Friday, 28 October 2011


I was in Toronto last week to attend and speak at the Toronto Economic Forum.
This two day event dealt with the major economic problems of our time, with particular emphasis on the impact they have on cities.
I shared the platform with Ted Menzies, Minister for State for Finance, in the present  Conservative  Party  Government of Canada. He is from Alberta.
He told me that one of the big changes taking place in Canada is the movement of economic influence towards western provinces, like Alberta, which have vast resources of oil and gas. Richer provinces transfer resources to poorer ones in Canada, and the pattern of these transfers is changing, as some provinces become more prosperous and others relatively less so.
 Canada has come through the financial crisis well, because its banks were prudently managed and regulated.  At Federal level, the budget deficit situation is under control, but there are significant problems in the two big provinces, Ontario and Quebec. Although the Liberal party of Canada has suffered badly in the recent Federal elections, being reduced to third place, it has done well in recent provincial elections in Ontario and continues to govern there.
At the Forum, I was delighted to meet longstanding friends of mine, Roy McClaren, who was Trade Minister in a Liberal Government, Mike Wilson, who was Finance Minister in a Progressive Conservative Government, and John Manley, who held several portfolios including Foreign Affairs in Liberal Governments. Mike Wilson also served as Canadian Ambassador to the United States while I was EU Ambassador there so we got to know one another well.
I gave an interview to CBC, the main Canadian television network.
In my speech to the Forum, I explained that the euro was more than just a financial arrangement, but was a political commitment to a more united and cohesive Europe, that would capable of keeping peace internally and of representing European interests globally. A failure of the euro was unthinkable, I said, because it would open Europe to becoming a playground for a battle for strategic influence between external powers.  That would eventually create huge risks for the peace of Europe.  
I emphasised the Ireland was interested in more Canadian investment, and was an ideal gateway for Canadian firms to the European market. Already, Ireland was home to 9 of the world’s top 10 internet companies in the world, 9 of the top 10 pharmaceutical companies, and 15 of the top 25 medical devices companies.  In addition, it had a highly developed international financial services industry and many of the Canadian based banks, whose senior representatives I met at the Forum,  had  substantial operations in Ireland.

Wednesday, 19 October 2011


I visited Chile this week on behalf of the Irish international financial  services industry.
Santiago is, in my belief, one of the most beautiful cities in the world and is surrounded by the Andes.
The Chilean economy is doing very well and Chile is well on the road to becoming a developed  economy  with a high  standard of living. The economy grew by 6% last year. Literacy in Chile is 97% and unemployment is  7.6%.  The unemployment benefit system is privatised and benefits decline after a time. Companies are obliged to offer employees a share in profits ( a minimum of 30%).
The Chilean pension system is also privatized .
Chile’s economy is vulnerable in one respect. Its exports are heavily concentrated in one sector, copper, which amounts to almost 50% of all exports by value. But the Government has put a reserve fund aside to cope with circumstances in which copper exports declined in value.
Politics in Chile is very lively. There is currently a huge controversy about higher education.  Much of the  third level sector is run on a for profit basis, and fees are high. Student demonstrators want it to be free.
Ireland’s new Ambassador to Chile, James McIntyre is presenting his credentials to President Pineda this week. I also met the EU Ambassador, Jaime Perez Vidal

Sunday, 16 October 2011


The coming weeks are of vital importance for the European, and the world , economy. I was in Brussels last week and the sense of urgency was palpable.  The French Prime Minister, Francois Fillon spoke of our being on the edge of a volcano that could blow up the EU, and our   contract between the generations, unless it was capped.
As the European Commission said   last Thursday  we need to break the vicious triangle  between doubts over
  • The sustainability of debt of some countries
  • The stability of the banking system and
  • Growth prospects of developed countries
Unless we find a reasonably convincing way of resolving these doubts, and   of  breaking the vicious triangle,  whereby each doubt  aggravates the other, we  are in  real difficulty.


The sustainability of Government debt depends on vigorous action to cut spending, and increase revenue. But this will take time. In the short run, the debts of some countries , including Ireland,  will actually increase as a proportion of national income.  This is because the gap that has opened up suddenly , between  revenue and spending ,  cannot be closed overnight. This is Ireland’s case.
In the meantime, therefore, we take holding actions   to restore confidence to potential purchasers of Government bonds.
One thing we should do quickly  is introduce the permanent  European Stability Mechanism. It could act  more flexibly, and more quickly,  than present arrangements to support Governments in difficulty which require consent by 17  national parliaments.
Pending that, the European Central Bank will have to continue to buy Government bonds. 
Essentially, the official agencies need to be able to deploy such a huge volume of financial fire power that it will scare off  speculators who might be tempted to short Government bonds of some countries, in the hope of making a quick profit. 
In that sense, I believe the United States is giving good advice to the EU, and that Germany is being too hesitant.
We also need to work on a Euro Bond proposal, which I wrote about in a previous post on this site, although that does not provide a short term solution.
A credible plan to reduce debt levels in the public and private sectors in most EU countries is crucial.    We should not  think that “Austerity” is  an optional policy choice. It is an arithmetic necessity. 


The current protests about “austerity” do not put  forward any credible policy alternative,  that would not involve a far more dramatic, and more sudden, fall in living standards than anything current policies would  entail.
A refusal to service existing debts, while maintaining current spending levels, would lead to an  immediate drying up of Government  funds. Cheques would bounce, and people would try to get their money out of the country.  A return to the living standards, and autarkic economic policies, of the 1930s would quickly ensue.   That is where the protesters ideas would lead us very quickly indeed.
It is striking that the media, which is giving generous coverage to these protests, is not subjecting the protesters ideas and proposals to any intellectual scrutiny at all.  For example the protests led the news bulletin on Ireland’s national station, even though only 1000 people took part in the protests in  Ireland .

Meanwhile far reaching measures to tackle  our current problems are being agreed by the EU, which, if  applied rigorously, and this is s a big IF, would gradually improve the competitiveness,  and  the public  finances,  of  EU countries.
I believe the so called “six  pack “ measures, recently agreed in the European Parliament,  will be a lot more intrusive than  most people think. They could mean, for example, that countries that fail to take action on unsustainable economic practices will be liable to EU fines.  This plan will apply to much more than excessive Government borrowing. It could cover wage setting policies and unsustainable energy policies.  If these measures can be implemented under the existing Treaties, I doubt if we will need any further Treaty change.


Restoring the credibility of the banking system will require more honesty than we have had up to now. Some countries, including Germany, have been unwilling to have their bank’s situation independently examined.  The stress tests have been based on heroic assumptions, notably in respect of the repayability, in full,  of all Greek debt.
None of the proposals currently being considered address what I consider to be the basic banking  problem.
In the present artificial setup,  some banks are too big too big, and too interconnected with other banks, to be allowed to  fail. 
This is because all banks in the EU have been allowed to borrow from ,and lend to,  one another  at wholesale level all across  the EU, and some of them have got very big doing that, but, when they get into difficulty,  they can only  be rescued ,or wound up,  at national level.  Risk taking is at one level, but responsibility is at another.  That has proven to be a recipe for disaster.
A bank that is free  to  borrow and lend with other banks all over Europe quickly can  quickly grow  too big for its home country to manage. That is what happened to Ireland’s banks.
I believe that it is now only possible to tackle the “too big to fail “problem at EU level, because too many  banks have already grown far too big for their home counties .
But a bank that is too big to fail at national level would not necessarily  be too big to fail at EU level. We need a real EU Single market for banking if we are to get control of the “too big to fail” problem.
To achieve that we should   have
  • An EU wide deposit guarantee scheme,
  • An EU wide system of banking supervision, and
  • An EU limit on the size of banks and on bank remuneration systems.


Getting growth prospects to improve is actually the most difficult of the three things we must do. This is because the things that Governments can do takes the longest times to deliver results.   But it is very important. For example, the structure of the Italian economy is so creaky that it starts to have price inflation if it grows by more than 1%.  Greece and Portugal have similar constraints.
The measures needed to put this right will  deliver big returns in the long run, but  are difficult politically, and sometimes slow to deliver results in the short run ie. before the next election.
Let me illustrate my point by referring to some the things the OECD recommended the Irish Government do to lift Ireland’s growth potential. The OECD said there should be
  1.  A Further decline in labour costs. This may be possible to negotiate  in the private sector, but difficult in the public sector because of the Croke Park deal.  But the German example shows that  reducing comparative labour costs does lead to big competitiveness gains over time. Germany is now getting the benefit of labour cost reductions it accepted  ten years ago.
  2.  Imposing Civil fines for breaches in competition law. This is essential ,but will take time to deliver  results.
  3. Cutting legal and medical fees charged by the professions.  Again very important, but will take time. It involves  taking on groups that are very good at getting media attention. The resistance to hospital  service reorganisation  shows how medical interests can manipulate public opinion, even though they are intelligent people and  know the  country is in receivership.
  4. Reducing  Long term unemployment benefit  rates,  the longer a person remains unemployed, and addressing  disincentives to taking up work,  caused by rent supplements.  The present rates of payment are apparently such that Ireland  has the highest “replacement rate” (80%) in the OECD. The replacement rate is  a formula that  compares  the level of social welfare income,   to wage income. The average OECD replacement rate is 60%
  5. Improving  reading and maths standards in Irish schools, which have dramatically disimproved  by comparison with other OECD countries,  since 2000.
The OECD recommends much closer inspection of teaching standards, which will be difficult to do without recruiting a lot more schools inspectors. This is hard to do when there is an embargo on recruitment under the EU/IMF programme. 
Apparently there are  more  teachers in Ireland  in schools that have not been inspected in the last 5 years in Ireland than  in ANY other OECD country!


All these ideas make a lot of sense. Similar, and more far reaching ideas, have been put forward for other EU countries.
Implementing them now would not bring instant results.  It will not lead to a quick  short term spurt in economic growth.
But doing  them now,  would show the sort of  political determination that would  give  lenders  confidence that Ireland  will grow faster  in the  longer  term. The  same sort of decision making is needed in France, Italy, Spain, Portugal, Cyprus, Slovenia  and Greece.
That would then encourage them to lend money now at reasonable rates to all these countries, including Ireland.
That is how all the three things, Government debt, banks and growth prospect are linked to one another.  The vicious triangle must be turned into a  benign triangle

Wednesday, 12 October 2011


It is not much remembered today, but in the parishes of Whitegate and Aghada in East Cork, where the British Army recruited heavily, almost one third of the male population died in the Crimean  War. In fact almost one third of the British Army deployed in the Crimea was Irish.

 It was the earliest example of a truly modern war, fought with new industrial technologies, and with modern communications and modern media hype.

I   recently read  “Crimea, the last crusade“ by Orlando Figes.  Figes is a specialist in Russian history and brings a new perspective to a war, that is usually remembered from a British point of view, as if the  charge of the Light Brigade  was what it  was all about.

The origin of the  war  was in the  ambition of the Russian Tsar to increase  his influence in the Ottoman Empire, both in general and ,  as the protector there of Orthodox Christians. He was very sensitive to preference being shown to Latin Christians (Catholics and Protestants) by the Ottoman authorities, especially in the Holy Land, then Ottoman Palestine, as a result of French pressure.

 While the immediate cause of hostility was a dispute about rights in the Holy Sepulchre church in Jerusalem, there was a wider fear of Russian expansionism, and  of Russian ambitions  to  create a sphere of influence that would threaten British and French interests.

There were echoes of current controversies in Afghanistan. The Ottomans had  only abolished the death penalty for Muslims who converted to Christianity in 1844, and in fact a number of executions took place after that. Against that background, it was surprising that France and Britain would join Turkey in a religiously motivated  war against Russia.  It explains some of the hostility that exists to this day between Orthodox and  Latin Christians,

The immediate reason for Britain and France joining Turkey in a war against Russia in 1854 was a Russian occupation of Ottoman provinces in present day Romania and Moldova. This was not intended to be permanent , but was a gambit to obtain other concessions from the Ottomans, notably better   rights for Orthodox Christians than  for Latin Christians.

Instead of conceding Russian demands in face of Russian occupation of some of their territory, the Turks declared war on Russia  in late 1853.  The Russians then destroyed the Turkish fleet, which was portrayed as a war crime in the British and French media .France and Britain declared  war on Russia in  March  1854.  They decided to  attack Russia in the Crimea, a  territory Russia had  taken from Turkey in the previous century.

The British Prime Minister hoped to roll back Russian power, forcing it to hand Finland back to Sweden, and to give back the Crimea, Circassia and Georgia back to the Turks.

The French were better prepared for the war than the British. French troops had winter supplies, but the British did not.  The French also had better medical supports,  and  systems for feeding  their soldiers in the field.

Both the French and British had much better  rifles than the Russians, but the Russians  had better anaesthetics which enabled them to perform battlefield surgery  more  quickly and to  save more lives.

Although , technically speaking, the Russians had  lost the war,  when it ended in  1856, the Allies did not achieve their  war aims.

But the religious and political bitterness , engendered by the  war ,  led to  atrocities when  it was over.

Muslim Circassians and  Tatars suspected of collaboration with the Allies, were  driven out of their homeland by the Russians .   20,000 Maronite Christians were massacred in Ottoman controlled  Lebanon,  and there were attacks on Christians in Nablus and Gaza.   Christian Armenians emigrated from  Ottoman  territory to Russia  because they feared a similar fate.

The fall of Communism has brought back to the forefront of modern politics many of the  old antagonisms that were on display during the Crimean war and in its aftermath.  That is what  made  this  book so interesting.

Sunday, 2 October 2011


The current economic situation is challenging because it is bringing up issues that are outside the range of experience of either the present, or the most recent previous,  generation of politicians.

One would have to back to the 1930s to find politicians who actually had real life experience of the sort of problems we  face today
In the 1930s, there was
1.) a collapse of confidence, in and between, banks, which paralysed the economy.
2.) There was a gold standard (currencies had a fixed exchange rate with gold and the supply of gold was limited) which, like the euro, precluded  countries using the standard from devaluing or printing money as  ways on inflating debts away  and thus  making savers pay for  the mistakes of debtors.
3.) There was also a slowdown in the rate at which people spent money (“velocity” is the economic  term for this),  and that meant  there was less bang for each  buck  that was  printed.
All these things are happening today, 80 years later.


The advantage of the gold standard was that it provided a fixed measure of value. And a banking system needs a fixed measure of value, which each bank can hold, and which provides it with a guide as to how much it can lend.
Since 1971, when the US ceased to exchange dollars for gold at a fixed rate of exchange, the world has lacked  a fixed measure of value on which to found its banking systems.  It has had to improvise.
In the  absence of  gold, sovereign debts of Governments were pushed into assuming  gold’s  role  as  a fixed measure of  value , on the assumption that Governments always repaid their debts at face value, and if a bank held enough Government bonds ,  it was thus , by definition,  a sound bank.
The difficulty was that , unlike gold, there is  no natural limit on the  amount of  Government debt.  Indeed the United States, and other Governments, issued large amounts of debt to people, like the Japanese and Chinese , who wanted to save for the rainy day and were prepared to buy the debt at ridiculously favourable prices to the borrower.  That, in turn,  led to an over expansion of the US and other western economies on the basis of credit fuelled by an oversupply of Government bonds.
Now the very clever people in the bond markets have discovered, to their amazement, that Government bonds are not as good as gold after  all. If you have too much of a good thing, it is not good any more.   Here is how their eyes were opened.


 Political parties threatened to, deliberately and unnecessarily , default on  Government debts to make a political point. This happened in the US recently.
 Some Governments produced deceptive public accounts to allow them to issue more debt than they can afford to service.  This happened in Greece.  Governments  generally, and many businesses, simply  borrowed too much,   at artificially low interest  rates .
The fact that none of the highly educated people in the rating agencies, banks, and accounting firms did not see the risk that  such  errors might be made , and  price the  risk such errors into the interest rate they charged on Government bonds,   was a result of  the  “tunnel visioned”  specialisation,  that passes for education in many our leading universities nowadays.
 We paid a price for the  fact that economics courses focussed insufficiently  on economic  history and  finance was  taught  as if it was  a branch of mathematical engineering,  rather than  something inherently under the influence of  psychology and politics
All this critique is fine as far as it goes.  But is there a solution?


I think we will only get our economies going again, if we can restore belief in a fixed measure of value ,that can perform the role that gold performed in the past, and  which sovereign bonds  performed until recently.
That is where the proposal for a euro bond could be helpful.  It could be a lot more than a short term fix.
Suppose all the euro area Governments could agree that they would all mutually guarantee the repayment of a  new  collective euro bond,  and that in addition  it  would have first call on (say) a fixed share of all VAT receipts.  Suppose then that this guaranteed  euro bond  could only  be issued by a euro area Government  in limited circumstances eg.
1,) that their budget law , and five year projections,  had been approved in advance by the European Commission and 
2.) the euro  bond  could only be issued  cover a limited  proportion of their total borrowing, as long as their overall debt/GDP ratio was more than (say) 40%.
This would have a number of advantages.
It would guarantee a minimum borrowing capacity to all euro area states.
It would, however, penalize countries who had debt /GDP ratios over 40%, because they would be forced  to borrow commercially  and pay higher rates of interest on the  extra borrowing, which would be a strong incentive to them to  get their debt level down as quickly as possible to  40% or below.
Because it would be guaranteed by all euro area Governments, and have a prior call on VAT receipts,  the new euro bond would have real credibility globally, as well as within the EU.
Banks who held such new euro bonds would now have something of real and certain  value, on the basis of  which they could confidently base  their lending  decisions. In that way, credit would start flowing again, jobs would be created and permanent structural damage to our economies avoided.
If this happened, Europe, rather than being the world’s economic problem, could be the provider of part of the world’s economic  solution.