18/7/20: Europe, the Land of the Unliving Leadership

If the U.S. of A. is the land of the brain-dead leadership, Europe (the EU) is the land of the unliving ones. The difference is the ratio of effort to failure. The Trump Administration is almost effortlessly creates daily flow of disasters. Meanwhile the EU27 is endlessly engages in strenuous attempts to not achieve something trivial.

Latest instalment is the European leadership summit this weekend: https://www.reuters.com/article/us-eu-summit/eu-nations-deadlocked-at-tense-coronavirus-recovery-summit-idUSKBN24J0A2.

One thing of note from Ireland's (and other net contributing states') perspective is that, as I predicted two months ago (https://www.thecurrency.news/articles/17392/france-and-germany-have-proposed-a-e500m-fund-to-shield-european-economy-what-does-it-mean-for-ireland), the proposed EU fund for addressing COVID19-induced recession will be a net cost to the more advanced European states.

What's worse is that this cost will be a function of Ireland's famously grotesquely inflated GDP. The tax avoidance shenanigans of the multinational corporations will cost us more in the COVID19 Fund case. And since all measures of our economic activity, from GDP to GNP to GNI to GNI* already include taxes paid by the multinationals to the Irish Exchequer, this added cost is not going to be recovered through tax revenues.

Here are some facts. The latest data for the official "Modified gross national income at current market prices" or GNI* - a measure of economic activity that is published by the Irish authorities, that partially (note: partially) strips out these tax shenanigans - is 2018. So we can use data through that year as a yardstick by which we can measure the official and only partial gap between the real economic activity in the State and the imaginary pretend-to-matter GDP of the Republic.

In 2018, actual GNI*-measured activity was EUR 197,460 million, while official GDP was EUR 324,038 million. The real economy of Ireland was, therefore, at least 39 percent less than the officially-measured economy of Ireland. Put differently, we claim we had a national income of 324 billion, but in reality, we only made 197.5 billion. If Ireland was filling a mortgage application, it would be lying on its income line.

This gap is growing over time (chart next, with estimates for 2019 based on actual GDP reported and estimated GNI* gap from the gross value added statistics, and 2020 forecast):

Yes, you see it right:

• Officially, actual productive capacity of the Irish economy, was 39.06% lower than implied by GDP measure in 2018.
• Estimated, based on officially released, but not yet fully aggregated, data 2019 gap was around 39.8 percent. Worse than in 2018.
• Based on official growth and inflation forecasts for 2020, and gross value added data for multinationals-led sectors vs domestic sectors for 1Q 2020 already reported by the CSO, real economy gap to imaginary GDP is likely to be in the region of 43.5% in 2020, or, possibly even higher. This higher figure is suggested by the booming exports of the Ireland-based multinationals during the first 3 months of the pandemic.

Since EU contributions are, in part, based on GNI (not GNI*), which is closely linked to GDP, and thus to gross accounting effects from the multinationals, Irish contributions to the EU27 budget are excessively inflated, roughly, by the gap factor. We know as much, as even ESRI - the mouthpiece of the 'official Ireland' - said so before.

Now, back to the EU27 'COVID Fund'. 

Irish authorities finally recognised the fact that Ireland will be a net payer into the fund, as opposed to a net beneficiary: https://twitter.com/tconnellyRTE/status/1284433835581726725?s=20. Which is what I warned about two months ago, when many Irish commentators were busy dividing the imaginary COVID Fund largesse into spending and investment priorities 'made available' to Ireland from Europe. 

Based on the GDP/GNI* gap, Ireland's repayments on the EU27 'COVID Fund' are likely to be 40% higher than the actual Irish economy's productive capacity would entail. 

The Fund is also likely to alter, long-term, the structure and the distribution of the Member States' contributions. Most likely, it will increase a GDP or GNI-linked share being paid in by Ireland. But even without accounting for this, the fact that we will be net payers into the Fund means that our investment priorities to be financed from the Fund will have to change dramatically. In fact, for every EUR1 borrowed from the fund, we will have to generate EUR 1.43 or more in added activity / return only to account for the GDP/GNI* gap. 

Take a simple example: suppose we borrow from the Fund EUR 1 billion to build a hospital. Nice idea. An expected return from the hospital that justifies such a project should be around cost of administration of investment + cost of funds + return and risk premia. Hard to pin these down, but, say we want to invest in a hospital in the first place because it will have socio-economic returns equivalent to 5 percent net of the cost of raising funds, if we were to issue bonds at 0 percent interest rate. With GDP/GNI* gap we have 5%*(1+43% Gap) = 7.15% required return to make that investment compatible to the Fund. And that is assuming we are just repaying our own share to the Fund. If the Fund also lends money to, say, Poland - a net recipient of transfers from the normal EU budgets, we will have to pay, roughly a GDP-weighted share of Poland's borrowings into the fund, too. Say that amounts to our normal net EU taxes contribution of ca 0.15 percent of GDP (historical average for 2016-2018 is actually 0.153%). This means we are actually going to be repaying 0.2145% of our GNI*-based economic capacity for Poland's financing. And so on. 

What could have been economically feasible or efficient to invest in under GDP base consideration may not be feasible or efficient under the repayment cost linked to our real economic activity measures, e.g. GNI*. That hospital we would like to have, and that makes sense as a combination of a fiscal stimulus and socio-economic investment, will no longer make sense to invest in, solely because we have spent decades fooling ourselves and the world around us that we are richer than we really are... whooping 38-40 percent richer. Playing a role of a rich uncle is has a cost, folks... 

Worse, the need for the repayment of the funds in the future, and more egregiously, the need to pay for the funds not borrowed by Ireland, will mean that in the longer run, Ireland will have to run higher debt or higher budget surpluses or both. If, say, Malta or Slovakia, or Hungary or Poland were to draw down funds from the COVID Fund, Ireland will need to contribute to repaying the money they borrowed. Such a repayment will either require Ireland issuing new debt or Ireland paying in from budget surpluses in years to come. 

In other words, the COVID19 Fund is a prescription for more austerity in Ireland in the future years. Not for less. 

Irish PM / Taoiseach says it is a good thing: rescuing Europe is also favourable to Ireland. I agree. The problem is that every little bit counts and Ireland will be going into 'rescuing Europe' with a pretend-to-matter GDP base, not with the real economy-measuring GNI*. And that is wrong. It is a right thing to contribute to other countries' recovery. It is a stupid thing to do so while playing a 'rich uncle' role we hoisted out of vanity and some strategic venality (yes, truth hurts, and truth about MNCs in Ireland hurts our pretence at not beggaring our neighbours though our tax rules).

Ireland's kommentariate will really enjoy investing in public infrastructure, the EU-style... the unliving leadership of Europe is setting us up for another 2012 'Game-changing Deal' (https://www.telegraph.co.uk/finance/financialcrisis/9365504/Debt-crisis-Ireland-hails-euro-game-changer.html). Then, again, the hope is that by the time the EU27 actually agree to the terms and conditions of the 2020 COVID19 Fund, we will be dealing with the recession of 2025 or 2032 or 2087.

2/9/19: One view of Austerity

A picture is worth a thousand words, some say. So here is a picture of austerity we've had (allegedly) in recent decades:

Source: @Soberlook 

The things are savage: debt is up from ca 70% to over 110%. Cost of debt carry is down from just under 4% to under 1.75%. So where are all those fabled public investments? And who has benefited from this massive increase in debt? Virtually all - financialized (a nice euphemism for being absorbed into financial assets valuations). Austerity, after all, is just the old-fashioned transfer of resources from the broader economy to the select few, made more palatable by the superficially low cost of borrowing.

20/8/19: Public Spending in the Euro Area: Post-Crisis Austerity?

Given the never-ending repetition of the 'austerity narrative' in European economic analysis, it is virtually impossible to conclusively address the issue of changes in public spending during the crisis and the post-crisis periods and the relationship between fiscal policies and economic growth. Thew reason for this is the lack of singular set metrics that can capture these dimensions of the debate.

However, this lack should not be a reason for not trying.

Here is an interesting chart (based on the IMF WEO data and 2019 forecasts), plotting average Government expenditure as a share of GDP for two periods for euro area economies. The two periods under consideration are: 2000-2007 and 2013-2019. I am also showing two metrics for Ireland: the GDP (a measure of economic activity that vastly overstates the true extent of national economic activity) and GNI* (an official Irish Government metric of national economic activity). Note: using 2014-2019 average paint effectively the same picture.

The picture is worrying. Thirteen out of nineteen euro area economies have witnessed a rise in Government spending as a share of GDP in post-crisis period compared to pre-crisis period, two experienced virtually no change, and four experienced declines. In other words, based on the ratio of Government spending to economic activity, only four states exhibit a clear case of 'austerity'.

Ireland is an interesting outlier to the picture (hence, reporting of GNI* metric): based on GDP measure, Ireland's Government spending as a share of GDP averaged 32.85 percent per annum in 2000-2007, and this fell to 30.32 percent in 2013-2019 - an austerity gap of 2.53 percentage points per annum. But based on GNI* measure, Ireland's Government spending rose from 38.69 percent in pre-crisis years to 45.51 percent in post-crisis period - an expansion gap of 6.82 percentage points.

Overall, using the above metric, top austerity countries in the euro area are:

• Malta (gap of -4.86 percent)
• Ireland (GDP gap of -2.53 percent)
• Germany (gap of -2.227 percent)
• Austria (gap of -1.311 percent)

Top fiscal expansion countries are:

• Finland (7.514 percent)
• Ireland (GNI* gap of 6.822 percent)
• Spain (4.3 percent)
• Estonia (4.26 percent)

17/10/17: Welcome to the Keynesian Monetarist Paradise

Via IMF, a chart plotting changes in sovereign debt holdings across Government, International & Central Bank agencies (so-called G-4 Official) and private debt holders:

Note:

1. These are changes in the stock of debt, not the actual stock of debt;
2. These are changes in the stock of debt of only four largest advanced economies;
3. These are changes in the stock of only sovereign debt, excluding quasi-sovereign, private and household debts; and
4. The years of forward forecast are, allegedly, the years of QE unwinding.

This debt bubble is a money-printing bubble which is a Keynesian Government 'stimulus' bubble. Look at the above. QED.

And, if you have not reaped its upside, you will pay its downside. Now, check your pockets.

28/7/17: Climbing the Deficit Mountains: Advanced Economies in the Age of Austerity

Just a stat: between 2001-2006 period, cumulative Government deficits across the Advanced Economies rose by SUD 5.135 trillion. Over the subsequent 6 years period (2007-2012) the same deficits clocked up USD 14.299 trillion and over the period 2013-2018 (using IMF forecasts for 2017 and 2018), the cumulated deficits will add up to USD 8.197 trillion. On an average annual basis, deficits across the Advanced Economies run at an annual rate of USD0.86 trillion over 2001-2006, USD 2.375 trillion over 2007-2012 and USD 1.385 trillion over 2013-2017 (excluding forecast year of 2018).

As a percentage of GDP, 2001-2006 saw Government deficits for the Advanced economies averaging 2.68% of GDP annually in pre-crisis era, rising to 5.42% of GDP in peak crisis years of 2007-2012, and running at 2.98% of GDP in 2013-2017 period. Looking at the post-crisis period, return to pre-crisis levels of Government spending would require

In simple terms, there is a mountain of deficits out there that has been sustained by cheap - Central Banks’ subsidised - funding, the cost of which is starting to go North. The cost of debt financing is a material risk consideration.

21/7/17: What Irish Civil Service is Good For?..

Recently released data on 2011-2016 Irish Government financial metrics shows that despite all the reports concerning the adverse impact of austerity on Irish Government employees, there is hardly any evidence of such an effect at the pay level data.

Specifically, in 2011, total compensation bill for the Irish Government employees stood at EUR 19.389 billion. This 5.39% between 2011 and the lowest point in the cycle (2014 at EUR18.344 billion), before rising once again by 2016 to EUR 19.354 billion. Total savings achieved during 2012-2016 period compared to 2011 levels of expenditure amounted to EUR2.759 billion on the aggregate, or 2.85% (annualized rate of savings averaged less than 0.57% per annum.

Statistically, there simply is no evidence of any material savings delivered by the 'austerity' measures relating to Government compensation bills.

But, statistically, there is a clear evidence of Irish public sector employment poor performance. Oxford University's 2017 International Civil Service Effectiveness Index, http://www.bsg.ox.ac.uk/international-civil-service-effectiveness-index, ranked Ireland's Civil Service effectiveness below average when compared across 31 countries covered in the report.

Spider chart below shows clearly two 'outlier' areas of competencies and KPIs in which Irish Civil Service excels: Tax Administration and Human Resource Management. Rest of the metrics: mediocre, to poor, to outright awful.

In fact, Ireland ranks 20th in terms of overall Civil Service Effectiveness assessment, just below Mexico and a notch above Poland. Within index components, Ireland ranked:

• 16th out of 31 countries in terms of Civil Service Integrity and Policy Making
• 26th in terms of Openness (bottom 10)
• 20th in terms of Capabilities, and Fiscal and Financial Management
• 13th in terms of Inclusiveness
• 22nd in terms of Attributes (bottom 10)
• 28th in terms of Regulation (bottom 5)
• 8th in terms of Crisis Risk Management
• 1st in terms of Human Resource Management (aka, working conditions and practices)
• 4th in terms of Tax Administration
• 31st in terms of Social Security Administration (dead last)
• 21st in Digital Services and in terms of Functions (bottom 10)

So while managing to score at the top of the league of countries surveyed in terms of pay, perks, hiring and promotion, Irish Civil Service ranked within bottom 10 countries in terms of areas of key performance indicators, relevant to actual service delivery, with exception of one: Tax Collection. May be we shall call it Pay, perks & Tax Collection Service?

But, hey, know the meme: it's all because of severe austerity-driven underfunding... right?.. 

Update:

In response to my post, the Press Office at Dept. of Public Expenditure and Reform posted the following, quite insightful comments on the LinkedIn, that I am reproducing verbatim here:

Secretary General Robert Watt: I was interested in reading this comment – and in particular the data on civil service performance.  There are methodological issues with the Study quoted.  Nevertheless readers might be interested in other data about the effectiveness of the Irish civil and public service which might give a more balanced assessment of performance. Important to consider the evidence before we reach conclusions.  Also, important to note difference between Civil Service (36,000 staff) and wider public service (320,000 staff)

Public Service performance

Over a range of international rankings, the IPA’s annual public service trends publication shows the Irish public service performing above average on many indicators.

The IPA’s Public Sector Trends, 2016

• Ireland is ranked 1st in the EU as the most professional and least politicised public administration in the Europe;
• Ireland is ranked 5th for quality of public administration in the EU;
• Ireland is ranked 6th in the EU for maintenance of traditional public service values (integrity); 
• Ireland is ranked 4th in the EU for perception of the effectiveness of government decisions;
• Ireland is ranked 2nd in the EU for encouraging competition and a supportive regulatory environment;
• Ireland is ranked 4th in the EU for regulatory quality;
• Ireland is ranked 3rd in the EU in comparison of how bureaucracy can hinder business;
• Business update of eGovernment services is higher than most of Europe with Ireland ranked 1st for highest update of electronic procurement in Europe;
• According to the World Bank, Ireland is ranked well above average for Government Effectiveness (although individual rankings are not available);
• Ireland is ranked 5th in Europe in the competitive advantage provided by the education system; 
• Ireland ranks 10th for life expectancy at birth and 8th for consumer health outcomes, but slightly below average for the cost-effectiveness of health spending;

The OECD’s Government at a Glance, published in July 2017 shows Ireland ranking strongly across a range of metrics although healthcare is a notable exception:

• Ireland is ranked 2nd in terms of citizen satisfaction with the education system and schools;
• Ireland is ranked 6th for citizen satisfaction with the judicial system and the courts and is also in the top 4 best improved countries in the last decade;
• Ireland is ranked 26th for citizen satisfaction with the healthcare system (slightly below average).

Recent customer satisfaction surveys of the Irish civil service show it delivering its highest customer satisfaction ratings to date. Satisfaction with both the outcome and the service delivered was rated over 80% which is close to the credible maximum.
General Public Civil Service Satisfaction Survey, conducted Q1 2017:      

• 83% are satisfied with the service they received (up from 77% in 2015);
• 82% are satisfied with the outcome of their customer service experience (up from 76% in 2015);
• 46% would speak highly of the civil service (up from 39% in 2015);
• 87% of customers claim that service levels received either met or exceeded expectations (up from 83% in 2015).

Business Customers Civil Service Satisfaction Survey, conducted, Q4 2016:

• 82% are satisfied with the service they received (up from 71% in 2009);
• 82% are satisfied with the outcome of the service received (up from 70% in 2009);
• 61% felt that the service provided has improved in the last 5 years.

Lots done but more to do!



My reply to the Department comment:

Thanks for the comments on this, Press Office at Dept. of Public Expenditure and Reform. I got similar methodological comments regarding the robustness of the Oxford study via Facebook as well and, as I noted, in the technical analysis part of the paper, Oxford centre does show improved metrics for Irish civil service performance in the later data, which is heartening. Also, noted the apparent dispersion of scores and ranks across countries, with what we might expect as potentially stronger performers being ranked extremely low. Also, noted the issue of data on Social Welfare for Ireland being skewed out of OECD range and impacted by 2011 legacy issues (although it is unclear to me how spending via health budget on social welfare is treated in the OECD and Oxford data). I will post your comments on the blog to make sure these are not lost to the readers.


I agree: lots done and certainly more to do, still. 

21/7/17: Professor Mario: Meet Irish Austerity Unsung Hero

In the previous post covering CSO's latest figures on Irish Fiscal metrics, I argued that the years of austerity amount to little more than a wholesale leveraging of the economy through higher taxes. Now, a quick note of thanks: thanks to Professor Mario Draghi for his efforts to reduce Government deficits, thus lifting much of the burden of real reforms off Irish political elites shoulders.

Let me explain. According to the CSO data, interest on Irish State debt obligations (excluding finacial services rescue-related measures) amounted to EUR 5.768 billion in 2011, rising to EUR7.298 billion in 2012 and peaking at EUR 7.774 billion in 2013. This moderated to EUR 7.608 billion in 2014, just as Professor Mario started his early-stage LTROs and TLTROs QE-shenanigans. And then it fell - as QE and QE2 programmes really came into full bloom: EUR6.854 billion in 2015 and EUR6.202 billion in 2016. Cumulative savings on interest since interest payments peak amounted to EUR2.65 billion.

That number equals to 75% of all cumulative savings achieved on the expenditure side (excluding capital transfers) over the entire period 2011-2016. That's right: 3/4 of Irish 'austerity' on the spending side was accounted for by... reduction in debt interest costs.

Say, thanks, Professor Mario. Hope you come visit us soon, again, with all your wonderful gifts...

21/7/17: Ireland: a Poster Child for Austerity through Taxes

Ever since the beginning of the Crisis in 2008, Irish policymakers insisted staking the claims to the heroic burden sharing of the post-Crisis fiscal adjustments across the entire society, the claims closely mirrored by the supporting white papers, official state-linked think tanks and organizations, and even the IMF.

Time and again, independent analysts, myself included, probed the State numbers and found them to be of questionable nature. And time and again, Irish political and policy elites continued to insist on the credit due to them for steering the wreck of the Irish economy out of the storm's path. Until, finally, by the end of 2016, Ireland officially was brought to enjoy falling official debt burdens and drastically declining deficits. The Hoy Grail of fiscal sustainability, delivered by FF/GP and subsequently (and especially) the FG/LP coalitions was in sight.

Well, here's a new instalment of holes that the official narrative conceals. CSO's latest data for full fiscal year 2016 on headline fiscal performance metrics was published earlier this month. It makes for an enlightening reading.

Take a simple chart:

Here, two figures are plotted against each other:

• General Government Expenditure, less Capital Transfers (the bit that predominantly is skewed by 2011 banks resolution measures); and
• Taxes and Social Contributions on the revenue side.

The two numbers allow us to compare the oranges and oranges: policy-driven (as opposed to one-off) revenues and policy-driven (as opposed to banking sector's supports) expenditures. Fiscal discipline is the distance between the two.

And what do we see in this chart? 

1. Gap between tax revenues and non-capital transfers spending shrunk EUR899 mln in 2012 compared to 2011 and proceeded to fall EUR2.698 billion in 2013, EUR 4.22 billion in 2014, EUR 4.416 billion in 2015 and EUR1.815 billion in 2016. So far - good for 'austerity' working, right?
2. Problem is: all of the reductions came courtesy of higher tax take: up EUR 1.567 billion in 2012 compared to 2011, EUR2.107 billion in 2013, EUR4.525 billion in 2014, EUR4.724 billion in 2015 and EUR2.713 billion in 2016.
3. All said, over 2011-2016, cumulative reductions in ex-capital transfers tax deficit were EUR14.05 billion, but tax increases were EUR15.66 billion, which means that the entire story of Irish 'austerity' was down to one source: tax take increases. The Irish State did not cut its own spending. Instead, it raised taxes and never looked back.
4. In fact, ex-capital transfers spending rose not fall, even as labor markets gains cut back on official unemployment. In 2011, ex-capital transfers Irish State spending was EUR71.403 billion. This marked the lowest point for expenditure in the data set that covers 2011-2016. Since then, 2015 expenditure was EUR72.113 billion and 2016 expenditure was EUR 73.011 billion.
5. So there was no aggregate spending austerity. None at all.
6. But there was small level of austerity in one category of spending: social benefits. These stood at EUR28.827 billion in 2011, rising to the cyclical peak of EUR29.454 billion in 2012, then falling to EUR28.526 billion in 2013 and to the cyclical low of EUR28.076 in 2014. Just as the labor markets returned to health, 2015 social benefits spending rose to EUR28.421 and 2016 ended up posting expenditure of EUR28.494. So the entire swing from peak spending during the peak crisis to the latest is only EUR418 million. Granted, small amounts mean a lot for those on extremely constrained incomes, so the point I am making is not that those on social benefits did not suffer due to benefits cuts - they did - but that their pain was largely immaterial to the claims of fiscal discipline.

So what do we have, folks? More than 100% of the entire fiscal health adjustment in 2011-2016 has been delivered by the rise in tax take by the State - the coercive power whereby money is taken off the people without providing much a benefit in return. That, in the nutshell, is Irish austerity: charging households, many struggling with debt, loss of income, poorer health and so on, to pay for... what exactly did we pay for?.. I'll let you decide that.

10/6/2017: And the Ship [of Monetary Excesses] Sails On...

The happiness and the unbearable sunshine of Spring is basking the monetary dreamland of the advanced economies... Based on the latest data, world's 'leading' Central Banks continue to prime the pump, flooding the carburetor of the global markets engine with more and more fuel.

According to data collated by Yardeni Research, total asset holdings of the major Central Banks (the Fed, the ECB, the BOJ, and PBOC) have grown in April (and, judging by the preliminary data, expanded further in May):

May and April dynamics have been driven by continued aggressive build up in asset purchases by the ECB, which now surpassed both the Fed and BOJ in size of its balancesheet. In the euro area case, current 'miracle growth' cycle requires over 50% more in monetary steroids to sustain than the previous gargantuan effort to correct for the eruption of the Global Financial Crisis.

Meanwhile, the Fed has been holding the junkies on a steady supply of cash, having ramped its monetary easing earlier than the ECB and more aggressively. Still, despite the economy running on overheating (judging by official stats) jobs markets, the pride first of the Obama Administration and now of his successor, the Fed is yet to find its breath to tilt down:

Which is clearly unlike the case of their Chinese counterparts who are deploying creative monetarism to paint numbers-by-abstraction picture of its balancesheet.

To sustain the dip in its assets held line, PBOC has cut rates and dramatically reduced reserve ratio for banks.

And PBOC simultaneously expanded own lending programmes:

All in, PBOC certainly pushed some pain into the markets in recent months, but that pain is far less than the assets account dynamics suggest.

Unlike PBOC, BOJ can't figure out whether to shock the worlds Numero Uno monetary opioid addict (Japan's economy) or to appease. Tokyo re-primed its monetary pump in April and took a little of a knock down in May. Still, the most indebted economy in the advanced world still needs its Central Bank to afford its own borrowing. Which is to say, it still needs to drain future generations' resources to pay for today's retirees.

So here is the final snapshot of the 'dreamland' of global recovery:

As the chart above shows, dealing with the Global Financial Crisis (2008-2010) was cheaper, when it comes to monetary policy exertions, than dealing with the Global Recovery (2011-2013). But the Great 'Austerity' from 2014-on really made the Central Bankers' day: as Government debt across advanced economies rose, the financial markets gobbled up the surplus liquidity supplied by the Central Banks. And for all the money pumped into the bond and stock markets, for all the cash dumped into real estate and alternatives, for all the record-breaking art sales and wine auctions that this Recovery required, there is still no pulling the plug out of the monetary excesses bath.

17/1/17: Government Debt in the Age of Austerity

The fact that the world is awash with debt is hard to dispute (see data here and here), but it is quite commonly argued that the aggressive re-leveraging happening in the corporate and household sectors runs contrary to the austerity trends in the public debt segment of the total economic debt. The paradox of the austerity arguments is, of course, that whilst debt is rising, public investment is falling and public consumption remains either stagnant of rising slowly. This should see public debt either declining or remaining static. Of course, banks bailouts in a number of advanced economies would have resulted in an uplift in public debt during the early years of the Global Financial Crisis and the Great Recession, but these years behind us, we should have witnessed the austerity translating into moderating debt levels in the global economy when it comes to public debt.

Alas, this is not the case, as illustrated in the chart below:

Here's a tricky bit:

• In the 5 years 2012-2016 (post-onset of the recovery) Government debt around the world rose 11.4% in level terms (USD), and 14.51 percentage points as a share of GDP per capita. During the crisis years of 2007-2011, Government debt rose 72.7% in dollar terms and was down 4.39 percentage points as a share of GDP.
• In the advanced economies, Government debt rose 67.6% in dollar terms in 2007-2011 period, up 4.7 percentage points, before rising 5.44% in dollar terms over subsequent 5 years (up 26.65 percentage points in terms of debt to GDP ratio). 
• In the euro area, Government debt was up 57.4% in dollar terms and up 0.51 percentage points in GDP ratio terms over the period of 2007-2011, before falling 6.9 percent in dollar terms but rising 24.8 percentage points relative to GDP in 2012-2016 period.
• And so on...

As the above chart shows, globally, total volume of Government debt was estimated to be USD63.2 trillion at the end of 2016, up USD6.46 trillion on the end of 2011. That is almost 84.1% of the world GDP today, as opposed to 78% of GDP at the end of 2011. More than half of this increase (USD3.91 trillion) came from the Emerging and Developing Economies, and USD2.3 trillion came from G7 economies. Meanwhile, euro area Government Debt levels declined USD815 billion, all of which was due solely to changes in the exchange rate and the rollover of some debt into multinational organisations' (e.g. ESM) and quasi-governmental (e.g. promissory notes) debt. Worse, over the said period of time, only one euro area country saw reduction in the levels of debt: Greece (down EUR34.46 billion due to restructuring of debt). In fact, in Euro terms, total euro area government debt rose some EUR1.36 trillion over the span of the 2011-2016 period.

All in, global pile of Government debt is now USD27.84 trillion (or 78.7%) up on where it was at the end of 2007 and the start of the Global Financial Crisis.

So may be, just may be, the real economy woe is that most of the new debt accumulated by the Governments in recent years has flown into waste (supporting banks, financial markets valuations, doling out subsidies to politically favoured sectors etc), instead of going to fund productive public investments, including education, skills training, apprenticeships and so on. Who knows?..

10/12/2016: Austerity: Three Wrongs Meet One Euro

"Is it the 'How' or the 'When' that Matters in Fiscal Adjustments?" asks a recent NBER Working Paper (NBER Working Paper No. w22863). The authors, Alberto Alesina, Gualtiero Azzalini, Carlo A. Favero and Francesco Giavazzi ask a rather interesting and highly non-trivial question.

Much of recent debate about the austerity in the post-GFC world have focused on the timing of fiscal tightening. The argument here goes as follows: the Government should avoid tightening the pursue strings at the time of economic contraction or slowdown. Under this thesis, austerity has been the core cause of the prolonged and deep downturn in the euro area, as compared to to other economies, because austerity in the euro area was brought about during the downturn part of the business cycle.

However, there is an alternative view of the austerity impact. This view looks at the type of austerity policies being deployed. Here, the argument goes that austerity can take two forms: one form - that of reduced Government spending, another form - that of increased taxation.

There is some literature on the analysis of the effects of the two types of austerity compared to each other. But there is no literature, as far as I am aware, that looks at the impact of austerity across different types, while controlling for the timing of austerity policies implementation.

The NBER paper does exactly that. And it uses data from 16 OECD economies covering time period of 1981 through 2014 - allowing for both heterogeneity amongst economic systems and cycles, as well as full accounting of the most recent Great Recession experiences.

The authors "find that the composition of fiscal adjustments is much more important than the state of the cycle in determining their effects on output." So that the 'How' austerity is structured is "much more important" in determining its effects than the 'When' austerity is introduced.

More specifically, "adjustments based upon spending cuts are much less costly than those based upon tax increases regardless of whether they start in a recession or not." This is self explanatory.

But there is an added kicker (emphasis is mine): the overall "results appear not to be systematically explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates -- that is outside of a currency union -- it appears to be able to dampen the recessionary effects of tax-based consolidations implemented during a recession." Now, here is a clear cut evidence of just how disastrous the euro has been for the real economies in Europe during the current crisis. As the authors note, correctly, "European austerity... was mostly tax based and implemented within a currency union". In other words, Europe choose the worst possible type of austerity (tax-based), implemented in the worst possible period (during a recession) and within the worst possible monetary regime (common currency zone).

In allegorical terms, the euro zone was like a food-starved runner starting a marathon by shooting himself in a knee.

6/9/16: The Pain in Spain: Growth vs Structural Deficits

FocusEconomics have published an interesting research note on Spanish economy. 

The country has been muddling through 

1. An ongoing political crisis - with already two elections failing to produce a Government and the latest failed efforts at forming one last week suggesting there is a third round of voting ahead - and 
2. The long-running fiscal crisis - with the EU Commission initiating series of warnings about Spain's failure to comply with the Fiscal Compact criteria and warning that the country is falling behind on deficit targets

Yet, despite these apparent macro risks, the economy of Spain has been expanding for some time now at the rates that are ahead of its other EURO 4 peers (Germany, France and Italy). 

In a guest post below, FocusEconomics shared their research with Trueeconomics readers:

The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit

Spain’s robust GDP growth despite the ongoing political impasse has made the headlines time and time again. The panel of 35 analysts we surveyed for this month’s Consensus Forecast expect GDP to expand 2.8% in 2016, one of the fastest rates in the Eurozone this year, before decelerating to 2.1% in 2017. 

And yet both Spain’s Independent Authority for Fiscal Responsibility (Airef) and the European Commission have warned in recent months that Spain is relying too heavily on GDP growth to reduce its deficit while neglecting much-needed progress with structural reforms to reduce its sizeable structural deficit (the part of the overall deficit which is adjusted for temporary measures and cyclical variations). This leaves it vulnerable to its deficit increasing in the future should economic conditions become unfavorable again. 

According to the Airef, without further reforms, a structural deficit of approximately 2.5% will still persist in Spain in 2018. 

Meanwhile, the European Commission predicted in its updated spring forecast that the structural deficit will reach 3.2% that year—well beyond the new 2.1% revised structural deficit target for 2018 (as part of an overall 2.2% deficit target) that it recently announced in July. Spain’s general government deficit is the sum of the deficits of the central government, the regional governments, the local authorities and the social security system, and most of the overshoot is expected to come from the underperformance of the regional governments and social security. Spain has gradually been reducing its overall general government deficit in recent years, albeit not at the speed stipulated by the European Commission, but it is the persistence of the structural part of the deficit that is the main cause for concern.

After deciding last month to waive the budgetary fine on Spain for missing its targets, the European Commission set a new series of targets up until 2018 in order finally to bring Spain’s overall deficit below the long-targeted 3% that year. In 2016 it expects Spain to meet an overall general government deficit target of 4.6%, not more than 3.1% of which is expected to be a structural deficit. This is in line with the European Commission’s updated spring forecast for the country, since it has decided not to impose additional adjustment requirements on Spain this year (attributing this in part to the fact that lower-than-expected inflation, which is out of the government’s control, has hindered deficit reduction efforts this year). In 2017 and 2018, however, the Spanish government will have to implement structural reforms to make savings equivalent to 0.5% of GDP each year to bring its structural deficit down to 2.6% in 2017 (as part of an overall deficit target of 3.1% that year) and 2.1% in 2018 (as part of an overall deficit target of 2.2%). Achieving this will require a strong government able to press ahead with a reform program—something which currently looks rather a panacea. Spain’s ongoing failure to form a new government since the first inconclusive elections in December last year may not have impacted the current resilience of its GDP growth, but it certainly puts its fiscal compliance in jeopardy and prolongs the structural problems of its economy.

The agenda ahead is tight. Under the Spanish Constitution, 1 October is the deadline for the government to present its proposed 2017 budget to the Spanish Parliament. And under the EU’s rules, the European Commission must receive the budget (which must, of course, indicate how Spain will meet the required 2017 targets) by 15 October, or Spain faces a fine. Spain is still struggling to form a government after two elections in the last nine months and looks highly unlikely to have a new government in place by October that is able to push through a budget with the requisite reforms. Mariano Rajoy, who heads the current caretaker Popular Party (PP) government and is seeking to be sworn in as prime minister again, failed to garner sufficient support at both his first investiture attempt on 31 August (for which he would have needed an absolute majority in his favor) and his second attempt on 2 September (at which a simple majority would have sufficed). He might have another attempt at being appointed after the regional elections in the Basque Country and Galicia at the end of September if by chance the circumstances look more favorable by then, but otherwise Spain will probably be going to the polls again on 25 December, in what would be an unprecedented event. Even if a new government is formed by some miracle, it looks highly likely to be a weak one that might not manage to last long, let alone implement a convincing reform program.

Click on the image to enlarge

A closer look at the political turmoil

Spanish parties are simply not used to formal coalition politics at central government level, and don’t seem to be willing to adapt to the times in a hurry. Since 1982, either one or other of the two main parties, the conservative PP and the Socialist Party (PSOE), had always managed to form either a majority government or alternatively a strong minority government, in the latter case achieving working majorities by striking mutually beneficial deals with regionally-based nationalist parties—especially in the Basque Country and Catalonia—to secure their support in the Spanish Parliament (a classic case of “I’ll scratch your back if you scratch mine”). Neither party was prepared for two quite successful newcomers—the populist left-wing Podemos (“We Can”) and the centre-right Citizens party (C’s)—coming along to break up their longstanding dominance, at the same time as the pro-independence wave in Catalonia makes reviving the traditional mutual support arrangements with the Catalan nationalist parties impossible. 

The re-run elections held on 26 June have so far simply resulted in another stalemate. The PP won again and this time managed to increase its seats from 123 to 137, but it still fell far short of an absolute majority of seats (176) in Spain’s Parliament. The only plausible option for Rajoy in the circumstances is to form a minority government, since both the PSOE and C’s ruled out the possibility Rajoy had initially advocated of a “grand coalition” comprising the PP, the PSOE and potentially C’s too—an option which market participants had considered the most likely to deliver the structural reforms Spain needs, but which would not have provided the “government of change” that so many Spanish citizens voting for new parties seek. Rajoy had managed to reach an agreement with C’s (32 seats) for it to support his investiture attempts on 31 August and 2 September, as well as the commitment of the one MP from the Canary Coalition (CC) to do the same, but he failed to secure the 11 abstentions he would also have needed to be voted in on the second attempt with a simple majority. This would have required some of the PP’s arch rival the PSOE to abstain, and PSOE leader Pedro Sánchez remains absolutely adamant that his party will continue to vote against Rajoy instead. Sánchez is in a weak position since the PSOE declined at the re-run elections and is under pressure from Unidos Podemos (an electoral coalition between Podemos, the United Left party and some other smaller left-wing forces), so he is not in a strong position to try and form a government himself, but he does not want to lose yet more voters to Unidos Podemos by being seen to allow or to prop up a conservative government either. It looks like only an internal crisis within the PSOE could possibly change the circumstances.

There is an outside chance that Rajoy could attempt an investiture vote again after the Basque regional elections on 25 September, if it looks like he might be more likely to get the Basque Nationalist Party (PNV)—which has 5 seats in the Spanish Parliament—on board then, to continue to boost his numbers and up the pressure on the PSOE to deliver the final few abstentions. The only plausible circumstance in which the PP might stand any chance of getting the PNV on side is if, after the Basque regional elections, the PNV itself finds it needs the PP’s support to be able to govern in the Basque region. This is not totally beyond the realm of possibility, since the PNV is likely to win the Basque elections with a minority of votes and could struggle to form a working majority, especially if its traditional ally, the Basque Socialist party (PSE)—the Basque federation of the PSOE—declines as expected amid the rise of Podemos, which could potentially build alliances with other left-wing forces including the Basque anticapitalist and secessionist EH Bildu coalition of parties. Podemos is proving particularly attractive in the Basque Country (and Catalonia too) given that it is the first Spanish party to support the idea of self-determination for Spain’s constituent territories. Indeed, the PNV itself, a traditionally centre-right party which is struggling to attract the younger generations of Basque voters, is far from immune to the risk of losing some of its voters to the populist party: at the Spanish general election re-run in June, it was significant that Unidos Podemos beat the PNV not only in terms of votes but also seats in the PNV’s traditional Basque stronghold of the province of Vizcaya (one of the three provinces making up the Basque region). In these changing circumstances, the PNV could possibly end up needing the support of the PP in the Basque Parliament in order to govern, which would inevitably require it to return the favour in the Spanish Parliament, but this is only one of various possible outcomes at this stage and the PNV certainly looks highly unlikely to contemplate this option as anything but a very last resort.  

Summing up

Overall, the political impasse thus looks set to continue for the foreseeable future—though if we’re looking for silver linings, at least Spain’s nearly nine-month hiatus is still nowhere near Belgium’s 2011 record of 19 months without a government. Spain faces unprecedented challenges as it undergoes a fundamental political transformation stemming from the widespread disillusionment with existing political institutions and actors and the emergence of new players, not to mention the territorial crisis due to the Catalan challenge to the integrity of the Spanish state. While Spain’s GDP growth has remained remarkably resilient in recent quarters, there is no room for complacency. The country’s persistent structural deficit—which cannot be effectively addressed during the current political deadlock—still renders its economy particularly vulnerable to future changes in economic climate and puts the country on a collision path with Brussels over the required fiscal consolidation trajectory. 

Author: Caroline Gray, Senior Economics Editor, FocusEconomics

20/2/15: Troika 3 : Greece 1. Rematch on Monday.

Eurogroup agreement on Greece 'achieved' tonight is a classic can kicking exercise in which Eurogroup and the Troika have won, Greece lost, but no one has moved an inch in real actionable terms.

Why?

• This is not an agreement to end the current programme that Greece is in, nor an agreement on a new programme to replace the current one. Instead, this is an agreement on the methodology for future negotiations over the replacement agreement. The current Master Financial Assistance Facility Agreement (MFAFA) is extended by four months. Hence, the current 'austerity programme' is still in place and has not been replaced by anything new. The extension is to allow time for developing a new agreement to bridge the current programme. This does not guarantee any of the conditions of the new agreement (e.g. 'easing of austerity' or 'reducing debt burden' or anything whatsoever) that will have to follow the current programme after June.
• Over the next two months (at the longest) here will be a review of the current programme and Greek Government proposals for amending the programme. The review will be conducted "on the basis of the conditions in the current arrangement" (see full agreement here: http://www.consilium.europa.eu/en/press/press-releases/2015/02/150220-eurogroup-statement-greece/). So no deviations from the 'basis of the conditions in the current' agreement will be allowed even in the review stage, although they might be allowed in the future agreement.
• However, the agreement also states that this review will make "best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions." In other words, the new agreement will still be required to run within the parameters allowed by the current agreement. You can read this as 'Greece has won recognition from the Eurogroup that current austerity programme needs revision'. Or you can equally read it as: within current austerity programme, there can be some flexibility, like for example, delaying austerity today, but loading more austerity risk into the future, should current delay fail to produce substantial improvement in underlying conditions.

To sum up the above: the old austerity (MOU and MFAFA) are now extended by 4 months. In exchange, Greece gets a promise that the Eurogroup and the institutions (aka Troika) will take a look at its proposals, as long as these proposals adhere to the basis of the current austerity MOU.

• Greece originally requested a 6-month extension, which would have allowed it to cover redemptions of some EUR6.7 billion worth of ECB bonds maturing in July and August, using the funds from the existent programme. They failed - the agreement extends current access to funds until June and puts Greece on the hook negotiating new bailout while staring into the double barrel of massive debt redemptions coming up. (see http://www.zerohedge.com/news/2015-02-20/why-4-and-not-6-months)

To sum up: Greece will be back to square one, but in a weaker financial position in June, unless it really plays ball before the end of the current extension. This is a major win for the Eurogroup.

• Greece committed to complete the current bailout. Worse, if it does not follow on through with the planned austerity, Greece will not receive the last tranche of funds. "Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup." So Troika is still there today as it was there yesterday and the Greeks have failed to end the current bailout. If you are inclined to say Eurogroup is not Troika, good luck: today's Eurogroup included IMF, ECB and ESM chiefs. And the Eurogroup clearly stated: "we welcome the commitment by the Greek authorities to work in close agreement with European and international institutions and partners. Against this background we recall the independence of the European Central Bank. We also agreed that the IMF would continue to play its role." So both ECB and IMF are in place and Troika has simply been renamed into Institutions. 

To sum up: Troika is here, still. 

• On top of that, the Greeks have lost control of bank recapitalisation funds. "In view of the assessment of the institutions the Eurogroup agrees that the funds, so far available in the HFSF buffer, should be held by the EFSF, free of third party rights for the duration of the MFFA extension. The funds continue to be available for the duration of the MFFA extension and can only be used for bank recapitalisation and resolution costs. They will only be released on request by the ECB/SSM." Until now, these funds were to be handled by the Hellenic Financial Stabilisation Fund (HFSF). These funds were also targeted by the Greek Government for use outside bank recapitalisations. Both are now lost positions for Greece: the funds move to EFSF, Greek Government has no say on their disbursement and they can only be used for banks recaps. 

To sum up: Greeks did not gain control over banks recapitalisation funds and did not gain access to these funds for the purpose of easing austerity.

• In return for the above concessions, Greece got a very wooly commitment from the Eurogroup that the New Troika "will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account". In other words, the primary surplus required for 2015 can (and probably will) be adjusted down. The problem, of course, is that this is only for 2015 and not beyond and that it is of a magnitude that will make absolutely no difference to Greece - we are talking about something of the order of 1-2 percent of GDP in just one year. 
• Reminder, Greek debt to GDP stands at around 175%. No amount of tinkering on the margins will deliver sustainability of this debt and no amount of tinkering on the margins can deliver a buffer of defense from the risk of future increase in the cost of funding the Greek debt.

To sum up: Presenting a primary deficit adjustment as a victory for the Greeks is equivalent to prescribing a course of homeopathy for the stroke patient.


Key point of the whole agreement is that it entails nothing in terms of what follows after the current bailout is completed. This - in all its principles and details - remains subject to future agreement, outside the scope of this Eurogroup meeting. In other words, Greece bought itself time to bargain about the future, Eurogroup bought itself time to get Greeks into even less comfortable financial position. And the Troika is still there.


In words of Wolfgang Schäuble: “The Greeks certainly will have a difficult time to explain the deal to their voters. As long as the programme isn’t successfully completed, there will be no payout."

In words of the Agreement: "The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely."

In words of the WSJ: "Greece’s ...government backed down from its plans to throw out the bailout program..., striking a tenuous deal with the rest of the eurozone to extend the program by four months."

In words of FT: "The decision to request an extension of the current programme is a significant U-turn for Alexis Tsipras, …who had promised in his election campaign to kill the existing bailout. …it includes no reduction of Greece’s sovereign debt levels, another campaign promise. Discussions on debt restructuring are likely as part of follow-on talks ahead of another bailout programme, which must now be agreed before June…Critically, the agreement commits Athens to the “successful completion” of the current bailout review, although it allows for Greece to negotiate its economic reform agenda."

Troika 3 : Greece 1

22/3/2014: Mind the Gap... Primary Balances Gap...

Here's a chart from Pictet showing precisely why all the austerity has been the case of too-little-to-date when it comes to stabilising debt ratios across the euro area:

And do note 'best in the lot' country of Ireland against the 'laggard' Italy... One wonders, how Messrs Kenny & Noonan are going to plug that gap while delivering tax cuts and jobs programmes?..

23/1/2014: The Age of Great Stagnation: Village Magazine, January 2014

This is an unedited version of my column in Village magazine for December 2013-January 2014.


With employment rising, property prices on the mend, mortgages arrears stabilising, Exchequer returns surging and business and consumer confidence regaining pre-crisis highs, one can easily confuse Ireland for an Asia-Pacific economic dynamo.

Alas, the reality of our economic predicament suggests that once the official hullabaloo about the return to growth is stripped back to the bare facts, it becomes clear that Ireland is entering a new age, the Age of Great Stagnation.

The reasons for this are two-fold.

Firstly, we are still facing a long-term debt crisis. No matter what statistic one pulls out of the hat, this crisis, embodied in high levels of debts carried by our households, non-financial companies and the Exchequer, is going to be with us for many years to come.

Secondly, we are still in a structural growth crisis. Neither our own development model, heavily reliant on FDI and transfer pricing by the multinationals, nor our core trading partners growth models, reliant on fiscal and financial repression to drag themselves out of the crisis, are sustainable in the long run.


In our leaders’ dogmatic adherence to the past (a behavioural  fallacy that economists call path-dependency) our official growth theory suggests that economic recovery in our major trading partners will trickle down to Irish national accounts.

Alas, in the longer run, a lot is amiss with this thinking.

For starters, exports-led theory of growth is simply not true. Over 2000-2013, Ireland led the euro area in growth and in a recession. Since the onset of the crisis, cumulative real GDP across the euro area contracted by 2.1 percent. In Ireland, over the same period, GDP fell by 4.7 percent as domestic drivers for the crisis overpowered external factors. As for the recovery period, unlike in the early 1990s, the improving economic fortunes abroad are not doing much good for Ireland’s exports to-date. Over the last four years, volumes of imports of goods by the euro area countries grew by almost 15 percent. Irish exports of goods over the same period of time rose just 2.2 percent.

The reason for this is structural. Tax arbitrage only works as long as there are profits to move through the Irish tax system. Once the profits dry out, arbitrage ends. Pharma sector is a good example of this dynamic. Replacing goods exports-driven growth with ICT services-driven trade is decoupling our external balances from the real economy.

Worse, much of our trade balance improvements in 2009-2013 was down to collapse in imports. This presents a serious risk forward. To fund our public and private liabilities, we need long-term current account surpluses to average above 4 percent of GDP over the next decade or so. We also need economic growth of some 3-3.5 percent in GDP and GNP. Yet, to drive real growth in the economy we need domestic investment and demand uplifts. These require an increase in imports of real capital and consumption goods. Should our exports of goods continue down the current trajectory, any sustained improvement in the domestic economy will be associated with higher imports. A corollary to that will be deterioration in our trade balance. This, in turn, will put pressures on our economy’s capacity to fund debt.

And given the levels of debt we carry, the tipping point is not that far off the radar. In H1 2013 Ireland's external real debt (excluding monetary authorities, banks and FDI) stood at almost USD1.32 trillion - the highest level ever recorded. Large share of this debt is down to the MNCs. However, overall debt levels in the Irish system are still sky high. At the end of H1 2013, total real economic debt in Ireland - debt of Irish Government, excluding Nama, Irish-resident corporates and households - stood at over EUR492 billion - down just EUR8.5 billion on absolute peak attained in H3 2012.

Which brings us to the second point raised in the beginning of the article: our economic, regulatory, monetary and political dependency on the euro area.

Instead of charting own course toward sustainable long-term competitiveness, we remain attached at the hip to the euro area. The latter is now seized by a Japanese-styled long-term stagnation with no growth in new investment and consumption, and glacially moving deleveraging of its own banks and sovereigns. Financial, regulatory and fiscal repressions are now dominating the euro area agendas.

All of the trade growth across the euro area today comes from the emerging and middle-income economies outside the euro block. And competition for this trade is heating up. Even Portugal, Greece and Spain, not to mention Italy are posting positive trade surpluses and these are projected to strengthen in 2014.

Meanwhile, we remain on a slow path to entering new markets, despite having spent good part of the last 6 years talking about the need to 'break' into BRICS and the emerging and middle-income economies. In Q1-Q3 2012, Irish exports of goods to BRICS totalled EUR2.78 billion. A year later, these are down EUR240 million.

We are also missing the most crucial element of the growth puzzle: structural reforms.

Since 2008 there has been virtually no change in the way we do business domestically, especially when it comes to protected professions and state-controlled sectors. Legal reforms, restructuring of semi-state companies’ and the sectors where they play dominant roles, such as health, transport and energy, reductions in the costs and inefficiencies in our financial services – these are just a handful of areas where promised reforms have not been delivered.
Instead of reducing the burden of monopolistic competition in key domestic sectors, we are increasing it. In banking, oligopoly of three domestic players is being reinforced by exits of international banks and lack of new entrants into the market.

In line with the lack of transformative changes in state-controlled sectors, there is little innovation in the ways the Government approaches fiscal policies. Taxes and charges are climbing up, while spending continues to run ahead of pre-crisis trends. On a cumulative basis, over 2008-2013, Irish Government spending above 1997-2007 trend stands at around EUR79 billion. This trend is based on a generous assumption for annual growth of government spending of 6 percent from 1997-1999 on. Over the last sixteen years, average annual growth in our nominal Gross National Product run at under 6.07 percent per annum. Growth in Government spending over the same period stands at 7.22 percent and for current expenditure – at 7.46 percent.

Meanwhile, costs are rising across all categories of regulations, from taxation to professional compliance, to operational aspects of enterprise. Not surprisingly, Ireland is experiencing falling entrepreneurship. According to the World Bank data, in 2004-2008, Ireland's average density of start-ups was 6.1 allowing for an average of 17,500 new companies to be formed per annum. In 2012 the density fell to 4.5 and the number of new companies registered slipped to 13,774.  This does not account for numerous re-openings of the businesses liquidated over the recent years to resolve the back-breaking tolls of upward-only rent reviews.

The political cycle is now turning against the prospect of deep reforms with European and local elections on the horizon.  With it, any prospect of real, structural change in the economy is fading away. The current technical recovery in the economy is likely to push Irish growth to above the euro area average rates in 2014. Beyond then, there is little visibility as to what can sustain such a momentum. In short, enjoy this late sunshine, while it lasts.

29/11/2013: McKinsey estimates of QE effects on economies

Recent paper by McKinsey Global Institute, published November 2013 and titled "QE and ultra-low interest rates: Distributional effects and risks" looked at the effects of exceptional monetary policy measures implemented by the central banks in the US, the UK, Japan and the euro area since 2007.

"More than five years [since the beginning of the crisis] …central banks are still using conventional monetary tools to cut short-term interest rates to near zero and, in tandem, are deploying unconventional tools to provide liquidity and credit market facilities to banks, undertaking large-scale asset purchases—or quantitative easing (QE)—and attempting to influence market expectations by signaling future policy through forward guidance. These measures, along with a lack of demand for credit given the global recession, have contributed to a decline in real and nominal interest rates to ultra-low levels that have been sustained over the past five years."

The "ultra-low interest rates have produced significant distributional effects if we focus exclusively on the impact on interest income and interest expense." as the result:


McKinsey's core findings include:

• ƒ"Between 2007 and 2012, ultra-low interest rates produced large distributional effects on different sectors in advanced economies through changes in interest income and ...expense."
• "By the end of 2012, governments in the US, the UK, and the Eurozone had collectively benefited by $1.6 trillion, through both reduced debt service costs and increased profits remitted from central banks."
• "Meanwhile, households in these countries together lost $630 billion in net interest income, with variations in the impact among demographic groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income."
• "Non-financial corporations across these countries benefited by $710 billion through lower debt service costs."

It is worth noting that the McKinsey study does not account for the effects of reduced unemployment and shallower recessions that were attributed to the deployment of the monetary policies. Neither does the study account for the effects of higher taxation levied by the Governments on households.

Banking sector effects identified in the study are:

• "The era of ultra-low interest rates has eroded the profitability of banks in the Eurozone. Effective net interest margins for Eurozone banks have declined significantly, and their cumulative loss of net interest income totaled $230 billion between 2007 and 2012."
• "...Banks in the US have experienced an increase in effective net interest margins as interest paid on deposits and other liabilities has declined more than interest received on loans and other assets. From 2007 to 2012, the net interest income of US banks increased cumulatively by $150 billion."
• "Over this period, therefore, there has been a divergence in the competitive positions of US and European banks."
• "The experience of UK banks falls between these two extremes."

Financial companies and assets:

• "Life insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates. Those insurers that offer customers guaranteed-rate products are finding that government bond yields are below the rates being paid to customers."
• Obviously, not a word about the vast financial repression sweeping across the financial sector, especially in the euro area, which is seeing assets seized for 'tax raising' etc.
• But a stern warning: "If the low interest-rate environment were to continue for several more years, many of these insurers would find their survival threatened."
• And, not stated but on everyone's mind: if the low interest-rate environment were to come to an end, wholesale bankruptcy of household and corporate financial balance sheets will do miracles to the economies too...
• Per McKinsey: "The impact of ultra-low rate monetary policies on financial asset prices is ambiguous. Bond prices rise as interest rates decline, and, between 2007 and 2012, the value of sovereign and corporate bonds in the United States, the United Kingdom, and the Eurozone increased by $16 trillion."
• "But we found little conclusive evidence that ultra-low interest rates have boosted equity markets. Although announcements about changes to ultra-low rate policies do spark short-term market movements in equity prices, these movements do not persist in the long term. Moreover, there is little evidence of a large-scale shift into equities as part of a search for yield. Price-earnings ratios and price-book ratios in stock markets are no higher than long-term averages."

Households:

• "Ultra-low interest rates are likely to have bolstered house prices, although the impact in the United States has been dampened by structural factors in the market. At the end of 2012, house prices may have been as much as 15 percent higher in the United States and the United Kingdom than they otherwise would have been without ultra-low interest rates, as these rates reduce the cost of borrowing."
• "If one accepts that house prices and bond prices are higher today than they otherwise would have been as a result of ultra-low interest rates, the increase in household wealth and possible additional consumption it has enabled would far outweigh the income lost to households. However, while the net interest income effect is a tangible influence on household cash flows, additional consumption that comes from rising wealth is less certain, particularly since asset prices remain below their peak in most markets. It is also difficult today for households to borrow against the increase in wealth that came through rising asset prices."

Summary of the effects:

18/7/2013: QE or Not-QE... spot the difference?

My recent exchange with @LISwires on the issue of risks involved in both continued QE and pursuing an exit strategy.


The tweet the started it: "Both are… RT @LISwires: QE is "Treacherous" RT @livesquawk: Roubini: Fed Exit Strategy Will Be 'Treacherous' fw.to/gWL3DCg @CNBC"

Explaining my view that QE & Exit strategies are both consistent with structural and grave risks are:

[Both QE and exit is] like being between a rock and a hard place... inside an iron pipe… Exit = QE = non-QE = stimulus = austerity = disaster. The whole point of a structural depression is EXACTLY that!

In a normal recession, one half of the economy's 'cart' gets stuck in the 'mud'. In a structural depression, the entire cart is in the middle of a quick sand trap.

The ONLY thing that would've worked was direct injection of funds to write down household & corporate debts, & in some cases - restructure sovereign debt too. We missed the boat on this by engaging in LTROs/OMT/ESM/EFSF/ESF/EBU/EMU… stupidity of tinkering along the edges. Hence [having engaged in wasting resources on marginal solutions], from here on - it is vast pain over long term. The choice was made by our 'leaders' in ECB/EU/IMF/National Governments/NCBs.

The real failure of economists/economics is NOT our inability to forecast disasters. It is in our inability to see the size & nature of disaster AFTER it hits.

Note: my reference to the direct recapitalisation solution can be traced to this: http://trueeconomics.blogspot.ie/2010/05/economics-16052010-eu-on-brink.html

10/6/2013: Italian GDP for Q1 2013

Italian GDP release for Q1 2013 in few tweets and a picture

So, 'fail' on preliminary reading, showing lead indicators being too optimistic. Expectations average was for -2.2% decline. And per components:

 Note the last one - growth crisis accelerating, not otherwise.

Note one positive contributor... the only one...

And quarterly changes on real GDP side:

So we know austerity has been savage. Really, savage...