submission to the EU affairs committee about the fiscal treaty

I would like to submit the following in response to your appeal for submissions on the EU fiscal treaty.

Broadly I welcome the treaty itself, but I am extremely sceptical it will prevent future crises and am concerned it will give a false sense of security from the very serious problems which remain in the Eurozone. These problems are I believe unsolvable unless we either leave the Euro or agree to much deeper and more unpalatable common reforms.

Firstly, a body of rules on public debt and deficits is a good idea for each individual Member State (MS). Therefore, as a framework agreement for each MS to implement such rules, the new treaty is I believe a good thing for the Union as a whole. Having sustainable public finances is unarguably a good thing.

However, the calculation of structural deficits is something less than a science, and fiscal rules proscribed by an international treaty are unnervingly inflexible. In cases of extreme adjustment, we will be dependent on our partners to allow us to exercise fiscal room for manoeuvre. I do not doubt that it will be possible to secure such consent if necessary, but it is nonetheless a power over our budget that should not be taken lightly. Implementing this treaty will pose challenges for all MSs -including those who currently enjoy benign conditions. There will undoubtedly be moments when we regret such a significant commitment and even bend the rules for expediency -but in the long run it is a good agenda.

My main problem with the treaty is that I believe it will not fix the much deeper problems of a common currency. I believe this treaty is the result of an incomplete interpretation of the source of the crisis and is addressed to some of the symptoms of the problem rather than the problem itself. It is a stricter form of the ineffective Stability and Growth Pact, which was never implemented, but which in any case would not have averted the crisis that has recently unfolded.

Without embarking on the huge task of summarising the crisis, let me make a few key observations about the crisis before examining how this treaty is likely to impact on future such crises.

This crisis was primarily the result of having a single monetary policy across a diverse union. In every MS, monetary policy was either too tight or too loose. In central Europe, where a decade of sclerotic growth prevailed in recent years, monetary policy was too tight and did not assist in generating activity. However, the problem was far more obvious in the less populated periphery countries, where an overly loose monetary policy led to a binge of debt. In Greece and Italy, this binge was primarily in the public sphere. Taxation collection slid as expenditure rose. The State had access to cheap money and used it. In Ireland and Spain, the overly loose monetary policy fed into private demand and especially construction loans.

Though these problems were different, it is important to recognise that they stem from the same problem of inappropriate monetary policy in individual MSs. The sluggish countries were reducing the capital available to themselves when they needed it most, and instead lending it to the countries that needed to reign in their borrowing -in effect the system made everyone's problems worse. This was predicted by economists long before the currency came into being and it seems their models have been tragically accurate.

As the crisis broke, credit dried up and in Greece this resulted in a crisis in the State finances. In Ireland it led to a crisis in the banks and also amongst individual borrowers who had overborrowed on the strength of a property bubble.

So how does the fiscal treaty propose to fix the problem of a one size fits all monetary policy?

Quite simply it does not. It proposes to control public borrowing only. This will prevent a future Greece. But it will in turn spawn a series of Spains and (Saints preserve us!) a string of Irelands. The fiscal treaty ignores the problem of inappropriate common monetary policy and instead focuses on the symptom of this problem in selected countries -i.e. public largesse. Meanwhile, private lending and borrowing is to be merely monitored, without further restrictions. Indeed, capital restrictions would be anathema to EU law.

The notion that more disciplined countries will not succumb to cheap money in the future when their monetary policy is inappropriately loose is naive at best -Racist at worst. The narrative of the virtuous countries versus the unvirtuous does nothing to explain the crisis and even shames us all. In reality we are fooling ourselves and setting ourselves up for a cycle of boom and bust where private debt bubbles will occur in country after country.

The fiscal treaty cannot easily be extended to cover the private sphere. MSs may agree to limit their indebtedness, but in market economies, the State does not have any useful power to bind private individuals from borrowing from or lending to one another. They can only manipulate the overall level of money available to financiers -i.e. monetary policy. But monetary policy is of little use in the Eurozone, because the money made available to sluggish countries will immediately be lent to the booming countries, making their situation worse.

Therefore, (without trying to be intentionally stark and provocative), I believe the Eurozone has only 4 options:

-A boom and bust cycle where individual MSs all endure periodic collapses, austerity and reform. No country can resist the allure of cheap money and even the "virtuous" will succumb.
-A common budget, issuing common debt and spending without regard to MS borders.
-A move by MSs to a centrally planned communist economy where all financial transactions are controlled by the State and dictated by national economic conditions.
-A dissolution of the Eurozone and a return to free floating currencies.

Given such horrific options, I must confess I favour a controlled exit at the first available opportunity. I write this as a committed Europhile and a great believer in the European project as both an instrument of prosperity and of peace. However, the Euro is not a workable currency, and this treaty does nothing to address this. The Euro is in fact going to destroy European unity and this completely inadequate treaty only serves to highlight the incomprehension of European leaders of the problems that are built in to monetary union.

In summation, I commend the treaty, but nevertheless advocate a withdrawal from the common currency at the earliest opportunity. It is particularly difficult to reach this conclusion when I am aware of how much money and sacrifice Ireland has sunk into retaining Euro membership in recent years -but the alternatives are unthinkable.

Whatever advantages the currency brings (e.g. attracting international investments, reduced transaction fees) is entirely unjustified when you consider the costs of remaining part of it. Noone will want to invest in Ireland while its currency is as inherently unstable as it is now apparent the Euro is. Noone will have faith in a currency that is doomed to boom and bust. Exit is the only sensible strategy.
sincerely
Ger

quantitative easing has been happening unannounced

This blog has previously spoken in favour of Quantitative Easing in the Eurozone.

I am therefore glad to observe that since then, the ECB has embarked on a massive money printing program, lending this money to financial institutions at an ultra low 1% rate.

Though they are not calling this Quantitative Easing -that is exactly what it is, and the relative stability of the markets in the face of what seems like a strong possibility of a Greek default, is testament to the availability of liquidity in the system. This is entirely necessary for the next few years until the burden of debt has shaken down and it is clear who owns what.

Letter posted to Senators prior to a debate on jobs 16/1/12

Dear Senator,
I am writing to you on the issue of jobs. I would like to see a rigorous and more determined effort to create jobs in our economy. Given that all of our budget cuts in recent years have been almost completely consumed by the increase in social welfare payments, it seems that job creation is not only vital for the unemployed, but for the country as a whole.

FORGET ABOUT RETAIL/DEMAND
The way I see it, jobs cannot come from a demand side boom. Talk of restoring old levels of consumption and investment is pie-in-the-sky, while Irish citizens are so burdened with debt and fearful of financial upheaval. I believe all fillips to the retail sector are consequently a waste of time. The sad truth is that we have all consumed and invested far more in the last decade than we were able to afford and we must pay back some of the borrowed money for this previous consumption and investment before there can be a rise in domestic demand. While there are things individual retailers can do to boost their own position, Ireland's recovery simply will not be led by retail -that is a sad but inescapable fact.

COMPETITIVENESS/EXPORTS
Instead, we must focus on competitiveness and the boosting of our ability to trade and export. Our hands are further tied in that we cannot afford to spend any money on job creation, and therefore must focus on reforming our economy (starting with legislation) and also directing our capital budget to those things which will most improve our competitiveness. By competitiveness, I do not mean (as Chambers and IBEC usually plead) lower business taxation or lower workers rights, but reforms tackling unproductive input costs including insurance premia, rents and energy.

LEGAL COSTS/INSURANCE COSTS
Reforms of legal services to reduce costs is a very good place to start as this is a significant burden on businesses, the State and the citizen at large through their insurance premia. Though I have no wish to malign any group working in the legal field, it cannot be denied that this expenditure is out of all proportion to the service provided by our judicial system. The publication of the legal services Bill is an important start, although it unfortunately delays a number of key actions while reports and further legislation is drawn up. I feel this is a mistake, we should include a mandate for the new legal services regulatory body to begin licencing educational institutions and preparing for the introduction of dedicated conveyancers immediately. Furthermore, we should look to urgently reduce the number of remand cases and the unnecessary length of delays caused by remanding of cases. Having courts sit for longer would be a good place to start.

TRANSPORT COSTS
Reforms to transport services will also do much to boost competitiveness. The excessive rents for commercial and residential properties in parts of the country (especially Dublin) is driven primarily by the absence of a good transport system. If it was possible for people to move and commute freely, the concentration of all development in the capital would be reduced and rents (and consumables) would equalise across the region. Businesses would be able to avail of a wider selection of staff and suppliers, consumers/workers would be able to avail of a wider selection of retailers/employers. This would have a dramatic effect on the costs of business and living (even larger than that of legal services). As rents gradually equalised, the spending power of businesses and consumers would rise allowing for either increased consumption, investment or debt repayments (all are to be welcomed).

For this reason, I believe we have made a mistake to refocus the capital budget on schools and construction work. Though schools are obviously necessary, their construction should not be prioritised as a job creation measure. By building schools, we may create more immediate jobs, but once this construction work is complete, the job boosting effect is lost. Whereas with a railtunnel transporting thousands into and out of the city each day, we would be reducing rents and cost of living across the Dublin region and having a long term impact on national competitiveness that would boost jobs in the long run.

I would advocate a realignment of the capital budget back to major transport projects. I would also advocate the sale of both dublin bus and bus eireann (2 profitable companies that will thrive in private ownership and which need to maintain investment levels far greater than they can manage within State ownership for the foreseeable future). I further believe that the DAA should be partially privatised to allow for some external scrutiny of their activities. It does not hurt to include more heads in evaluating major operations like the DAA.

ENERGY COSTS
Finally, I believe strongly that the electricity grid which is currently owned by ESB, but operated by Eirgrid, should be transferred wholly to Eirgrid. As we are about to sell a stake in ESB (possibly the remainder of the company in subsequent years), it is crucial that we transfer this ownership now before we lose ownership. Selling the grid as part of ESB, while retaining the operation of it in another company (Eirgrid), ensures that we will not get the full value of the asset being sold. What investor would be prepared to buy this asset at its full value when they know they will not be allowed to operate it? This is a nonsensical way to sell a grid. If we are truly committed to selling a stake in the grid (I hope not), then at least let us sell it under the ownership of Eirgrid. Selling the asset as part of Eirgrid gives us at least a fighting chance of gaining the full value of the asset -investors will hopefully be willing to pay full price for a share of the grid if they are also buying the right to operate it.

These are merely a menu of options, but I urge you to look at competitiveness as not merely the best, but quite literally the only way out of our present crisis. Restoring credit and/or demand is a fantasy in our current predicament.

Letter to Ajai Chopra about the Legal Services Regulation Bill 2011

Dear Ajai,
I am writing to you again about structural reforms in Ireland's program (see my previous letter about the electricity market). This time, I am writing to you about reform of the legal profession. As part of the program, Ireland has to liberalise the system of training and accrediting legal practitioners in Ireland. In fulfilment of this obligation, the Government has published the Legal Services Regulation Bill 2011.

While there is much in this Bill which is worthwhile, unfortunately on the issue of liberalising the training and accreditation of legal practitioners I believe it comes up short. Both the Memo to the Bill and the Govt press releases alongside it suggest that it is opening up the way for competition between training centres. However, apart from requiring a report to be drawn up on legal training, the actual Bill merely says that the new Legal Services Authority is to keep the provision of training places under "review" (section 9).

This use of the word "review" is quite peculiar. I cannot recall seeing it used in this manner in Irish law before. It appears that far from the new Authority having the power to authorise and regulate the training of lawyers by new and existing institutions, its role will be a more passive one of simply monitoring this process as carried out by the existing training institutions.

This seems to contradict Ireland's commitment under the program. It seems that apart from monitoring the existing institutions, the only proactive thing the new authority will do is publish a report on regulating training -which may or may not be acted upon by later governments.

I believe, this is a mistake, and that instead of waiting for a report to be drawn up and further legislation to be published later (if ever), we should state right now, in this initial piece of legislation, that the authorisation of institutions to train accredited lawyers is to be liberalised and performed by the new authority. We must state this up front, now, to get the ball rolling on this. We have had previous reports on this topic, I see no reason to delay reform while another one is prepared.