17/5/2014: Foreign Affairs on the rise of Ukrainian ultra-nationalism

These days, it is rare to see any seriously argued articles about the role of ultra-nationalism on the Kiev-side of the Ukrainian civil war (that's right - it is now a full-blown civil war). But here is a very good article on the subject published in highly reputable and usually highly critical of Russia Foreign Affairs: http://www.foreignaffairs.com/articles/141405/alina-polyakova/on-the-march?sp_mid=45902074

It is objective, in my view, and it is factual. It does not assert that ultra-nationalism has a broad support in public opinion, but it does show that it is gaining ground and is one of the stronger forces behind the political leadership in modern 'Western' Ukraine.

And further:

Read the whole article!

17/5/2014: Growth Forecasts: What Matters and What Doesn't

This is an unedited version of my Sunday Times article from April 20, 2014.



Nothing sums up frustrations of the policymakers and general public with economics as well as the famous quote from the US President, Harry S. Truman: “Give me a one-handed economist, all my economists say is ‘on the one hand …and on the other hand…”

Quips aside, human choices and activities - the fundamental forces driving all economics - are unpredictable and painfully complex to model and measure. But beyond behavioural intricacies, complex nature of modern economic systems implies that data we use in analysis is often rendered non-representative of the realities on the ground.

Take for example the concept of the national income. Economists define this as a sum of personal expenditure on consumer goods and services, net expenditure by Government on current goods and services, domestic fixed capital formation, changes in stocks and net exports of goods and services. Combined these form Gross Domestic Product or GDP. Adding Net Factor Income from the Rest of the World (profits and dividends flowing from foreign destinations into Ireland, less payments of similar outflows from Ireland) gives us Gross National Product or GNP.



All of this seems rather straightforward when it comes to an average country analysis. By and large the overall changes GDP and GNP are closely linked to other economic performance indicators, such as inflation, investment, employment and household incomes.

Alas, this is not the case for a tiny number of small open economies with significant share of international activities in their total output, such as Ireland. In such economies, both GDP and GNP can be severely skewed by tax optimisation and global rent-seeking strategies of multinational enterprises. Faced with large share of domestic accounts distorted by tax arbitrage, economists are left to deal with high degrees of uncertainty when forecasting national output and employment. Even past data becomes hard to interpret.

In recent months, various analysts published a wide range of forecasts and predictions for Irish economy for 2014-2015. Consider just three sources of such forecasts: Department of Finance, the ESRI and the IMF.

Budget 2014 projections, forming the basis of our fiscal policy predicted average annual real GDP growth of 2.15 percent, with underlying real GNP growth of 1.7 percent. These projections were based on the assumed annual growth of 1.5 percent in personal consumption, and 6.35 percent growth in investment. These projections were also in-line with IMF forecasts.

Around the same time, ESRI was forecasting GDP growth of 2.6 percent for 2014 and GNP growth of 2.7 percent, well ahead of the Department of Finance outlook. ESRI forecasts were much more skewed in favour of domestic investment and personal consumption.

Fast-forward six months to today. In its latest analysis, IMF lowered its forecast for our GDP growth to 1.7 percent for 2014, leaving unchanged their outlook for 2015. The Fund forecast for GNP growth remained unchanged for 2014 and was raised for 2015.

ESRI has shifted decidedly into even more optimistic territory. The Institute's latest predictions are for GDP expansion of 3.05 percent on average in 2014-2015. GNP growth forecast is now at 3.6 percent. ESRI's rosy projections are based on expectations of a massive 10 percent growth in investment, with private consumption expectations also ahead of previous projections.

Finally, this week, Department of Finance upgraded its own forecasts, lifting expected 2014-2015 growth to 2.4 percent for GDP and 2.5 percent for GNP. Domestic demand growth is now expected to average 2.4 percent through 2015, and investment growth is expected to run at a head-spinning rate of 13.9 percent.

Everyone, save the IMF, is getting increasingly bullish on Irish domestic economy, which, in return, spells good news for employment and household finances.



The problem is that all of these forecasts give little comfort to anyone seriously concerned with the impact of economic growth on the ground, in the real economy.

Even the ESRI now admits that we cannot forecast this economy with any degree of precision. More significantly, the Institute recognises that our GDP figures are no longer meaningful when it comes to measuring actual economic performance. Instead, the ESRI claims that GNP is a better gauge of the real state of the Irish economy.

In truth, the proverbial rabbit hole does not end there: Irish GNP itself is still heavily skewed by the very same distortions that render our GDP nearly useless.

The ongoing changes in our exports and imports composition are throwing thick fog of obscurity over our net exports, which account for 22.6 percent of our GDP and 26.7 percent of our GNP – not a small share.

Since 2012, expiration of international patents in the pharmaceutical sector, triggered billions in lost exports revenues and shrinking trade surplus. In colloquial terms, Irish economy is now running weak on expired Viagra.

Just how much the patent cliff depresses our GDP and GNP is a mater of dispute, but we do know that pharma accounts for about one quarter of our total exports and one eighth of the gross value added in economy despite employing very few workers here. The patent cliff was responsible for a massive 1.25 percent drop in our labour productivity across the entire economy last year. But, as ESRI analysis previously shown, the overall effect of patents expirations on our GDP (and by corollary on GNP) is extremely sensitive to the assumptions relating to where pharma companies book their final profits. Profits booked in Ireland yield significant adverse impact. Profits channeled through Ireland to offshore destinations have negligible impact.



Which brings us to the second force contributing to rendering both GDP and GNP growth largely irrelevant as measures of our economic wellbeing.

Based on data through Q4 2013, since the bottom of the Great Recession in 2010, our net exports of goods and services rose EUR10.6 billion, driven by EUR14.4 billion in new exports of services offset by the decline of EUR3.05 billion in exports of goods. Ireland’s exports-led recovery was associated with a massive shift toward ICT exports.

Much of this trade was associated with little real activity on the ground.

Consider for example tax revenues. In 2010-2013, for each euro in added net exports, the Exchequer revenues increased by less than 3.3 cents. Back in 2000-2002 period the same relationship was more than six times higher. Of course back then both the MNCs and domestic companies were in rude health or on steroids of cheap credit and patents protection, depending on how a two-handed economist might look at the numbers. Still, the core composition of our exports was more directly connected to real production and value creation taking place in this country.

This can be directly witnessed by looking at other metrics of current activity, such as Purchasing Manager Indices published by Markit and Investec Ireland. Since Q1 2010, both Services and Manufacturing PMIs have been consistently signaling a booming economy. Meanwhile, GDP posted an average annual rate of growth of just 0.22 percent. Employment in industry ex-construction is down 21 percent on pre-crisis peak, employment in professional, scientific and technical activities is down 4.3 percent and employment in information and communication sector is down 1.1 percent.

The new crop of multinational corporations driving growth of GDP and GNP in Ireland is much more aggressive at tax optimisation than their predecessors. Which means that they also tend to use fewer domestic resources to deliver real value added on the ground.



All of which suggests that gauging true extent of economic growth in Ireland is no longer a simple matter of looking at either GDP or GNP figures. Instead, we are left with other aggregate measures of the real economy, such as: non-agricultural employment and the final domestic demand – a sum of private and public consumption and gross fixed capital formation.

By the latter metric, this economy has managed to deliver 6 consecutive years of uninterrupted annual declines in activity. In 2013, inflation-adjusted domestic demand fell by some EUR366 million on previous year. Cumulated losses since 2008 now stand at EUR32 billion or almost 20 percent of our GDP. Good news is that the rate of declines has been de-accelerating every year since 2009. And in H2 2013 demand rose 1.75 percent year on year. Bad news is that in real terms, our final domestic demand is currently running at the levels just above those recorded in 2003. In other words, we are now into the eleventh year of the ‘lost decade’.  At H2 2013 rate of growth, it will take Ireland until 2026-2027 to regain pre-crisis levels of domestic economic activity.

Meanwhile, employment figures are painting a slightly more optimistic picture, albeit these figures too are not free of methodological problems. In Q4 2013, non-agricultural employment in Ireland stood at 1,793,000, with H2 figures on average up 1.91 percent or 33,550 on the same period of 2012. To-date, non-agricultural employment numbers are down 13 percent or 266,550 on pre-crisis levels. However, when one considers total population changes in Ireland since the onset of the crisis, the ratio of non-agricultural employment to total population is currently at 39 percent, which is the level below those recorded in Q4 2000.


To the chagrin of the Irish policymakers and general public, our economy is, like an average economist, two-handed. On the one hand, our employment and total demand figures show an economy anemically bouncing close to the bottom. On the other hand, a handful of MNCs are pushing our GDP and GNP stats up with profits from their operations in far flung places retired here. Harry Truman really had it easy compared to Enda Kenny.

Box-out

The latest data from the Central Bank covering retail interest rates confirms two key trends previously highlighted in this column.

The first one is the rising cost of borrowing compared to the underlying European Central Bank policy rate. In January-February 2014, average retail rates on new loans for house purchases were priced 3.32 percent higher than the ECB rate. A year ago the same margin was 2.89 percent. For non-financial corporations, average margin rose from 4.58 percent to 5.03 percent for loans under EUR1 million, and from 2.42 percent to 3.1 percent for new loans over EUR1 million. Lending margins over the ECB rate in January-February 2014, averaged two to three times the margins charged in the same period of 2007 at the peak of credit bubble.

The second trend relates to the spread between rates paid by the banks on deposits and interest charged on loans. Since October 2011, Irish households consistently faced deposit rates that are by some 2 percentage points lower than the average annual cost of new loans for house purchases. In January-February 2014 this gap widened by some 0.27 percent compared to the same period of 2013. The spread is now running at double the rate recorded at the peak of the pre-crisis credit boom. The same holds for interest rates differential between loans and deposits for non-financial corporations which is now at the second largest levels since January 2003 when the data reporting started.

In short, credit today is historically more expensive, while deposits are cheaper. Irish banking sector continues to extract emergency rents out of the real economy with no easing in sight.

17/5/2014: The Banking Inquiry Shopping List...

This is an unedited version from my Sunday Times article from May 4, 2014.


This week, the Government announced the establishment of a banking inquiry.
The idea is to take a definitive, conclusive and final shot at identifying the events and the actions that have led to the historically and internationally unprecedented financial crisis that has ravaged our economy, society and the lives of millions of our citizens.

Some would say this was long in coming. But, in reality, we have been here before.


Between 2010 and 2011 we had the Nyberg Report, the Honohan Report and the Regling-Watson Report. All were full of generalist discourse about technical and systemic failures, but contained few specifics. In July 2012 we had the PAC report into the crisis. This set out the framework for the current inquiry, but also fell far short of bringing the matter to a closure.

All of these reports and inquiries suffered from similar problems. They were limited in scope, restricted in terms, covered only sub sets of the crisis history and virtually nothing in terms of the crisis fallout, and were disempowered to deliver conclusions in excess of anodyne academism. None of the reports to-date delivered final definitive answers, named names and specific actions by actual players.

This nation, told to pay for the banks and other domestic and foreign actors’ reckless practices, was never given a chance at establishing impartially and substantively the truth about the causes and the drivers of the crisis.

The Anglo Three trial, concluded this week, served as a logical denouement of the aforementioned processes of obfuscation of the causes of the crisis. It loomed large in public minds as a possible source of closure. Excessively technical in nature, restricted in scope and legalistic in terms of discovery, it naturally fell short of achieving that closure. With this failure, public trust in core institutions of this state has been stretched too thin. Even our public representatives now see the urgent need for some sort of a broadly based, non-partisan and open inquiry.


To be effective, the inquiry must mark a clear-cut departure from the past.

It has to be open and broad. Its remit must cover years prior to the crisis, preferably starting from the regulatory, monetary and market foundations laid out in the late 1990s, reaching beyond the night of the 2008 Guarantee, all the way to today.

The inquiry must cover not only the actions of the banks, but also those of our regulators, supervisors, the Department of Finance, the Department of Taoiseach, the roles played by the IFSC-based institutions and the Social Partners. It must deal with technical issues, such as, amongst others, liquidity rules breaches, macro prudential risks build-up and transmission of risks from Government policies to the banking sector and property lending, investment practices violations, and funding risks.

The inquiry must dig deep into the underlying culture, strategic choices and decision-making in our banking system, broader financial services, and economy and policymaking at large.

It must name key names. It must place responsibility on the shoulders of individuals involved - those still serving and since retired. The inquiry must distinguish and allocate legal, regulatory, professional and ethical responsibilities, identifying not just potential violations of the law and regulations, but also systemic weaknesses in competencies, incentives and performance.

The inquiry must achieve clarity as to the role played by banks auditors, consultants, advisory committees and boards, as well as by banks executives, including mid-ranked professionals, such as economists, risk analysts, and lending managers.

We need to know and understand the roles played by European and potentially US policymakers, organisations and investors in fuelling the credit bubble here in Ireland and in structuring the disastrous fallout from the credit bust.

Ireland paid some 40 percent of the overall cost of the euro area financial crisis. The inquiry at least should tell us, who benefited from these payments and who owes us a refund.

Above all, the inquiry must be robust, open, and reflective of the public appetite for closure. It must leave behind evidential record of errors made, strategies adopted, actions taken, regulatory breaches unaddressed and expert opinions supplied. In other words, it will have to break an entirely new ground in terms of all past inquiries ever conducted in the history of this state.

15/5/2014: Innovation, Employment & Growth: Ireland's Human Capital Dilemma

This is an unedited version of my article for Sunday Times, April 06.


From jobs programmes aiming to boost employment creation to entrepreneurship strategies and to solemn promises to unlock credit supply and investment for indigenous innovation-based enterprises, Irish SMEs have been basked in the public policy sunshine.

Much of this attention is cross-linked to another public policy fad, Ireland’s long-running obsession with innovation and R&D. In 2013, amidst continued borrowing for day-to-day operations from the Troika, Irish State spent EUR773 million on supporting research and development activities in academia and industry. Of this, a good portion was targeted to fund R&D and other innovation activities linked to Irish indigenous SMEs.

There are three basic problems with all this policies activism. One, we have no idea as to what sort of financial returns this public investment generates to the taxpayers. Two, we have virtually no coherent and independently verified evidence that the innovation-focused SMEs are delivering any serious economic returns in terms of real jobs creation and income generation. Three, we have no proof the state-funded innovation is a right model for SMEs growth generation in the first place.


Enterprise innovation is a weak spot for Ireland. Indigenous patent applications reported in July last year by the Patents Office and covering full year 2012 stand at decades low. Monthly data from the New Morning IP – an Irish consultancy dealing with issues of intellectual property – shows that in 2013 indigenous patents applications fell even further, down by almost 3 percent year on year.

Back in 2006, the national strategy for science set 2013 as the target date to deliver a 'world class knowledge economy'. Since then, numbers of indigenous patents filed under the Cooperation Treaty and to the European Patent Office have declined.

And the problem reaches beyond our SMEs. For example, per IDA own figures, only 28 percent of agency clients have spent more than EUR100,000 per annum on R&D. In other words, nearly three out of four MNCs had, de facto, nil research activity here.

The university sector is the cornerstone of Irish Government's vision for delivering an innovation-focused SMEs culture. Sadly, our best universities are barely visible on the radar of international rankings. Ireland’s top university currently ranks only 61st in the QS Top University league table and 129th in the Times Higher Education (THE) rankings. Trinity ranks 55th in Arts & Humanities – an area that receives absolutely zero attention from the likes of IDA and Enterprise Ireland and is firmly placed outside our economic development policy umbrella. TCD ranks 81st in engineering and technology, 83rd in life sciences and medicine and 136th in natural sciences. All of these areas are focal points for R&D spending and feed into state enterprise supports systems. UCD is no better: ranked 139th in the world under QS criteria and 161st by the THE rankings.

By pretty much every possible metric, our innovation engines are not firing.


Meanwhile, enterprise formation, an area that should be a core priority for the Government that is allegedly focusing on entrepreneurship and jobs creation, is lagging. Irish start-ups rates, relative to the economy size, are low today and have been low even in the days prior to the Great Recession.

Based on the OECD statistics, despite years of booming ICT services and substantial growth in the IFSC, Ireland today shows relatively static number of enterprises trading in market services, and declines in the number of enterprises working in manufacturing and industries, excluding the construction sector.

Late last year, OECD published its Economic Survey of Ireland. The document recommended empirically founded approach to enterprise and innovation supports. OECD noted that over-proliferation of funding agencies and programmes is yet to be scaled back. Per OECD, Ireland has over 170 "separate budget lines… and 11 major funding agencies involved in disbursing the Science Budget". Meanwhile, the Government continues to add new ones, seemingly with little regard for their effectiveness. Not surprisingly, there is no evidence on systematic and independent evaluation of these programmes effectiveness. And there are no continuously reported return metrics relating to state investments in enterprise development and innovation.

Instead of real statistics, often misleading and highly aggregate numbers are being put forward as markers of success. Jobs commitments and gross jobs additions are presented as signifiers of major breakthroughs, without independent audits. Companies’ registrations rates are reported as being equivalent to start up rates and no central data reporting is provided for actual enterprise formation. Take for example a jump reported in new companies registrations in Q1 2014 when 10,741 new companies were entered into the register, marking a 6% rise year on year. This number included 3,989 limited companies - the third highest rate of new limited companies registrations for the first quarter over the last 10 years.

Sadly, these headline statistics tell us preciously little about the underlying dynamics of companies formation. For example, how many business restructurings completed in 2012-2013 are now leading to companies re-registrations? How many of the businesses launched in previous years survive? How many of businesses launched are actively trading in the real economy? We simply do not know.

Focus on top-line reporting metrics, such as aggregate numbers of companies registered, VC funds disbursed, R&D budgets spent, obscures the woeful lack of coherent policies supporting indigenous enterprises formation and growth. As the result, beyond the areas of ICT services, biotech and medical devices, we neither foster formation of micro enterprises nor help smaller companies to reach 'medium' size. And, via tax and compliance measures, we actively penalize self-employment – the source of much of the early-stage entrepreneurship.


Promoting real innovation and enterprise cultures requires supporting investment ecosystem and entrepreneurial risk-taking. These goals can only be achieved by lower taxation, especially via lower CGT and income tax, and a benign and highly efficient personal and business insolvency regime. These are not priority areas for the Government.

However, tax policies mix is a necessary, but not a sufficient condition for success. To further promote real enterprise growth, we need to stop fetishising scientific R&D-driven enterprises and ICT and refocus public funding toward more evidence-based enterprise development projects.

International research shows that ordinary and traditional sectors SMEs drive growth in jobs and income. Where traditional sectors are put onto exporting paths, these SMEs can drive exports growth as well. In contrast, high performance start-ups in ICT services, usually focused directly on exports markets, are less employment and income-intensive. ICT does contribute strongly to productivity growth and is a nice niche business to have on offer for investors, but as McKinsey recent research pointed out, tech innovation business is unlikely to fulfill the economy-wide hunger for jobs, especially jobs for the indigenous workforce.

Focusing on active training for entrepreneurship and mentoring of new companies is another necessary addition to the policies mix that is currently being sidelined in favour of populist drive for state investment and R&D funding. One key area where we are lacking in supports is access for entrepreneurs to legal, tax and financial advice. Costs of tax and legal compliance and structuring are unbearably high for younger companies and for smaller enterprises considering growth strategies. These costs crowd out funding available to companies to finance further development, hiring, as well as cap companies growth potential.

On investment side, we have a thriving culture of VCs chasing the 'next Facebook'. Over 90 percent of all VC funding extended in Ireland goes to finance ICT start-ups, with more than two-thirds of this going to ICT services companies, as opposed to physical technologies.  We also have over 75 incubators and accelerators, with the vast majority of these being state-owned and/or state-funded. These too focus almost exclusively on companies working in ICT, biotech and other lab-linked innovation sectors.

But we have no idea as to the effectiveness of this strategy. Numbers employed in core ‘knowledge economy’ sectors have grown by about 4,900 from the onset of the crisis through 2013. All of this growth was down solely to ICT jobs which added 9,125 new employees, while professional, scientific, and technical activities employment, excluding education sector, is down 4,225 on 2008. Adding up jobs creation reported by the MNCs from 2008 through present, it is highly likely that indigenous employment in professional, scientific, technical, and information and communication sectors has probably shrunk.

Looking at the overall landscape of enterprise formation here, we do know that with exception of Ryanair, CRH, Paddy Power and a handful of other flagship companies, no Irish SME has grown beyond the 'medium' level threshold. The magic target of exceeding EUR20 million in annual sales - set in the Enterprise Ireland 2005-2007 strategy plan has vanished, unmet.

Put simply, Irish indigenous companies are not getting smarter with billions of public funds invested in SMEs-targeting R&D activities and ventures over the years. At the same time, Irish SMEs are not growing in size either. Micro enterprises show some progression toward becoming small firms, but small firms show little dynamism upward and medium-sized companies are stuck with no capacity to break into the big firms league. The system is broken and incremental policy adjustments are not holding a promise of a solution. We need to go back to the drawing table on enterprise policy in Ireland.

Box-out: 

Recent research from the US, published by the National Bureau for Economic Research looked into sell-side equity analysts' ability to predict equity prices and the impact their predictions have on market valuations over the period of 1983-2011. Controlling for a wide variety of factors that routinely influence forecast errors, the study has found that at the times of the crises sell-side analysts forecasting accuracy deteriorates by up to 50 percent relative to normal. And just as analysts’ errors explode, their influence rises as well. In particular, forecasts that upgrade outlook for companies amidst the falling market tend to carry the greatest weight of public attention. Optimism pays, even if only for analysts’ employers. Which, of course, creates a powerful incentive for sell-siders to ‘talk up’ equities just around the time of the worst bear market. Lastly, the study found that at the time of financial crises, marketing efforts by sell-side analysts tend to increase, in part due to greater pressure on them to perform, in part due to expanded opportunities for being ‘heard’ by investors.

John Kenneth Galbraith thought that "The conventional view serves to protect us from the painful job of thinking." In the case of sell-side analysts musings on the crises, that might be not a bad alternative.

16/5/2014: Summary of euro area 'peripherals' risk ratings

A neat summary of sovereign risk ratings by the majors and Euromoney Credit Risk:

Rankings on the left reflect country position in risk league tables per ECR (lower rank, better performance) and in the brackets give changes on ranks since 2013 (so, for example, Ireland improved its risk position by 5 places to 38th out of 186 countries covered by ECR). ECR score is a risk score (higher score, lower risk) and ECR tier is a tier of risk that groups of countries cluster into (lower tier, closer the tier to top performing lowest risk countries).

The lesson, probably, is:

• Greece is due no upgrades
• Cyprus is due no upgrades
• Portugal is due an upgrade on Fitch to BBB+, Moody's to Baa2 or Baa3; and S&P to BBB
• Italy is due no upgrades
• Spain is due no upgrades
• Ireland is due no upgrades post Baa3 upgraded to Baa1 (+positive outlook) by Moody's today

One way or the other, things are starting to move more positively on ECR scores side, but ratings agencies are still lagging. But that is not new - exactly the same lags took place on the downside of trade back in 2008-2012.

16/5/2014: Three Points on Irish Universities Performance

Three slides on Irish Higher Education state of play from my presentation yesterday at the Cork IT (many thanks to the CIT for their hospitality):

16/5/2014: Competitive Sports of Competitiveness Gains

Yesterday I posted my Sunday Times article on unemployment and skills: http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html

Here is an interesting chart via BBVA Research on labour costs competitiveness gains across the euro 'periphery' and other euro states:

BBVA Research chart above is plotting changes in unit labour costs 2009-2013 and decomposing these gains in 'competitiveness' into productivity growth and earnings/wages cuts. Here Ireland is a shining exemplar of improved competitiveness.

Alas, there are some problems with this. Wages/earnings destruction is hardly a good way for regaining competitiveness, especially when this process is associated with sticky prices (real value of income declines). In Ireland's case, we had on top of the said reductions of the purchasing power of income, also higher taxation and extraction of rents by the public sectors and by the banks. All of this 'improved competitiveness' is, therefore, a wee-bit of pyrrhic victory for Ireland. 

And then, of course we have our fabled increases in productivity. What happened here? Have we suddenly discovered major technological breakthrough that allow us to produce more using fewer resources? Err… not really. We took down construction and retail and domestic services sectors and reduced them to ashes. Highly labour-intensive, these sectors employed many producing lower value added than other sectors where few produce huge value added (much of it of course is superficial and accruing to the MNCs, but who cares in this land of magic competitiveness?). When we destroyed domestic sectors, we ended up with an economy producing less, but with even fewer people working. All the social welfare rolls swelling also fuelled our productivity. Of course, were we to fire everyone and just leave around one tax arbitrage P.O. Box in IFSC open, we will have miraculously higher productivity than anyone else in the world.

So where are we, really, if we take out all these superficial and even potentially self-destructive 'efficiency gains'? Probably closer to Portugal - a net gain in competitiveness of around 3-4%. Not bad, but not as wonderful as our heroic 9.5% gain.

15/5/2014: Flapping at the zero line: euro area GDP growth Q1 2014

Flash estimates of euro area GDP growth for Q1 2014 were out today. Here are few charts (via Markit Economics) of the disaster:

Yep: Netherlands down 1.4%, Portugal down 0.7%, Italy down 0.1%, France flat. Overall euro area at +0.2% which you might as well call 'flat as a pancake'...

The hope or rather 'expectation' was for 0.4% growth. I covered that earlier: http://trueeconomics.blogspot.ie/2014/05/752014-eurocoin-leading-indicator-april.html

Surprise to the downside is huge. It seems that all the hopium injections into expectations - based primarily on firm financial markets and business and consumer sentiment readings, and not on firm actual data have put a bit of bender into the blender... PMIs booming, GDP flapping powerlessly on the zero line.

One would be embarrassed, if one wasn't working in Financial Services...

15/5/2014: PMIs and actual activity: something is still amiss...

Services Activity vs Services PMIs... something is seriously amiss... still...

Notice how the activity has fallen in Q1 2014 compared to Q1 2013 and yet PMIs expanded even further into growth territory?..

Notice how in ALL 1st quarters since 2011 (recovery on-set), PMIs grossly over-estimated actual changes in Services Activity, signalling slower growth in Q1 2012 y/y against actual activity rising sharply, signalling greater growth in Q1 2013 against actual growth rate falling short of PMI-signalled one, and lastly completely contradicting actual outrun in Q1 2014.

Notice how since the onset of the 'recovery' - PMIs-consistent average growth (vertical reading on the trend line, for every underlying level of PMIs) is always below actual activity recorded...

Go figure the puzzle, but my suspicion is that the survey is skewed too heavily to MNCs...

15/5/2014: Universal Health Insurance: Fake Treatment for a Fake Disease

This is an unedited version of my Sunday Times article from April 13, 2014.


According to Ambrose Bierce’s Devil’s Dictionary, “revolution is an abrupt change in the form of misgovernment”. From this point of view, Irish health system reforms proposals, published by the Government earlier this month are revolutionary in nature.

To prove the above conjecture, one needs to establish two facts. First, that the existent system is a misgoverned one, as opposed to being simply erroneous by accident. Second, that the changes to Irish healthcare being proposed are likely to result in a newly misgoverned system.


The systemic failings of Irish healthcare system are well documented and require no proof. But the fact that these failings are an outcome of the policy choices made by our public office holders and senior civil servants is less obvious. Until, that is, one considers the specific policies of the recent past.

Take our State’s approach to funding healthcare. Under the so-called two-tier system, Irish taxpayers pay four times for the same service: twice for services provision to themselves and then again for the services provided to non-taxpayers. Payments for both services take place via purchases of private insurance, with funds used by hospitals to underwrite their non-fee paying customers, capital stock and employment of staff, and via general taxation, which co-underwrites the same.

Thus, far from being subsidised by the public purse, private insurance holders in Ireland are subsidising public services. In exchange for paying more for healthcare, majority of insurance holders do not necessarily get any better quality or greater quantity of services. Sometimes, they get to jump a queue for some services ahead of public patients. Sometimes, they get better rooms to stay in. But they are not guaranteed such access in all cases. In fact, majority of insured patients in Ireland purchase insurance to achieve some security in being diagnosed and treated should the need for an assessment or a treatment arise.

It is that simple – faced with mismanaged, politicised and state-controlled healthcare, people pay over the odds to get necessary treatments and still bear uncertainty of whether they can secure such treatments.

In terms of economics and simple logic, it is not possible to subsidise someone who pays for the same service twice. Let alone someone who pays for that service for themselves and for someone else. Instead, the entire claim of a subsidy made by a myriad of our public officials, analysts and politicians is based solely on the armchair socialism belief in the existence of the proverbial free lunch.

Under normal conditions, any Government running healthcare with limited resources and under constraints of public finances in peril should treasure those residents who diligently pay for services that others get for free. But in a misgoverned service system, things are different from the norm.

In Budget 2014, Irish Government put forward expenditure adjustment measures relating to health amounting to the full year ‘savings’ of EUR666 million. Just over a half of these measures relate to shifting costs from public purse to the patients. While both public and private patients are being hit, majority of these costs hikes befall private insurance holders.

In the last three Budgets health related revenue and expenditure measures increased the cost of services provision by around EUR670 per insured person. Thanks to the State policies, a family of four on a health insurance plan is now some EUR4,000 poorer in terms of their pre-tax income. This amount represents some 6 percent cut to annual average earnings for a family with two working adults.

Irish families did not get any new or better services in exchange for this loss. But they certainly got plenty of abuse. The latest policy documents from the Department of Health charge the insurance holders with obtaining a state subsidy, and taking away resources from and undercutting access to healthcare for those in need. One gets an impression that private and semi-private patients in Ireland are attending spas co-located with public hospitals, not seeking basic health services.

Thus, few in the Government decry the fact that, based on CSO data, since the end of 2010, Irish health insurance costs rose 56.5 percent, against the overall inflation of just 3.9 percent. This trend compounded already significant cost hikes sustained by consumers under the previous Government. Set against December 2008, February 2014 prices across the entire economy were flat. Over the same period, health services costs rose 8%, hospital services are up 25.5 percent and health insurance costs more than doubled. Since the onset of the crisis, health insurance inflation has outstripped increases in the cost of home and motor insurance by a factor of 6 and 7, respectively.

Undeterred by the absurdity of the state policies toward those purchasing health cover, back in early 2012, the Minister for Health established the Consultative Forum on Health Insurance "with a view to generating ideas which would help address health insurance costs". The forum deliberates while the Government continues to pile up new and higher charges and costs to the already hefty burden of paying for healthcare. Not surprisingly, two years into its existence, the trend for health insurance prices is still up, undeterred by the wise men and women populating the Forum.

The end-game: since 2008, some 245,000 people have dropped their insurance cover, with total numbers covered by insurance down to 2,052,000 in December 2013, according to the Health Insurance Authority. And the above numbers are expected to get worse, not better, over the next nine months.

In short, there is little but misgovernment that is evident in our current public policies on health.


This misgovernment is now being counterpoised by the promise of the new reforms. Per the Department of Health’s latest white paper on introduction of the Universal Health Insurance (UHI), published earlier this month, Ireland is to move toward a cut-and-paste carbon copy of the Dutch system. The reform promises a free healthcare with uniform access for all.

In truth, the system is not free. Setting aside Minister for Health guesstimates of the final cost of the Government proposals, the Dutch UHI system costs more on per capita basis than our existent system. And the Dutch healthcare costs inflation is higher than here, once we strip out ‘austerity’ measures imposed on public and private health. Since 2008, Dutch UHI costs rose by some 40 percent, while the patients faced a reduction in the basic package contents.

But UHI is not the only cost relating to health services in the Netherlands. Dutch families purchasing the UHI also face significant costs under the Exceptional Medical Expenses Act (EMEA). The EMEA covers care for disabled and elderly, partial cover for psychiatric care and other similar expenses. On top of that, under the Dutch model, access to a range of services and treatments falls outside the UHI cover. These include, amongst other, such necessities as ulcer drugs, tranquillisers and anti-depressants.

2011 assessment of the system, by the Dutch Association for Elderly Care Physicians puts total annual cost of healthcare provision in the Netherlands at EUR7,400 for a family of two adults with two children on a combined family of EUR60,000. Pair this cost with a likely loss of tax deductibility under the UHI, Dutch pricing of UHI applied to Ireland can lead to the annual costs of EUR8,800-9,000 per average household.

We can delude ourselves into dreaming up schemes that can beat Dutch efficiency, but in our hearts we know that the HSE in its current form is unlikely to become a benchmark for healthcare management in Europe. We can further imagine that the Dutch model’s successes are down to the introduction of the UHI, but that too would be a stretch of imagination.

For example, the Dutch are one of the top performers in the OECD in reduction in mortality from heart disease. Yet much of this improvement took place well before the introduction of the UHI. On the other hand, in recent years, the Dutch posted 7th highest rate of mortality from cancer in the OECD. In this area, Ireland actually outperforms the Netherlands. Slower rates of improvement in cancer treatments in the Netherlands have been associated with more recent years, under the UHI cover, as opposed to earlier years, prior to the UHI coming into force.

As per access, based on 2013 OECD review of healthcare systems around the world, Dutch system delivers relatively mediocre performance when it comes to the patients perceptions of equitability of health outcomes based on individual income.

Quality of care is also a concern in the case of a UHI model.  In 2010, Dutch Healthcare Performance Report found that absent price-differentiation under the UHI, hospitals tend to compete for patients on the basis of quantity, not quality of services provision. This reduces times spent on hospital beds, but increases re-admissions to hospitals. Cost containment measures are also often resulting in reduced compliance with treatment plans, which is increasing the risks for patients with chronic diseases and long-term conditions.

In the case of GPs access, flat fees, combined with cuts to capitation spending, UHI can result in shorter consultations and fewer conditions being addressed during each consultation.


The main advantage of the UHI system is that it separates provider of services, such as hospitals and medical practitioners, from payer for services, e.g. the state and insurance companies. In Irish context, this means drastically reducing HSE’s power in managing the health system. Thus, absent a deep, structural reform of the HSE, current insurance holders can simply expect to pay more for even lesser services of lower quality under the UHI.

All of this clearly suggests that latest plans propose a new form of misgovernment being introduced into the already misgoverned system of public health. A Biercean revolution in policy formation.

box-out:

IMF's latest Fiscal Monitor released this week makes for an uncomfortable reading for anyone concerned with public finances in Ireland. The Fund sets out an exercise of estimating the fiscal efforts needed to drive down Government debt across the advanced economies to their target levels by 2030. In the case of Ireland, this envisages a reduction in debt from 123.7 percent of GDP forecast for 2014 to a 2030 target of 64.8 percent. To achieve this, the IMF estimates that Ireland will need to deliver average annual surpluses net of interest costs on public debt of 6.3 percent of GDP over the next 17 years. This is slightly below Spain's, but well ahead of Portugal's and Italy's. Iceland, hit by a crisis as severe as ours, will require only 1.1 percent average surpluses to deliver on a debt reduction from 91.7 percent of GDP in 2014 to 43 percent of GDP in 2030. One of the drivers for this bleak outlook for Ireland is the Fund estimation that we will run second highest level of average fiscal deficits in 2014-2030 in the euro area. Another reason is that by IMF analysis, Irish economy has been a relative laggard in the group of crises-hit advanced economies. IMF reports a Cyclically Adjusted Primary Balance (CAPB) - a measure of public deficit stripping out the temporary effects of the recession on public finances and interest payments on Government debt. This year Ireland will reach a cyclically adjusted primary surplus for the first time since the onset of the crisis. Iceland has done the same two years ago, as did Greece. Portugal recorded its first CAPB surplus in 2013. Italy has posted surpluses in every year since 2006. Only Spain is expected to under perform Ireland on CAPB basis. For all the talk about tax cuts in 2015, it looks like the IMF might have some tough questions for the Government before the Budget Day.

15/5/2014: Jobs & Employment: Lot Done, More to Do, Still

The is an unedited version of my Sunday Times article from April 27.



As cooperative organisations go, Paris-based OECD is one of the more effective ones. Its regular assessments of member states economic policies and performance drill into various sectors and often flash light into the darker corners of policy formation and implementation that are often untouched by the likes of the IMF, the central banks and the EU Commission.

Good example is the OECD’s third annual review of Ireland's Action Plan for Jobs, published this week.

The review starts by highlighting the positive achievements to-date set against the Action Plan targets and the realities of the unemployment crisis we face.

After hitting the bottom of the Great Recession, Irish labour markets have recorded a rebound in 2013. As the result of the robust jobs creation in the economy, Irish employment levels rose by around 60,000 in 12 months through Q4 2013. New jobs additions were broadly based across various sectors and predominantly concentrated in full-time employment segment. All of which is the good news.

Being a diplomatic, politically correct body, the OECD does not question the aggregate numbers of new jobs recorded. As this column noted on numerous occasions before, the 60,000 figure includes a large number of jobs in agriculture – a number that generates more questions than answers. But from the point of view of the OECD and indeed the Irish Governments 2012 Action Plan for Jobs, quality is a distant goal, while quantity is the primary objective. By this metric, as OECD notes, Ireland is now well on track to deliver on the interim target of 100,000 new jobs by 2016.

Still, accolades aside, Irish non-agricultural employment is lingering at 39 percent of total population – implying a dependency ratio that is comparable with that seen in the late 1990s. Official unemployment counts are around 253,000 and factoring in those in State training programmes the number rises to over 330,000. 16 percent of our total Potential Labour Force is currently not in employment. A things get even scarier when we add all people searching for jobs, underemployed, unemployed that have been discouraged from looking for work, those in State training programmes and the net emigration of working age adults. By this metric, the broadest joblessness rate in the country stands at around 32 percent.

Unlike the Government, faced with the above numbers, the OECD recognises that the Action Plan target of 100,000 new jobs by 2016 is a reflection of our public culture of low aspirations. "While Irish policymakers can take some satisfaction in the economy’s return to growth and recent robust job growth, significant challenges lie ahead if the country is to rapidly bring down the unemployment rate," said report authors. Anodyne a statement for you and me this screams a serious warning to the Government in OECD’s language.

There are legitimate concerns and uncertainties about the pace of the labour market recovery. At peak of employment in Q3 2007, there were 2.17 million people working in our economy. At the bottom of the Great Recession, in Q1 2012 that number fell to 1.825 million. In Q4 2013 the number employed was 1.91 million or 76,000 above the trough, but almost 260,000 below the peak. Meanwhile, Irish working age population has grown by some 93,700 despite large net outflows due to emigration. In other words, jobs creation to date has not been enough to fully compensate for demographic changes in working age population.

Beyond headline unemployment numbers, Ireland is facing a huge crisis of long-term joblessness, the crisis that was recently covered in depth by this column. With it, there is a significant risk that improved jobs creation in the future is not going to provide employment for those out of work for more than a year.

While reversing emigration and accommodating for growing population will require much higher rate of new employment growth than we currently deliver, the Government’s Medium Term Economic Strategy published this year is aiming to bring employment levels to 2.1 million in by 2020. This means thirteen years after the on-set of the crisis our employment is expected to still fall short of the pre-crisis peak.


Which begs a question: who will be the unemployed of tomorrow?

OECD is rather serious on this subject. "Tackling unemployment and ensuring that high cyclical unemployment does not become structural and persistent are important challenges. A relentless focus on activating those most vulnerable to alienation from the labour market will be even more important than aggregate job creation targets in this regard."

In other words, according to the OECD, long-term unemployed, youth out of jobs and out of education, as well as those with low skills and of advanced working age are at a risk of becoming structurally (re: permanently) unemployed, even if the Government targets under all existent strategies are met.

Much of this stems from the sectoral breakdown of jobs being created and types of jobs that are growing in demand in modern workplace.

For example, the OECD praises the Government for focusing Action Plan "on private sector-led, export-oriented job creation by getting framework conditions right and continually upgrading the business environment". But export-led growth is not going to do much for our high levels of long-term unemployment. Jobs creation in exporting sectors is directly linked to modern skills sets and high quality of human capital. Long-term unemployment is linked to lower skills and/or past skills in specific sectors, such as construction. To make a dent in an army of long-term jobless we need domestic growth. To make this growth sustainable, we need productivity enhancements in domestic sectors and SMEs that require employment of higher skills in these sectors. There is a basic contradiction inherent in these two drivers of recovery: skills in supply within the pool of long-term unemployed are not matched to skills in demand within the modernising economy.

Something has to be done to address this dichotomy.

Under various policy reforms enacted during the crisis, Ireland witnessed introduction of significant changes to the benefits system, employment programmes, as well as reduced levels and duration of unemployment insurance cover. In addition, the Government used restructuring of training programmes to introduce a new concept of one-stop support centres, Intreo, which are being rolled out across the country. All of this is in line with previous OECD and Troika recommendations and much of it is needed.

But, as OECD notes, six years into the crisis, more remains to be done.

The OECD identifies Government's flagship activation programme, JobBridge as "large and expensive" and insufficiently targeted to help the most disadvantaged groups. In other words, JobBridge has became a synonym for unpaid apprenticeship for recent graduates instead of being a stepping stone from unemployment to a job requiring moderate re-skilling. OECD also highlights the risk of State training programmes effectively delaying job searches by the unemployed or reducing their job search efforts.

Beyond the above, the OECD points to the risk that the longer-term and lower-skilled unemployed may fall outside the resources and remit cover of the new agencies - the SOLAS and the Intreo.

With all reforms to-date, the OECD highlights the lack of willingness on behalf of the Government to rationalise some of the labour market programmes, even where there is clear and available evidence of their low effectiveness.

One example is the long-established Community Employment Programme (CEP), which accounts for a full one third of all spending on activation programmes. Data available to the Government strongly shows that CEP is not cost-effective and has a spotted track record in terms of securing the participants return to regular employment. Instead of the CEP, the Irish state should focus resources on developing a modern apprenticeship programme that can replace existent ineffective schemes. This focus on market skills-based training available under the apprenticeship system, supported by the OECD report, is in line with policy suggestions presented in this column in the recent past and with the Entrepreneurship Forum report published last year.


The OECD report also provides a detailed analysis of the institutional reforms that are needed to deliver sustainable jobs creation in Ireland in line with the Government agenda. There is a need to mobilise employers to engage with the Government programmes to develop employment and skills systems that can address future demands in the real economy. Instead of craft-focused and manual professions-oriented training, Ireland needs more MNCs and SMEs-driven skills acquisition and upgrading programmes.

The OECD also stresses the need for stimulating productivity growth by developing more skills-intensive domestic sectors. Unlike the Irish authorities, the OECD is painfully aware that aggregate productivity growth, jobs creation and skills development must be anchored to indigenous sectors and enterprise, including the SMEs, and not be relegated to the domain of the SMEs and exports-oriented producers alone.


In all of this, the report highlights a major bottleneck in the Irish human capital development systems – dire lack of training and up-skilling programmes available to SMEs and early stage companies that are capable of supplying skills that are in actual demand in the markets and that can simultaneously drive forward productivity growth and innovation in Irish enterprises.

Slightly paraphrasing Fianna Fail’s GE2002 posters: in the case of Government delivery on jobs and unemployment, “A lot done. Even more to do.”

Note: PLS1 indicator is unemployed persons plus discouraged workers as a percentage of the Labour Force plus discouraged workers.  

PLS3 indicator is unemployed persons plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training 



Box-out:

Since the early days of the EU, one of the most compelling arguments in support of the common European currency was the alleged need for eliminating the volatility in the exchange rates. It remains the same today. High uncertainty in the currency markets, the argument goes, acts to depress international trade and distorts incentives to transact across borders. Alas, theory aside, the modern history puts into doubt the validity of this argument. During the 1990s, prior to the creation of the euro, Irish current account surpluses averaged 1.9 percent of GDP just as the economy was going through a period of rapid accumulation of capital - a process that tends to put pressure on current account balance. Still, in the decade before the euro introduction, Ireland's external balance ranked fifth in the European Economic Area. During the first decade of the euro, owing to the massive credit bubble, Irish current account balance collapsed to an annual average of -2.3 percent of GDP. Since hitting the bottom of the crisis, our performance rebound saw current account swinging to an average annual surplus of 7 percent. Alas, this reversal of fortunes ranks us only 7th in the EEA. In fact, since 2000 through today, non-euro area economies of Denmark, Sweden, Switzerland have consistently outperformed Ireland in terms of current account surpluses. Cumulatively Swiss economy generated external balances of 135 percent of GDP between 2001 and 2013, Swedish economy 88 percent and Danish economy 51 percent of GDP. Irish cumulated current account balance over that period is a deficit of 9 percent of GDP. Let's put the matters into perspective: between 1990 and 1999 Irish economy generated a total surplus of USD12.5 billion. Since the introduction of the euro, our cumulated current account deficit stands at USD23.5 billion. At current blistering rates of current account surpluses, it will take us another five years to achieve a current account balance across the entire period of 30 years. Meanwhile, deprived of the alleged benefits of currency stabilisation, Denmark accumulated curret account surpluses of USD149 billion between 2001 and the end of 2013, Sweden USD378 billion and Switzerland USD645 billion. The euro might be a good idea for a political union or for PR and advertising agencies spinning its alleged benefits to European voters, but it has not been all too kind to our own trade balances.






15/5/2014: Bad Habits Die Hard

A neat summary of the euro area revisions to targeted deficits for 2014-2016 period:

Per BBVA Research: "The relaxation in fiscal targets approved by ECOFIN in the first half of 2013 was an important factor in the European economy’s recovery in the second half of the year, as we pointed out in previous editions of this report. The panorama has not changed. Fiscal policy continues to be contractive, but less so than forecast at the time, thanks to the postponement of the 3% deficit target for several countries, including France, Italy and Spain. Deviations from the deficit targets in 2013 have been small, except in France (0.4pp off the May 2013 stability plan’s target) and plans presented to the Commission in April this year retain the targets forecast or modify them towards a somewhat slower consolidation path."

Here's a question: we have growth in underlying GDP (anaemic, but still growth). We have widening deficits compared to targets, and deficits reductions over time are penciled in at slower rates for 2014-2015. Oh, and we are still running deficits… so explain to me where is that amazing 'austerity' excluding the bizarre stretch of the imagination by which lowering deficits (not turning surpluses) is 'austerity'… [presumably in the same way as spending money we don't have is a stimulus, may be]…

Just a few pages down, BBVA gloriously declare: "Fiscal policy will continue to be restrictive in the forecast horizon, although fiscal efforts will be less rigorous than those of 2012 and 2013, since the rest of the adjustment has been postponed, in order to meet the target of structural balance in the public accounts beyond 2015. With all this, public consumption may go up by around 0.3% in 2014 and 0.7% in 2015."

Ah, European 'austerity' - where reducing the rate of spending growth represents unbearable economic pain and is yet consistent with a possible increase in the Government consumption...

It clearly looks like we are back to the good old 'bad' habits' on the side of the euro area periphery's largest sovereigns...