in a holding company under state control and made available to airlines flying routes into Ireland. I do not have faith in the contractual burdens that the Minister proposes to put on the slots as a reliable safeguard of our flight connections. Rather, before the sell-off of the remainder of Aer Lingus, I would like to see the State embark on a "sale-and-leaseback" arrangement with Aer Lingus to resecure these slots into State ownership. This will be expensive, but the subsequent sale will pay for it and our enviable flight connections will be truly secured. Otherwise, I guarantee you, in a few years some cleverclogs will find a way to sell these slots to the Oil Sheikhs or the Chinese -or some other country with lots of new money and poor flight connections. I know we will regret any sale of these slots. We are relatively overserved with flight connections in comparison to other similar sized countries, and perhaps take this advantage for granted.

Finally, I'd also add that while the private sector does well at managing staff, using fixed assets and addressing costs -it is not good at everything. For instance, the State is far superior to the private sector at capital investment, largely because in normal times it has concessionary lending rates (and presumably we will do sometime again) and also because it has the luxury of looking at long term benefit rather than simple, immediate cashflow problems. Therefore in all state asset disposals, we should aim to dispose as much as possible with those bodies which deal with large numbers of staff, are responsible for delivering services etc., and avoid disposing of assets which are perfectly well run in State ownership and can be used to serve strategic national aims. Legal title to the Grid and ownership of the landing slots are perfect examples of critical national infrastructure which can be leveraged to national ends, can be invested in cheaply by the State and which have small staffing and management requirements. They are better run under public ownership.
sincerely
Ger

Wednesday, October 5, 2011

Plan A is a sham

Since my previous entry (Final Fantasy), it has become something of an orthodoxy that the problem is not confined to just the periphery Eurozone, and in fact all countries (US included) must now start making real efforts to balance their books.

But the problems with the official line go deeper than this. Our current plan, is for the Eurozone countries to collectively borrow money and lend it to the weakest countries (Greece, ireland and Portugal), while structural and fiscal reforms take place. A classic international bailout -Plan A. This was always going to be a difficult plan that needed commitment in word and deed from both the net borrowers and the net lenders. However, it has received little from either. Now, with the downgrade of Italy's credit rating, it is no longer a viable plan.

The great kerfuffle last week at Germany's approval of the 2nd Greek bailout package misses the point completely. That Germany has agreed, at the 11th hour, to supporting Greece is no longer a useful decision. While the Germans (and others too it must be said) dithered and protested at Plan A, Italy's credit rating was downgraded, and now she is rapidly losing access to the markets. It now seems unlikely (although this reality has yet to hit home) that the Italians are going to be able to fund their portion of the 2nd Greek bailout. As a large country, their contribution is indispensible to the success of Plan A. But realistically, the idea that Italy is going to borrow money at 8%+ and then lend it to Greece at 3% while trying to reign in their own deficit is a fairy tale.

It now seems that Plan A is unworkable, it just hasn't sunken in yet. Plan B is going to be more chaotic. It could take the form of countries exiting the currency union (harmful to banks, diplomacy), a global bailout of indebted eurozone countries (unlikely), common borrowing (politically unpopular and diplomatically undesirable) or more robust action from the European institutions to support the currency.

Personally, I think Quantitative Easing is the way to go. This has been anathema to the Eurozone until now because of cultural issues about inflation -but inflation is the very thing we need. Inflation punishes money hoarders, relieves the indebted, forces the wealthy to invest/spend. It is the principle tool FDR used to lift America out of Depression and it is IMO the best solution to our current problems. If the Euro-area inflation rate was artificially boosted to around 4-5%, we would quickly see convergence between the core and the periphery. We would also see a lift in economic activity as money hoarders would be forced to spend or invest. Finally, it would deleverage the economy, relieving the indebted, the banks and even the sovereigns. Quantitative easing has the added advantage of also providing a large amount of cash as ready ammunition for the central bank to use to fight financial fires for a few years.

It will be 3 years next week since I advocated the use of inflation to fight the financial crisis. The UK and the US have followed my advice and recovered from what were far worse starting positions than Europe. However, paralysed by cultural sensitivities, Europe has refused to take its medicine. But now, the alternatives have become so terrible that I feel sure our next step (Plan B) will be Quantitative easing and inflation. Once we get on with it, we will start to wonder why we made such a fuss about it in the first place and caused so much hardship to Europeans. Stupidity, I believe.

Thursday, September 15, 2011

Letter to the Minister for Energy Re: Sale of ESB

Dear Pat,
I am writing to you about the ownership of the electricity grid and the sale of ESB. In particular I am urging decoupling of the grid from the ESB prior to any sale of the state utility.

Firstly, the creation of a competitive electricity market in Ireland is incomplete. ESB remains a dominant player, and its ownership of the grid allows it to influence investment decisions that effect the whole market. Our principle aim must be to create a competitive industry where other smaller companies get a fair crack of the whip. A large dominant player is neither economically sensible nor fair to the smaller competitors. Consumers, including employers, suffer from the resultant high electricity prices.

Secondly, I am extremely concerned that we will not gain the full value of the transmission grid in any sale if it is bundled with the ESB. Because the grid is operated by Eirgrid, it is therefore not an attractive investment for private investors. No sensible investor wants to pay full price for an asset they will not be allowed to operate. By selling the grid with ESB, I believe we are doomed to accept a price that is substantially below the true value of the grid. It can only be sold for full price if Eirgrid is sold along with the grid (although I definitely do no advocate this).

Therefore, both to improve competition and to safeguard the value of State assets, I urge you to decouple the grid from the ESB prior to any sale of the ESB.

Letter to the Minister for Transport

Dear Leo
I am writing to you about the proposed sell-off of the remainder of Aer Lingus. In particular I am writing to emphasise the critical importance of retaining effective State control over the landing slots currently in Aer Lingus' posession.

In my view, the part-privatisation of Aer Lingus with its slots was a mistake. The slots should have been removed from the company (decoupled) prior to the part-sale of the airline. We now face a difficulty in selling off the remainder of the company without endangering these vital assets of national importance.

Unlike the review group on State Assets, I do not believe we should trust blindly to the market to deliver high quality flight connections to Ireland. Indeed, our flight connections are currently the envy of other countries, primarily because, as an island state, we identified the crucial value of air travel at any early stage and developed it aggressively over the last century. If the market alone had dictated our flight connections we would have far fewer and far less high quality connections than at present. But as an industry of national importance we have actively collected high quality flight connections.

I read that it is the Department's intention to insert clauses into the sale of the State's shares to safeguard the landing slots. However, clauses such as this are ripe for failure: companies are liquidated, dismembered, they surrender assets -there are myriad ways in which such clauses can lose their effect.

Rather, I urge you, prior to any sale of Aer Lingus, to devise a "Sale-and-leaseback" agreement with Aer Lingus so that the state can regain ownership of the slots. Such an agreement will not be cheap, but it will be more than paid for by the subsequent sale and is the only way to guarantee our control over the foreign landing slots that successive governments have gathered. Frankly, they are vital to tourism, business and our globally integrated economy and their worth to the country far exceeds their market worth to the airline.

Otherwise, I guarantee you that the chinese or the oil sheikhs, or some such investor, with lots of money and poor flight connections will snap them up and deprive us of these vital assets. Countries that are less well endowed with flight connections, are better placed to appreciate their true worth. We have become complacent when we think we can simply sell our principle connections to the outside world.

Friday, August 12, 2011

the Bull will eventually leave the China shop

"In any set of data, the fact that is most undoubtedly true, beyond all need of measurement, is the mistake".


It has been a truism for over a decade now that the Asian tigers (especially China) are on the rise and the old Western powers are in decline. Certainly there is more than ample empirical evidence for this. China's growth rates have outstripped the West's by a multiple, they have industrialised vast areas and vast numbers of their population. They have made some (though not very impressive) advances on moving up the economic value chain, they have gained new technologies by means fair or foul (depending on who you listen to). The list is endless, but the narrative is the same -China vigorous, West sclerotic. The evidence seems to be overwhelming.

Yet it does not feel right. There are a limited number of doubters of this hypotheses (Chris Patten and Will Hutton for starters), but they are held out as rather fringe views. Nonetheless, there are questions to be answered about financial lending practices, poorly developed financial systems, political stability, income inequality, a credit boom and above all -demographic projections. The customary response to any such query usually takes the line that China is different, that it has a track record of defying Western maxims and that it is simply not possible to assess China by the same criteria as other countries.

It does not ring true.

In recent weeks there have been (very muted) articles warning about a high inflation rate, exposure to Western sovereign crises, the imminent peaking of the demographic dividend, the Chinese Government's unhappy choice between curbing inflation or killing growth etc.. Though it seems unlikely that these are the harbingers of a full-blown economic/political upheaval in China, nonetheless, it does not seem possible that the People's Republic can continue to defy gravity indefinitely.

Indeed I would go further than this. In my view, demographic input to China's development is being dramatically underestimated (ditto for Ireland during the Celtic Tiger years). Much of their growth story can be attributed to their (now reversing) demographics, a transitory benefit that will soon be militating against them. Besides demographics, a chronically loose monetary policy (which includes lending targets for banks and massive export subsidies in the form of currency manipulation) has supercharged the economy -but this too can only be a transitory advantage. Indeed the Chinese financial bubble might have burst long ago if it did not have the demographic trend underpinning it all along.

China, like Ireland has had very favourable demographics and a loose monetary policy which delivered consistently high, but ultimately illusory growth rates. Ireland came back to earth with a bump, but is too small to really damage the global economy. However, needless to say that an Irish style recession in China would really make waves in the global economy.

I feel sure that such a reverse is coming. If it came now while Western powers were still sorting out the financial crisis, then it would really put the tin hat on this recession. But regardless of when it happens, it will be a huge upheaval.

Final Fantasy

As bad as our self-imposed national economic disaster has been, nevertheless Ireland deserves credit for having acted. The sheer size of our banking losses meant that Ireland has been unable to hide from the truth that is still only emerging across the rest of the OECD countries -that cheap borrowing and living on credit will not be an option for many years to come.

Ireland and the Baltic countries are virtually alone in having made serious fiscal and household adjustments in recent years. Portugal and Britain have also started on this road but have yet to deliver significant results. However, the other developed countries, notably the United States, Japan and much of continental Europe seem to still be in denial about the paradigm shift that has occurred. While the PIIGS have been in the headlines, in reality lenders will soon be casting a sceptical eye on all State borrowings and from now on, balanced budgets and declining debt profiles will have to be the order of the day -like it or not.

The truth is that all countries need to move quickly to a fiscally secure footing, and only those with the most extreme situations (such as Greece) can receive help in achieving this.

Far from requiring a European response, this crisis requires much more widespread austerity -which falls mainly in the domain of domestic, even houshold policy. All of our European policy interventions to date have been aimed at staving off these uncomfortable but inevitable national tasks. The very stability of the Euro has been called into doubt over the manouevring of leaders to delay austerity. Nonetheless we will eventually have to face up to our deficits and the control over the process we still retain could evaporate at any moment. The crisis calls for much more concerted actions by all States to correct their budgets for next year. That is the fundamental truth of the sovereign part of this crisis, all the complexity that has been heaped on top of that is simply detail.

In these circumstances, a "double-dip" recession seems inevitable (despite what Mr Buffett says). We have been living beyond our means and no wizardry will substitute for what must come next -working harder for less.

Saturday, July 30, 2011

The land of the free

Without getting into the specifics of the US debt ceiling crisis, this is an appalling state of affairs from two perspectives.


Firstly, ideological differences about big government versus small government, though important and worth debating -should never be allowed to get in the way of balancing budgets. Regardless of whether you think the State should do a lot, or do a little, it seems obvious that it must pay its way. Day-to-day expenses should not be paid for by borrowing.


Unlike Ireland, where a bank and budget implosion has caused us to borrow heavily in recent years, the Americans seem to simply be indecisive. They want the State to pay for things, but they don't want to pay the state for doing them. Whatever economic efficiencies may be achieved from tweaking the model of economic governance in the US, they will not compensate the state for having to borrow on the markets to fund a lifestyle deficit.


Personally, I think it is outrageous that the richest people in America can get away with contributing so little, but whether or not the books are to be balanced by cuts or taxes is unimportant beside the crucial task of balancing them.


Secondly, the divisions over this philosophical issue are not only crippling the US' ability to balance its books, but in recent weeks it has been shown, that both sides of this absurdly overheated discussion are willing to bring the country to the brink (seemingly beyond the brink) of chaos simply to win the argument. This is not about economics. Economics is about tweaking governance to try and achieve the greatest prosperity. This artificial crisis, has been created to serve bitter political ends without regard to the economic consequences.


Watching this completely reckless argument, one can't help but feel the decline of America, and recognise that it is (mostly) self-imposed. Friends of the United States must watch on in acute embarassment at this abject failure to complete one of the most basic tasks of any democracy -to agree a budget. You would be aghast to see this in the most turbulent banana republic, but in democracy's greatest champion it's unthinkable.


The state's services must be paid for; when they named it the land of the free, they did not mean there's no charge.

Monday, July 25, 2011

A tax on advertising

I believe that we should levy a small tax on high-value advertising.


Advertising is unpopular and is generally regarded as a blight on our lives. Though low-end advertising like classifieds and small notices serve an important economic purpose; most high-end advertising serves no useful purpose. It exists to artificially inflate the price of and demand for products by exaggerating their intrinsic worth. This artificial inflation of demand does increase economic indicators, but does not actually improve economic wellbeing -indeed, it harms the economy by encouraging citizens to misallocate their own resources.


Apart from its economic impacts, there is also much work linking advertising and anti-social problems. Advertising has been linked with eating disorders, materialism, burglaries, feelings of inadequacy, depression etc.


Therefore, apart from raising (much-needed) revenue, there are sound economic reasons and indeed possible social benefits from reducing the pervasiveness of advertising. Therefore I would like to see such a tax levied.


It could be argued that advertising pays for much of our media. Nevertheless, at this time, when the VAT on newspapers and magazines has been reduced as part of the Governments jobs initiative, it seems like a perfect time to introduce such a measure. By introducing a levy on advertising as the VAT on newsprint is reduced, we will effectively be reorienting the income structure of news outlets, increasing the income derived from customers and reducing the income they derive from advertisers. In this way, news outlets might (a bit of a stretch) be inclined to print more quality material and eschew hollow articles about consumerist lifestyles and unnecessary products.

Friday, July 22, 2011

A plan to save Euros

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/123978.pdf



Well, I certainly can't remember a more anticipated EC. But ultimately I'm disappointed with this document.


The big headline outcomes are a new bailout for Greece, voluntary private sector involvement in Greece's debt crisis is to be pursued, extension of the loan-terms for all 3 program countries, as well as a loosening of EFSF rules to allow it provide support to countries that are not in a program.




Extending the terms of the loans was regretfully necessary. The idea that the program countries will be going back to the markets in the next couple of years has lost all credibility. This much I concede was unavoidable.

The involvement of the private sector is a good idea (if it is done with a moderate hand). European Governments (and especially the program countries) are financially exhausted and it is important to ease the pressure somewhat by shifting some of this assumed responsibility back to the original risk-takers. Besides, after 4 years of turbulence, anyone still holding Greek bonds is probably a speculator anyway and it is highly unlikely that any truly fragile financial institution is still exposed to a Greek default. We will probably find that a moderate default will have very little financial impact. However, I find the part of the document dealing with private sector involvement vague. It states that private sector involvement will be voluntary, citing willingness on the parts of investors to roll over Greek debts. But it is doubtful that they are volunteering to do anything greater than this. Rolling over debts is well and good, but frankly it doesn't really relieve the Member States.


However, my greatest problem with the deal is in its loosening of the rules of the EFSF/ESM. The idea of lending to countries that are not in a recovery program seems obviously silly -all the expense and none of the reform -who could argue that's a good idea? A reform program is the necessary exit strategy from providing support to Member States. It is indispensible. If Member States have to be bailed out, then we need to map a route for them to stand on their own feet again, or else we will end up with a proper transfer union.

I doubt that will ever be allowed to happen, neither the lenders nor the borrowers want it. So it appears to me that this is some sort of a PR stunt to reassure markets that IT and ES will be allowed access EFSF funding without having the humiliation or terms of a bailout. These countries may gain some short-term, pre-crisis credibility because of the access to credit this brings, but noone could argue this would be a good idea if we decided to do it in practice. Not only would we be sacrificing the reforms that rightly come with access to bailout money, but this change could (and I stress could) create expectations of the EFSF being used as a mechanism for some sort of transfer union.

The whole idea of the ESM was to create a mini-IMF for the Eurozone, bailing out countries on the condition of mending their credit positions. This proposal nominally drifts way beyond this. This is not rehabilitation, it is artificially cheap credit -the source of all our woes. Taxpayers may be willing to assist their neighbours to turn around their situations, but they will quickly squash any notion of paying for the indebted countries to carry on with business as usual. Frankly I'm surprised it has been even made it onto this document.

There is also provision for the ESM to dabble in secondary markets. This could be a very useful policy tool if it is used to involve the private sector in debt reductions, but seemingly it is only permissible with the agreement of each MS and the ECB. One must wonder then why it was necessary to include it in this document if it can only be used when everyone is in agreement -more spindoctoring?


Finally, the new Greek bailout. Unavoidable in my opinion, but it has to be properly funded. While the document promises big on the involvement of the private sector, I have already expressed some doubts about this. I will go further. The document also calls on the IMF to participate in the new bailout. I do not think it is incredible to suspect that the IMF may decline to involve itself without more private sector involvement. That would be a quite incredible humiliation for everyone involved, but right now, I would not rule it out.


So my verdict is that the only people that got what they wanted were the Irish. The concessions on our interest rate and also on the term of our loans, alongside the modest burning of financial bondholders, fiscal austerity and the gradual recapitalisation of our banks means that Ireland is now in a much better position than 3 years ago. Though it is not smooth sailing from here, it is likely that Ireland will begin to make a recovery in the next 2 years and recover strongly soon after. Doubtless the banks will still require more capital (even though we have sworn on our honour that we tested them properly this time), but the whole mess seems more manageable these days. Economic reforms scheduled under our bailout deal will go further to getting us out of Dodge.


But the concessions to the program countries on the terms of their loans, does not in any way compensate for the lack of hard details on the Greek bailout, or the fudging of the role of the EFSF. Though markets have reacted well today, I am not satisfied with this deal and fear it is based substantially on wishful thinking and fuzzy economics. Frankly, we need to cluck at this text and tell them all to try again.


Markets are not the measure of these deals. Markets rise and fall on the self-interest of investors. Rising markets in response to more public stimulus is unsurprising -not a true yardstick of the effectiveness of policy.











TEXT of the Deal:

 
Greece:
1. We welcome the measures undertaken by the Greek government to stabilize public finances
and reform the economy as well as the new package of measures including privatisation
recently adopted by the Greek Parliament. These are unprecedented, but necessary, efforts to
bring the Greek economy back on a sustainable growth path. We are conscious of the efforts
that the adjustment measures entail for the Greek citizens, and are convinced that these
sacrifices are indispensable for economic recovery and will contribute to the future stability
and welfare of the country.
 
2. We agree to support a new programme for Greece and, together with the IMF and the
voluntary contribution of the private sector, to fully cover the financing gap. The total official
financing will amount to an estimated 109 billion euro. This programme will be designed,
notably through lower interest rates and extended maturities, to decisively improve the debt
sustainability and refinancing profile of Greece. We call on the IMF to continue to contribute
to the financing of the new Greek programme. We intend to use the EFSF as the financing
vehicle for the next disbursement. We will monitor very closely the strict implementation of
the programme based on the regular assessment by the Commission in liaison with the ECB
and the IMF.
3. We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum
extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a
grace period of 10 years. In this context, we will ensure adequate post programme monitoring.
We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments
facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost. We
also decided to extend substantially the maturities of the existing Greek facility. This will be
accompanied by a mechanism which ensures appropriate incentives to implement the
programme.
4. We call for a comprehensive strategy for growth and investment in Greece. We welcome the
Commission’s decision to create a Task Force which will work with the Greek authorities to
target the structural funds on competitiveness and growth, job creation and training. We will
mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek
economy. Member States and the Commission will immediately mobilize all resources
necessary in order to provide exceptional technical assistance to help Greece implement its
reforms. The Commission will report on progress in this respect in October.
5. The financial sector has indicated its willingness to support Greece on a voluntary basis
through a menu of options further strengthening overall sustainability. The net contribution of
the private sector is estimated at 37 billion euro.
underpin the quality of collateral so as to allow its continued use for access to Eurosystem
liquidity operations by Greek banks. We will provide adequate resources to recapitalise Greek
banks if needed.
1 Credit enhancement will be provided to
1
debt buy back programme will contribute to 12.6 billion euro, bringing the total to 50 billion
euro. For the period 2011-2019, the total net contribution of the private sector involvement is
estimated at 106 billion euro.
Taking into account the cost of credit enhancement for the period 2011-2014. In addition, a 
Private sector involvement:
6. As far as our general approach to private sector involvement in the euro area is concerned, we
would like to make it clear that Greece requires an exceptional and unique solution.
7. All other euro countries solemnly reaffirm their inflexible determination to honour fully their
own individual sovereign signature and all their commitments to sustainable fiscal conditions
and structural reforms. The euro area Heads of State or Government fully support this
determination as the credibility of all their sovereign signatures is a decisive element for
ensuring financial stability in the euro area as a whole.
Stabilization tools:
8. To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to
increase their flexibility linked to appropriate conditionality, allowing them to:
- act on the basis of a precautionary programme;
- finance recapitalisation of financial institutions through loans to governments including
in non programme countries ;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the
existence of exceptional financial market circumstances and risks to financial stability
and on the basis of a decision by mutual agreement of the EFSF/ESM Member States,
to avoid contagion.
We will initiate the necessary procedures for the implementation of these decisions as soon as
possible.
9. Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising
to euro area Member States from their guarantees to the EFSF.
Fiscal consolidation and growth in the euro area:
10. We are determined to continue to provide support to countries under programmes until they
have regained market access, provided they successfully implement those programmes. We
welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate
our strong commitment to the success of these programmes. The EFSF lending rates and
maturities we agreed upon for Greece will be applied also for Portugal and Ireland. In this
context, we note Ireland's willingness to participate constructively in the discussions on the
Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured
discussions on tax policy issues in the framework of the Euro+ Pact framework.
 
11. All euro area Member States will adhere strictly to the agreed fiscal targets, improve
competitiveness and address macro-economic imbalances. Public deficits in all countries
except those under a programme will be brought below 3% by 2013 at the latest. In this
context, we welcome the budgetary package recently presented by the Italian government
which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in
2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and
structural area. As a follow up to the results of bank stress tests, Member States will provide
backstops to banks as appropriate.
12. We will implement the recommendations adopted in June for reforms that will enhance our
growth. We invite the Commission and the EIB to enhance the synergies between loan
programmes and EU funds in all countries under EU/IMF assistance. We support all efforts to
improve their capacity to absorb EU funds in order to stimulate growth and employment,
including through a temporary increase in co-financing rates.
Economic governance:
13. We call for the rapid finalization of the legislative package on the strengthening of the
Stability and Growth Pact and the new macro economic surveillance. Euro area members will
fully support the Polish Presidency in order to reach agreement with the European Parliament
on voting rules in the preventive arm of the Pact.
14. We commit to introduce by the end of 2012 national fiscal frameworks as foreseen in the
fiscal frameworks directive.
15. We agree that reliance on external credit ratings in the EU regulatory framework should be
reduced, taking into account the Commission's recent proposals in that direction, and we look
forward to the Commission proposals on credit ratings agencies.
16. We invite the President of the European Council, in close consultation with the President of
the Commission and the President of the Eurogroup, to make concrete proposals by October
on how to improve working methods and enhance crisis management in the euro area..


COUNCIL OF
THE EUROPEAN UNION
Brussels, 21 July 2011
STATEMENT BY THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA
AND EU INSTITUTIONS

We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial
stability of the euro area as a whole and its Member States. We also reaffirm our determination to
reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the
sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the
rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro
is based on sound economic fundamentals. But the challenges at hand have shown the need for
more far reaching measures.
Today, we agreed on the following measures:

Wednesday, July 20, 2011

Signs

Signs

It's a rotten summer. Cold, wet and relentless. Earlier in the year (March), after a 2 day downpour, there was a sudden die-off of all the plants. Everything from the grass to the trees and bushes all suddenly died off, with their leaves turning brown and whole plants perishing in many instances. They still haven't recovered.

I remember a very similar thing occured in 2007. A storm came and almost immediately afterwards, the trees and grass all became burnt and shrivelled. There followed a terrible summer.

It seems that this formula is repeating itself this year. I can't claim to understand the mechanics of it. Maybe the plants know that there's a bad summer ahead, or perhaps some sort of acidic content in the rain kills off plant life and this in turn effects the weather (we are still quite ignorant of how vegetation effects the weather, though it's an area of increasing interest).

Either way, I am now going to watch for this "sign" in future.

Friday, July 15, 2011

NOTW-News International-Murdoch scandal

I must confess, I have no particular antipathy towards Murdoch. While I think his anti-monarchy, anti-EU line has damaged British politics and he is pretty craven to Chinese interests -nonetheless he is a fairly restrained media mogul.

However, no democracy should tolerate one person or organisation controlling large chunks of the media. It robs us of the pluralist discussion which is the greatest strength of a democracy.

Though noone can know for sure, it looks very likely that these scandals are not about phone-tapping at all. Over the last number of years there has been a series of clashes between the murdoch press and the British establishment, ranging over superinjunctions, phone-tapping, paparazzi tactics, spying on royals etc.. The pattern is the same and there has been a gradual, but perceptible increase in Murdoch's struggles to get his way with the British powers that be. The only conclusion that can be drawn is that somewhere in the British establishment, a decision has been made to clip his wings a bit and reduce the influence of News International on British politics. The struggle over superinjunctions, phone-tapping, police bribes etc. appear to simply be theatres for a broader struggle.

The heat has clearly been turned up on this struggle in recent weeks, and the most explosive revelations have only come recently. The phonetapping of a teenage murder victim, bereaved families of war casualties etc. is public relations dynamite. So much so that Murdoch has had to close one newspaper and postpone his takeover of BSkyB.
But the real question is whether it will rest there? Will this movement against press centralisation carry forward to see legislative controls created for media ownership?

What is really needed is for a special competition regime to exist to ensure pluralist ownership of private media outlets. I have not heard anyone raise the possibility yet, but MPs and the public are furious and it is difficult to imagine such a proposal failing if it was put before the House of Commons tomorrow.

I certainly do hope that such a regime is created, it would be a massive boon to British democracy. A generous transitional period could be permitted to allow Murdoch exit with his wealth intact, but ultimately, it is vital that no person or organisation be permitted to control more than a small fraction of the media (apart from the BBC).

I wonder how Denis O'Brien feels about all this?

Thursday, July 14, 2011

Paying the Piper

I am a europhile. I am committed to good relations between European neighbours, as well as cooperation in areas of mutual benefit -especially the Single Market and all of its offshoots.

However, I have never been seized by the Euro. Though I did not really comprehend the difficulties that could arise from a common currency (now laid bare for all to see), there was enough negative commentary to assure me that it was far from a secure venture. Most of all, the benefits of having a stable currency regime always seemed overhyped and the whole thing seemed to have been thrown together with limited vision for how it would work in practice.

Which brings us to the present day. I am living in a country which has really borne an incredible burden on behalf of this common currency. When the Irish banks began to implode, the ECB (a European institution with a mandate to safeguard Eurozone interests) forbade the collapse of any banks in Ireland -regardless of how insolvent they were. The cost of the necessary support however was to come from the Irish State and Irish taxpayers.

While I have no objection to the ECB looking after the European interest and having the power to make decisions in the interest of the currency -this becomes problematic when individual Member States end up paying the bill (in this case -a disastrous bill which has plunged us into 3 years of depression with no recovery in sight). It seems obvious that the people who make the decisions should bear the consequences. If the Eurozone has the power to make us support the banks, then the Eurozone must pay for this support. If Ireland must pay for the bailouts then the Irish authorities must have the power to decide their own policy. But instead we have a clearly broken model where the ECB decides what's best for the eurozone and individual Member States (in this case, one of the smallest Member States) bear the burden.

Since we have been forced to seek IMF/EZ assistance, we have heard a great deal from Eurozone media-hacks about "he who pays the piper calls the tune" -i.e. swingeing reforms and cuts must follow from their assistance. Apart from the bloody-minded arrogance entailed in this dismissal of our quite extraordinary cuts to vital services, there is a fundamental hypocricy. We were never allowed to call the tune when bailing out the banks, but we were forced to pay. Now, in our national bailout talks it is the same people calling the tune, and it is debatable how much they are really contributing to our recovery.

It is impossible for us to leave the Eurozone right now, but once recovery happens (if it ever does), we should leave at the first opportunity. I am still a committed europhile and wish us many years of happy cooperation with our european partners in the EU proper -but the Eurozone is not a cooperative, it is clearly a disfunctional organisation, and no place for a small Member State.

All this austerity has been for nothing.

Wednesday, July 6, 2011

A simple tweak to create representative Governments.

A discussion topic I just kicked off on a matter of national concern. I think this gets to the heart of the poor performance of Irish democracy.

http://www.wethecitizens.ie/talk/article/representative_government_coalitions




Currently, the Dáil elects the Taoiseach who appoints a Government from amongst his/her own followers. As Taoisigh are chosen by the Dáil on partisan lines, they then proceed to select Governments on partisan lines, reinforcing tribal politics. Instead of forming a Government that is representative of the Dáil (and therefore of the people's choices at General Elections), we end up with Governments of one tribe or another, representing only a segment of Irish society. The entrenchment of partisan politics means Dail debates focus on highlighting divisions between the parties rather than the details of the issues before the house.

I propose that the Taoiseach's power to select the Government should be subject to the results of the General election (or more precisely, the make-up of the Dáil). The Taoiseach, when presenting a Government to the Dáil should have to secure approval from a supermajority (80%) of Deputies, or if he/she is unable to secure this supermajority, then the Government should be selected directly by the Dáil in a Proportional Representative (PR) vote.

The advantages of this would be that the Government (the principal decision-making organ of the State) would be more representative of the Dáil as a whole and therefore of the choices made by the electorate. Taoisigh will have the chance to form a representative Government(exercising some choice as to what would be a workable team), but if the Dáil feels that the Taoiseach's selection does not represent the broad opinions of the Dáil (i.e. more than 20% of Deputies are aggrieved by the make-up of the Taoiseach's proposed team), then they can directly select the Cabinet. In practice, there would always be a cross-party deal to allow the Taoiseach to win the supermajority vote, but not without making concessions to minority voices, and under the threat of having the power to form the Government taken from his/her hands if he/she fails to build a broadly based coalition. A baldly partisan Government would be impossible. Broadly based coalitions would represent the people as a whole, taking decisions in the general interest, being less indulgent of underperformance by their colleagues, and less beholden to sectional groups. Cooperative deliberation instead of sectional fighting would begin to define Dáil and Government debates. The current preference for backbiting over deliberation would lose its appeal if the Government was representative of the Dáil's make-up.

The principal disadvantage would be that we would be sacrificing the position of strength that has been invested with every Taoiseach since the 1937 Bunreacht. Our 1937 constitution (as was the trend in 1930s Europe) focused on creating a strong individual at the heart of the State, to be in a position to direct all the resources of the State to combat specific problems, especially threats to security. This principle has served us well (though in the rest of Europe it was a disaster), and the Taoiseach has always had the clout to mobilise any resources available to combat security threats. By depriving him/her of the power to dominate the Dáil, we will lose the ability to focus the State's efforts on a particular priority issue. We cannot have deliberative democracy without sacrificing authorative Taoisigh.

Monday, July 4, 2011

Household V. Business debts -policy implications

http://www.centralbank.ie/polstats/stats/cmab/documents/ie_table_a.6_loans_to_irish_residents_-_outstanding_amounts_(incl._securitised_loans).xls


In a sea of confusing data, a significant trend is going largely unreported. With our national fixation on the appalling accumulation of public debt, we are largely ignoring the even greater reductions in private debt held by Irish individuals.

In the last 12 months, over 50bn euros of private debt has been repaid by irish individuals (18% of total private indebtedness). This reduction in debt is even larger than the accumulation of debt by the State and shows that Ireland is indeed mending its position -albeit slowly and with immense pain. This builds on reductions in previous years so that our levels of private indebtedness have fallen from 348bn in 2008 to 255bn today -almost a third of all private debts have been repaid or settled in the last 3 years.

There is hope then that pretty soon, private individuals will have run down their debts and may begin to divert their income from debt repayment to investment, consumption or saving -any of which will be beneficial to our economy and/or banks. If 50bn euros a year is being found for debt reduction, then once our debts fall to a lower level we can expect this flow of money to be diverted back to the real economy, providing a welcome lift to our slumped economy.

However, the picture is not as simple as all that. Within the figures for debt reduction, it is clear that it is businesses and not households that are repaying all this debt. Despite bleating from the faux-tycoons that seem to have taken over all media in the last few years, it is clear that Irish businesses are not just profitable, but are highly profitable and increasingly debt free.

Household indebtedness:    Peak 178bn     Today 165bn  (7% reduction)
Business indebtedness (excl. banks):  Peak 170bn     Today 90bn  (47% reduction)

It is clear from these figures that although private debt reduction continues to happen at an astonishing rate, household indebtedness has hardly fallen at all through the years of recession, and has actually grown as a proportion of income. Given this stubbornly high level of household debt, all talk of a consumer recovery next year (for instance by cutting VAT to high-end goods) is misplaced. Our recovery simply cannot come from a return to the shops as advocated by Michael Noonan -and even if it could, it is foolish of him to encourage highly indebted households to spend more.

Based on these trends, it seems likely that the recovery will happen in business, primarily business that does not depend for its livelihood on selling to Irish households (especially exports). As they run down their debts, businesspeople will increasingly look for alternative uses for their income, whether investing in new fixed assets, expanding their businesses, taking on new staff or saving their cash in financial products. All of these outcomes would be good for the economy in the long run, but in the short run we desperately need to encourage business to hire and save -alleviating our unemployment and banking crises respectively.

Unfortunately, my hunch is that such efforts will fail and business will instead concentrate on upgrading assets and expanding markets. Though this is good, and will stand to us in future, it is not our immediate requirement. This "jobless recovery" seems inevitable based on these figures and the general business outlook and means that we are now facing a situation where business is likely to boom in the near future while households face years of austerity and unemployment.
Which brings me to an unpalatable problem, the inequitable burden of taxation on households by comparison with the low rate of Corporation Tax payable by business has always had its detractors, however now it seems that we are facing a bleak period of rising inequality where a debt-free, lightly-taxed and highly profitable business sector will be coexisting with households plagued by indebtedness, public service reductions, and a likely increasing tax burden.

The obvious solution (unfortunately no Irish politician can even mention this without inviting scorn) is to increase business taxes and use the funds to alleviate the positions of households to allow for a more balanced recovery where households would be given space to reduce their debts to the same extent as business. Given the depth of our problems it is vital that all sections of society bear a share of the necessary burden of adjustment. While we can be relieved that businesses have found the cashflow to reduce their debts, we should be extremely alarmed that in spite of years of austerity, Irish households have not found the surplus funds to reduce their indebted positions. Their should be red warning lights flashing all over policy circles to sound the alarm that despite a consumption slump, households' position has hardly improved at all. We urgently need to rebalance the burden of adjustment (particularly that of taxation) so that our blessedly vigorous businesses start to contribute to our recovery in line with the contributions already made by households.
However, in Ireland, we have developed an unhealthily debate-free credo of low Corporation Taxation. Even though it is now clearly in our economic interest to raise Corporation tax, to promote balanced growth, this topic is off-limits and instead the Government has just delivered a tax cut to restaurants and newspapers in some sort of bizare plan to create employment.

We are rapidly reaching a point where Corporation Tax must be increased or inequality will spire alarmingly. We need to treat this tax rate as it is -a simple revenue raising measure with economic import- instead of the Holy Cow we have allowed it to become.

The situation has not been helped by the invasion (for invasion it is) of a new proto-business commentariat, feeding an industry of armchair tycoons and self-congratulatory professionals. Business and enterprise are now viewed not as mere economic activities, but increasingly also as moral virtues and ends in their own right. While I find this new romantic vision of the world of business (espoused by a host of glitterati who could not possibly be more remote from real business -including comedians, politicians, academics, chiefs of Semi-State bodies etc.) to be somewhat less harmful than other crude ideological prisms which we have popularised over the years to explain a frustratingly complex world, it would nonetheless be extremely harmful if we allowed it to get in the way of the necessary decisions regarding our economic recovery. We cannot allow the burden of adjustment to fall exclusively on households, which clearly are unable to improve their desperate positions despite greatly reduced consumption patterns. High levels of debt interest repayment, increased household taxes and service cuts are obviously depriving them of the ability to run down their debts -all the while as business escapes such measures and is increasingly debt-free. That is a recipe for eventual disaster as household debt is every bit as unsustainable as business debt was at the outset of the crisis.

We need to bypass this body of mindless ideology that has taken over the debate about business taxes and form policies with recovery -not the Sindo- in mind. We cannot allow ourselves fall hostage to blowhards who evaluate problems based on ideology rather than substance. Noone can be spared, not even the well connected and (depending on your views) not even the virtuous.

Thursday, June 16, 2011

How to burn a bondholder

Michael Noonan's announcement of a modest burning of senior bondholders has obvious symbolic importance and also some significant economic benefit to Ireland. But surely he will run up against the ECB as previous attempts have done?
However this may be a good strategic moment to seek to share losses on bondholders. The increasingly tense standoff between Greece and the Eurozone financial authorities over stalled austerity plans is beginning to change what is possible at EU level. The ECB (and other authorities) are desperately seeking leverage over an increasingly defiant Greece. All responsible policymakers are (rightly) alarmed at the possibility that Greece might begin to act unilaterally in a beggar-thy-neighbour approach which could return us to the precipice of late 2008. Certainly, Greece's self-interest seems to dictate such a move as any chance of the current plan working is remote without some level of default agreed or otherwise. If this is the case, an agreed default, coupled with a continuing austerity plan is the desired outcome. But the bloody-minded Greek Street and the browbeaten Greek legislature are in poor form for pursuing an agreed path which will inevitably require a heavier debt burden and greater austerity than a unilateral plan.
In this climate, Eurozone authorities are searching for leverage over Greece to get them to stick to an agreed path. They are brandishing sticks at Greece, but lack carrots. Rewarding Ireland for its austerity to date would be an effective carrot to encourage Greece to return to the agreed path. So far, Ireland's commitment to a common approach to the crisis has not been acknowledged in policy concessions. In particular, burning the bondholders (especially those of Anglo) would have a small economic benefit, but would also have a huge political and morale impact on this beleaguered nation. The Irish have long since become fed up with hearing about cuts to the blind and the sick so that fatcats can recover their failed investments.
Possibly, the need to encourage Greece won't be enough to make the ECB concede this small bondburning exercise to going ahead, but this is the right moment to press the case. We have at least some chance of persuading them and it's not a gigantic amount. A 3bn default simply cannot destabilise Europe's banks -can it?

Wednesday, March 9, 2011

The new Government

Looking at the new government, there are few surprises. Most of the main appointments have been well flagged over recent days.

Michael Noonan's installation in Finance is a real coup for FG, even if some of the functions have been hived off into a new ministry under Brendan Howlin. Actually, I'm opposed to seperating Public Service management from Finance as it was the previous seperation of these functions under Bertie Ahern that gave rise to a series of damaging pay agreements.

However, after this, it must be said that Labour has done fairly well out of the partnership deal. Of the significant ministries, they have roughly half of the relevant posts, even though FG have twice as many seats in the House. Labour control such titanic departments as Social Protection, Education, Public Expenditure, Energy, and Trade. Noone can call that a bad deal for Labour and indeed they have negotiated well. I particularly hope that Ruairi Quinn will use his time in Education to make some reforms to the inequality of the education system.

Justice, Environment, Finance, Enterprise, Health, Transport and Agriculture are the main ministries on the FG side (in no particular order). They are all areas that FG have targeted for structural reforms so we live in hope that this will now happen.

In particular, FG have radical ideas about reforming the health service: Ideas which I am sceptical of. Their support for a move to the so called Dutch System is misplaced in my view. By putting private insurance companies at the centre of decisions on resourcing we must consider how effective these companies are at present in managing costs. All evidence is that they are even less effective than the HSE at managing the costs of medical provision. Furthermore, by leaving it to these bodies to decide on resource allocation we are paving the way for the closure of more remote less profitable hospitals, especially on the West Coast. That would be an undesirable outcome as health provision on the West Coast is already absurdly sparse.

In Transport, FG has long advocated the privatisation of the State bus operators, and indeed I would agree with this. Though I think Bus Eireann provides an excellent service, there is scarcely a case for the State to maintain a bus operator of its own. Especially when the contract for PSO routes are funded seperately. The new NTA will need to be reformed if this is to be a success.

FG's control of Environment, and specifically, the appointment of Phil Hogan to this position does not bode well IMO. FG's 5 point plan, in the section penned by P Hogan, committed to reforming Local Government and devolving power to it. However, Local Governments in Ireland are too many, too corrupt and too ineffective to be reformed. There needs to be a discardance of the scalpel when dealing with these layers of ensconced entitlement. Instead there needs to be a fairly brutish reduction of their numbers and role, and especially of the money available to them. However, Phil Hogan is scarcely likely to do this. I wish him well in his attempts to reform this monstrously overweight layer of unnecessary featherbedding, but I believe he will not achieve anything worth doing.

The vote happens tonight.

Saturday, March 5, 2011

The turning of the tide?

For all the hackneyed superlatives that have been thrown around this election, allow me to add one more: Since the foundation of the State, probably no Dail has had so many superlatives used to describe it.

The challenges are unprecedented
The electorate is near-revolutionary
The expectations are impossible
The counterparties are intransigent
The situation is desperate
The situation is insoluble

Frankly, expectations are simultaneously so high and so low that the only thing that is certain is a further polarisation of our polity now that we have lost the unifying hatred of the previous government.

This blog will follow developments in politics, society and whatever else flies across my screen and interests me.