Monday, 31 May 2010

A week in China

I spent the last week in China. It was the first time I had been there since 1978. The change is dramatic.

Then, everybody seemed to be wearing the same colour boiler suit and the roads were thronged with bicycles . Now , high fashion is on display and the sound of bicycles bells has been replaced with that of accelerating cars and trucks.

Some things did remain the same. In the fields of southern China one could still see farmers doing their backbreaking work, under the eyes of their ancestors. In rural China, the bones of the deceased are buried under tombstones in midst of the land they once tilled, rather than in graveyards .

But ,even in the remotest areas of China, change is under way. We met a young man in Guilin , in the south west. He approached us and asked in good English where we were from. When we said we were from Ireland, he immediately responded “O , Yes, Riverdance!” .

It emerged that he himself was a student of Chinese calligraphy, and was the first person from his village ever to go to college. His village was up in the mountains, three hours walk from the nearest road and six more hours by road from the university.

He said he was almost a celebrity at home because he had gone to college. His parents were tea planters and neither could read. He said his mother still could not believe him when he told her he had learned English. He said he would love to travel outside China, but that his main ambition was to return to his village and help the children there to learn English.

There are still big gaps between income levels within China. Incomes range from a GDP of 72000 RMB per head in Shanghai ,down to just 12000 RMB in Kansu.

In Guangxi, the province where we met the student, GDP per head is 15500 RMB. These gaps in income are no wider than those found within the European Union between, for example, London and Latvia.

Labour shortages will eventually become a problem in China. Honda is facing a strike by workers demanding higher wages in their plant in Guangdong. Food prices will also come under pressure as arable land is taken over for development and water shortages affect irrigation.

We visited some tourist sites, like the Great Wall and the tomb of Confucius. What was striking was that the overwhelming majority of the other tourists there were the Chinese themselves. They are able now to afford to enjoy their own country. It is a remarkable contrast to the situation that existed in China throughout the nineteenth, and most of the twentieth centuries.

Monday, 24 May 2010


· International Financial Services Sector combines to create IFSC Ireland to promote and market the IFSC internationally

· Former Taoiseach John Bruton to become Chairman of IFSC Ireland commencing September 1st 2010

IFSC Ireland

Ireland’s international financial services industry,in a private sector initiative, has announced its intention to create the role of Chairman of IFSC Ireland. Former Taoiseach and EU Ambassador to the United States, John Bruton, has agreed to accept the position.

The Chairman of IFSC Ireland will work with the industry to promote Ireland as a location of choice for international financial services, to identify opportunities for the development of the IFSC, and will act as a point of contact and advice for potential investors.

Accepting the role, John Bruton said, “I’m delighted to accept this invitation to work with IFSC Ireland to promote Ireland’s international financial services industry, which already supports in excess of 25,000 well paid jobs. Bringing jobs to Ireland will be my overriding priority in this new role, on behalf of the organisations who have come together to establish IFSC Ireland."

"The international financial services industry in this country has remained resilient throughout the global downturn and is continuing to act as a source of well paid employment particularly for young qualified graduates. It is also the source of many further spin off jobs. This key group will be the mainstay of our economic recovery and I am particularly pleased to be asked to play a part in ensuring that we continue to generate new employment opportunities in the IFSC for our young people .The IFSC is a global centre of excellence in key areas of banking, fund administration, and insurance. It is a success story that we should be proud of. I hope to be able to put my experience overseas, previously in the public sector and now in the private sector, to use to promote the industry in a manner that maximises the employment benefits of the IFSC for Ireland.” Mr Bruton said.

IFSC Ireland has been developed and is being wholly funded by the Irish Funds Industry Association, Financial Services Ireland, the Federation of International Banks in Ireland, the Institute of Bankers, the Irish Stock Exchange, the Irish Association of Investment Managers, and the Dublin International Insurance and Management Association.

A joint statement issued by the organisations establishing IFSC Ireland stated that “We are delighted that John Bruton has accepted our invitation to Chair IFSC Ireland and believe that his outstanding national and international credentials will be key to our renewed drive to exploit the full potential of the IFSC to create new jobs and generate economic activity. The Irish economy faces many challenges including the need to attract investment and stimulate job creation. The establishment and growth of the IFSC was one of the driving forces of Ireland’s economic transformation over the last 25 years. The industry believes that the IFSC can, once again, play an important role in supporting our economic recovery. However, in light of the quickening pace of the global recovery in international finance the industry believes that it has a responsibility to take the lead in ensuring that Ireland is positioned to attract further investment in this important area.”

Welcoming the development, Barry O’Leary, CEO of IDA Ireland said that;

“IDA Ireland welcomes the creation, by the industry, of IFSC Ireland and the appointment by IFSC Ireland of a Chairman of such global standing to represent it. The Chairman will be supported in his role by IDA .Ireland and will work in close co ordination with them . The international financial services sector in Ireland has proved to be very resilient despite the current economic situation. We believe there are significant investment opportunities for Ireland to win across a broad range of activities within the industry. These will generate highly skilled employment thereby assisting our economic growth and recovery. We look forward to collaborating with the industry and the new Chairman to ensure this comes to pass”


IFSC Ireland

This week I accepted an invitation of the newly created private sector organisation, IFSC Ireland to act as their chairman.

It has been set up by organisations representing firms already operating in financial services in Dublin , to promote further expansion of the industry which employs 25000 people in top quality jobs. Dublin has built up a very good infrastructure of legal, accounting, and other expertises to support firms in international financial services . So the total job number exceeds 25000.

I hope to be able to assist in promoting the bringing of new firms and new types of business to Dublin.

Thursday, 20 May 2010

Book Review for the Irish Independent

These two books, published in close succession, attempt to debunk the case for the present pattern of aid to the poorer countries of the world by both the citizens and the Governments of the wealthier countries. Linda Polman, a Dutch journalist, attacks humanitarian assistance given to refugees from war and Dambisa Moyo, a Zambian economist, focuses on the negative effects of longer tern development aid.

Polmans case is that much of the help given to war refugees prolongs the wars from which they are fleeing. She cites the camps set up in the Congo for the Hutu refugees from Rwanda, many of whom had themselves participated in genocide in the country from which they had fled. The camps, she says, were used a base for regrouping by the Hutu fighters and this prolonged and aggravated the huge war that developed in that part of Africa . She also claims that the civil war in Nigeria was prolonged by the humanitarian help given in the breakaway state of Biafra. One might also ask if the prolonged Israeli occupation of the West Bank and Gaza has not been unintentionally facilitated by humanitarian assistance.

She says that aid agencies are frenetically competing with one another for the funds of a fickle public, and prioitize the search for harrowing television images over the careful examination of the longer term effects of what they are doing .

She favours a code of ethics to govern the activities of all organisations that give humanitarian aid in war time, which seems a reasonable proposal. But she dodges any attempt at the difficult task of outlining what such a code would say.

Dmbisa Moyo’s concern is with the effects of development aid given to her native continent of Africa. She claims that aid facilitates corruption, encourages rent seeking behaviour, siphons away scarce local talent from more productive activity, and removes pressure to reform inefficient government systems. Aid has come to provide 75% of the revenue of some African Governments and that this has distorted the local economy in the same way that oil revenues distorted the Dutch economy by artificially enlarging the influence of Government in social and economic activity.

She argues in favour one off infrastructure projects in Africa to help get African goods onto world markets and against support for recurrent expenditure on things like health and education.

Now that the world economy is changing, and African growth rates are beginning to outstrip those in Europe and North America, the problems that both books address may begin to solve themselves. Africans may be better able to help themselves, and the “West” may be fully preoccupied with its own problems. Moyo makes a strong case for opening up Western markets to African exports, and suggests that would be more beneficial than aid, some of which she shows to be doing real harm to Africa’s capacity to develop itself .

Both books deserve a reasoned response from aid organisations in Ireland and elsewhere.

Sunday, 16 May 2010

From the Abbey to Zagreb

Last week took me from attending the staging of Shakespeare’s Macbeth in the Abbey Theatre in Dublin, to a conference on the European economy in Zagreb, the capital city of Croatia.

Finola and I accompanied out daughter Emily to Macbeth. We had each of us studied it at school (not in the same year!), and it was interesting to revisit it after so long(in my case...). I am afraid I had forgotten many of the twists and turns in the plot. There was a big and young audience at the play which shows that the Bard has not lost his appeal.

The conference in Zagreb was very interesting. Croatia is next in line to join the European Union, and it is watching closely as the leaders of the EU take on the forces in the financial markets who have doubts about Greek financial prospects.

It is important to remember that the euro is first and foremost a political project, a harnessing a single currency to build a structure of peace in Europe. If the European Union cannot manage its economy together, its political unity and influence will also be undermined.

The US, China, India and Brazil can each speak and act in a unified way on economic matters. If the EU fails to act together it runs the risk of being “Balkanised” economically speaking, in other words it runs the risk of having outside forces exploit its divisions for their own purposes.

It is also important to keep in mind that when the euro was first launched it stood at a value of $1.20. It subsequently went as high as $1.60, a development that had inevitable effects on the competitiveness of some European countries. We are now dealing with the consequences of that currency appreciation, which also affected Irish exports to Britain, which had allowed sterling to devalue.

Last week I also attended a very interesting lecture in the Royal College of Surgeons in Dublin by Chris Patten, the former EU Commissioner for External relations and former Governor of Hong Kong. Chris is a very witty speaker who has a deep understanding of the forces shaping the globe. He argued, notwithstanding the rise of other powers, that the United States would continue to be a predominant global influence in the 21st century. But he reminded his audience that the combined GDP if the EU is still bigger than that of the US.

I paid a most enjoyable visit to Bailieboro, County Cavan to speak at a meeting on Europe, organised by my friends Senator Joe O Reilly and Councillor Sean McKiernan. It was very well attended and the questions were penetrating and well informed.

Finally, I was honoured to be invited, along with Alan Dukes, to appear before a Committee of the Dail and Senate which is looking at how the two Houses can play a bigger role in EU affairs. I believe the present crisis, with its necessary closer scrutiny of the budgets and economic policies of member states, will give the parliaments of member states new and strong levers for more effective involvement in economic policy making , both in their own country, and in the EU as a whole.

Thursday, 6 May 2010

The Greek Crisis

The European Union has many lessons to learn from the Greek crisis and the panic in the bond markets that has given rise to it. But they are also an opportunity to deal with problems that might otherwise be put on the long finger.

The fiscal crisis has created the conditions in which Europe can assemble the political momentum to deal with the underlying cause of its present economic problems. That cause is a huge loss of competitiveness vis a vis Asia, which had been concealed from view by the artificial and temporary credit expansion of the past ten years.

Credit expansion was a sort of anaesthetic that dulled the pain of an underlying loss of competitiveness. Now that the anaesthetic has been abruptly withdrawn, there is real pain. But that pain is a spur to action to cure the problem, and without it the problem would have been allowed to get even worse before anything would have been done.

European countries will have to restore competitiveness by shifting resources into education and infrastructure and away from consumption of all kinds, including Government consumption, and by cutting service and wage costs through greater competition and productivity. The European Union will have to take on the powers necessary to prevent a recurrence of a Greek style crisis, powers it should have been given when the currency union was formed.

For example, Greece should not have been allowed to join the euro until it had first undertaken structural reforms that would have put its public finances on a sound and transparent long term basis. The EU should have insisted that Greece’s pension and tax collection problems, problems that are now being tackled in the midst of a crisis, were dealt with before Greece was allowed to join the euro. This would have involved much greater EU interference in matters that Greeks might then have regarded as purely national questions. But if , as now appears to be the case, states within the euro are not to be allowed to default, and are thus to benefit from low interest rates that go from being in a currency union, then there is no choice but have this sort of interference .Otherwise there would be a continuing risk of euro countries going off the rails repeatedly and having other countries repeatedly in a position of having to pledge their credit to get them back on track.

This same sort of EU involvement with domestic economic policy making will continue to be necessary after a country has joined the euro. While the problems of Greece predated its entry to the euro, those of Spain and Ireland arose after they had joined, and were able to enjoy interest rates that were lower than they would have had to pay if they still had their own currencies. The EU needs to be able to supervise the volume and direction of credit expansion in member states of the euro to ensure that it does not lead to an unsustainable private sector credit situation that eventually puts Government credit at risk too.

The EU also needs to be able to supervise developments in the relative competitiveness of different countries within the euro zone. If a country is losing competitiveness because its costs are rising faster than those of its neighbours, it will lose business and that will mean that its Government revenues will fall. That, in turn, could eventually lead to solvency questions for the Government, as we have seen. If Governments in the euro zone are not to be allowed to default on their debts, and if other EU states may have to ask their taxpayers to help out, that means that a loss in competitiveness of an individual euro zone country is a matter of legitimate concern for all euro zone countries.

I believe it was both fair and reasonable for Germany and others to insist on a long term and detailed austerity programme from Greece before releasing funds. It is true that these measures will depress the Greek economy in the short term, but that had to happen sooner or later anyway, and the sooner it is done the sooner Greece will get back on a sustainable path.

But Germany and others who are asking for these severe measures to be adopted by Greece now should recognise that the obligation to follow a common economic policy within the euro zone applies to them too.

It should not be forgotten that one of the first countries to break the original euro zone rules on Government borrowing was Germany itself. In fairness though, Germany got itself back in line without having to get financial help from other members.

More importantly, all EU countries already have an obligation under EU Treaties to treat economic policy making as a matter of common interest .

Germany has benefitted from being in the euro by having a more competitive exchange rate than it would have had if it still had the Mark. If Germany was still using the Mark, and had had the big trade surpluses and high savings rate that Germany now has, the Mark would have risen dramatically against all other currencies in Europe , and German exports would have become too expensive for other people to buy.

Thus being in the euro has helped German exports and boosted savings in Germany. Much of these savings ,that were not invested at home ,were invested in Greek bonds partly because Greece was using the euro and there was none of the exchange risk that might have applied if the German banks had bought (say) Turkish bonds instead. This is why it is in Germany’s own interest that Greece should neither default on its debts, nor leave the euro. That would hurt German banks and that in turn would hurt finances of the German Federal and state Governments.

Countries, like Germany, also benefit from being in the euro in promoting their exports, because the euro zone provides an enlarged home market in which their exporters face no extra costs associated with having to be paid in different and volatile currencies. They are paid in their home currency, the euro. Their exporters also benefit, as stated earlier, by having a more competitive exchange rate than they would have had if they were still using the Mark.

For these reasons the help being given to Greece by the other euro zone countries should not be portrayed as some sort of charity, but as a loan that is being extended in the rational self interest of both the lender and the borrower.

After all, the overall medium term financial position of the countries of the euro zone is strong.

But will it be enough? Will the Greek system crack under the strain? If it is not enough and if Greece, or some other euro zone country, needs to come back again for more loans because it has difficulty borrowing commercially, will the remaining euro zone countries then be prepared to use their credit a second or a third time to help out the country in difficulty?

My sense is that there will be a willingness to help out again, so long as in the meantime, strong and enforceable arrangements have been put in place at EU level to ensure that all euro zone members run their economies properly and that deep seated structural and competitiveness issues are tackled vigorously by all members .

One of the difficulties in selling the present plan to lend money to Greece to electorates in Germany and elsewhere was that the existing EU arrangements to ensure each euro zone country ran its economy properly had visibly failed. By the time any other country might need help, that has to be put right.

I believe that can and will be done. But one should not underestimate the challenge. Giving more powers to the EU will not be agreed easily. Germany can insist on what Greece does to qualify for a loan in the present emergency but ongoing supervision of all euro area economies, including Germanys own economy, is another matter. The German Constitutional Court, in its judgement on the Lisbon Treaty, has questioned whether European integration can be allowed to go any further, because it said it did not believe that a sufficiently democratic system applied at EU level. It questioned whether the elections to European Parliament created a sufficient democratic mandate to allow more policy making to be transferred from Germany to the European level.

If the German Court adheres to this interpretation and is not over ruled by the European Court, and if the euro is to be kept, and if keeping the euro requires more power to be exercised at EU level over the economic policies of euro zone states, then more democracy will have to be built at EU level , at least for EU countries that are in euro. That would appear to be the logic of the German constitution.

One way of doing this would be to have one of the EU’s many Presidents directly elected by the people of countries in the euro. For example, the President of the Euro Group (currently the Luxembourg Prime Minister who is also Finance Minister) might be elected by the people of all euro zone countries, rather than be selected at a private meeting as is currently done. Such a course should meet the democratic requirements of the German Constitutional Court in that it would create a Europe wide election in which economic policy would be debated.

The bottom line is that where there is a will, there is a way. Europe has a single currency. It may amuse academics to speculate about what thing might be like if we went back to national currencies, but that is not going to happen any time soon because the costs would be enormous.

The problems the crisis has revealed are not currency problems as such. They are structural economic problems, that we were going to have to deal with sooner or later, no matter what currency or combination of currencies we used.

For example, there is a long term problem in Europe with the cost of ageing , but the disciplines imposed by the present crisis may actually be a help in giving Governments the courage and the space to deal with those problems at the same time as they deal with the short term cash flow problem.

Action on the one will help with the other. For example, raising the pension age saves money in both the short term, and in the long term. It is also easier to make unpopular decisions like that in a crisis than it is in calmer time. The challenge for Europe is to ,turn the present crisis into an opportunity to put our economy on a sound footing, a footing that will enable us to prosper in a twenty first century world where we will be only one of many players, not the dominant player as we were in the nineteenth century.

Special Thanks to Guillaume Piolle for his photo