Thursday, February 23, 2012

23/02/2012: ECB - which side of policy divide?

A very interesting interview today in the WSJ with Mario Draghi (ECB) (link here) (and a HT to @LorcanRK). Some top level points:

"In the European context tax rates are high and government expenditure is focused on current expenditure. A “good” consolidation is one where taxes are lower and the lower government expenditure is on infrastructures and other investments.

The bad consolidation is actually the easier one to get, because one could produce good numbers by raising taxes and cutting capital expenditure, which is much easier to do than cutting current expenditure. That’s the easy way in a sense, but it’s not a good way. It depresses potential growth."

Now, EU austerity so far is primarily focused on (1) keeping taxes high, (2) cutting spending and (3) penalizing offending states (e.g. Hungary) by withdrawing funds for investment. In Ireland, meanwhile, the 1990s consolidation was based on lower taxes (corporate and personal income) and increasing investments (including public investments). The 2008-present consolidation is characterized by rapidly increasing taxes, complete choking off of public investment coupled with massive drop-off in private investment and effectively no cuts to current spending by the State.

Err... now, Draghi, supposedly, is the head of one Troika institution that has capacity to drive or influence policies in Ireland. Why is his description of a 'good' consolidation being exactly canceled by the Irish Government policies that the ECB is partially co-determines, then?

"In Europe first is the product and services markets reform. And the second is the labour market reform which takes different shapes in different countries. In some of them one has to make labour markets more flexible and also fairer than they are today. In these countries there is a dual labour market: highly flexible for the young part of the population where labour contracts are three-month, six-month contracts that may be renewed for years. The same labour market is highly inflexible for the protected part of the population where salaries follow seniority rather than productivity. In a sense labour markets at the present time are unfair in such a setting because they put all the weight of flexibility on the young part of the population."

Once again, quite correctly Mr Draghi identifies labor market rigidities that are clearly present in Ireland. And once again, these very same rigidities are not target of the Irish Government reforms. In fact they are precluded by the Croke Park Agreement that Mr Draghi's Troika is not challenging. What is going on here? Out of two core prescriptive policy sets, both are being wrongly pursued / targeted in Ireland under the watchful eye of Mr Draghi's ECB.

And to top up the proverbial cake: "The European social model has already gone when we see the youth unemployment rates prevailing in some countries. These reforms are necessary to increase employment, especially youth employment, and therefore expenditure and consumption."

Really? Well, EU Commission continues to talk about the Social Model. The irish Government and indeed majority of Government in Europe are continuing to run Social Partnership-linked policy making institutions (though of late, the Social Partnership in Ireland has run onto the rocks of insolvency). Where is Mr Draghi with his views on optimal policies?

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