Tuesday, 31 July 2012


Finola and I spent a few days in her native county of Mayo recently.
We visited the beautiful, and almost deserted, beaches of the Erris peninsula, which is  one of the most remote places in Ireland . We were there on one of the few sunny days of what has been a disappointing Irish summer.  We enjoyed a lobster in the newly opened Talbots Hotel in Belmullet.
We also were in Westport for the Westport Music Festival, and were at a free concert of the Sawdoctors, whose music captures something of the essence on the  west of Ireland, and its people .

Friday, 20 July 2012


I enjoyed reading “The Pursuit of Italy, a history of its land, regions, and peoples” by David Gilmour , published by Penguin in 2011.
David Gilmour is an historian with a point of view, and the title gives his point of view away. He has doubts about whether Italy should ever have been united as one country, because it is so diverse in geography, history, language and ethnicity.
He quotes a statistic t that ,when Italy was united in  1861, only 2.5% of its inhabitants spoke  present day Italian(which is the original language of Tuscany).
Italians ,though grouped in a series of small states, had been the richest people in Europe from the early Middle Ages to the end of the sixteenth century. In the years after unification in 1861 it was one of the poorest, and remained so almost until the mid twentieth century.   
He particularly regrets the demise of the Republic of Venice, which had lasted over 1000 years, but which was  dissolved and handed over to Austria by Napoleon.
The rule of Italy by a series of independent states was not regressive.
 Tuscany was the first state in Europe to abolish the death penalty. Gilmour argues that the legal system on Naples and Sicily was more tolerant than the Piedmontese system that was imposed, after the Neapolitan Bourbon King of Naples and Sicily had been dethroned by Garibaldi,  and a union with the rest of Italy put through in a  dubious referendum.
The central challenge facing the liberal elite that became the governors of united Italy after 1861 was to forge the diverse people of the peninsula in a single united people. Waging war was their chosen method.
 Harsh colonial campaigns were waged in Eritrea and Libya.  Italy went to war against Austria in  1915, even though Austria was willing to concede all its demands. Mussolini repeated the mistake in 1940.
Whereas the prevailing ideology of Italy from 1861 to 1945 was aggressively nationalistic, the prevailing ideology,from 1945 until very recently, has been anti nationalistic, and European in orientation.
 But not everything in post war Italy was perfect. Extravagance became a feature of public life. Italy now has the best paid parliamentarians in Europe.
This book helps a reader to understand some of the challenges facing Italy today as it seeks to get its people to support the measures necessary control its huge public debt.

Wednesday, 18 July 2012


The long running crisis in the euro area is caused, at least in part, by the fact that the participants in the bond markets have little understanding of, and for a long time had little interest in, how the  eurozone makes its decisions at political level.

In the past, these bond market participants assumed, without much enquiry as to why, that Greek  government bonds were no more risky than German Government bonds, simply because Germany  and Greece had  the same currency.

At that time, they took no interest in the internal politics, or  relative  competitiveness, of Greece and Germany. This misunderstanding often also encompassed economic commentators, especially in the English language media, who, then and now, are unduly influential in the mind of  bond market participants.

Then, in the wake of the shock of the Lehman collapse, everything changed.
The slightest political ripple now sends  amplified shock waves through the  bond markets, and the interest rates charged to lend to different  countries  within the euro zone  vary greatly. Long ignored indices are now scrutinized obsessively.

Both bond buyers and economists, having blithely ignored the EU political system for years, now  crave complete and definitive answers from it, and they want those answers  yesterday!
Of course, the markets worry about the viability of the public finances of individual countries or of their banks, but an even greater concern is to know whether a particular country will stay in the euro in all circumstances.  A country leaving the euro could impose an immediate and shocking loss on lenders to that country, and to its banks.

So the first priority for the markets is convincing them that, no matter what happens, nobody is going to leave the euro. That is a matter of political conviction, not macroeconomic analysis. After that, everything else can be negotiated.

But the political leaders of the euro zone come at things from a very different angle to that of the  commentators and bond buyers. While the political leaders understand the bond buyers  craving for  certainty, they are  engaged in a complex multidimensional political negotiation, in which they have to balance the interests of  17 different sets of national taxpayers, some of whom want to shift liabilities to someone else, and others of whom  who want to  take on  as little  liability as possible, for the debts of others.

 The political negotiation is further complicated by the fact that the EU does not  yet have the  legal power to do some of the things it needs to do, and  some of its members  want to withhold  agreement to giving it those powers, in pursuit of national concessions . Britain is the most outstanding example of this, but more recently Italy played that game. In Ireland, one political party wanted to veto the ESM, which is beneficial to Ireland, simply to get concessions on something else. This sort of silly thing goes on often in EU negotiations, because EU negotiations are conducted by humans, not  by angels.

While there is a European Union, the people who make the final decisions for the Union are national politicians, elected by national electorates, and the national electorates frequently do not understand one another very well, or choose not to do so.

The cheap caricaturing of Germany in some other EU countries has been matched by equally  juvenile caricatures in parts of the German press of other countries, like Greece.  Sometimes the critics have a point, as when Germans complain about the possibility of  extending  their credit to countries ,like France, which  are reducing their  retirement  age to  60, while Germany  feels it has to raise its retirement  age to  70 to maintain German creditworthiness.

As well as making decisions, leaders have to bring their parliaments, which reflect these very diverse electorates, along. Sometimes they need a two thirds majority, as in Germany, or a referendum, as in Ireland.

To use a construction analogy, the markets want the EU to produce a fully constructed and furnished building in time for next week’s bond auction.  But the politicians are trying  to  build the  foundations without having  finalised the architectural drawings,  while  simultaneously arguing about the height of the building, investigating whether  they can buy some units prefabricated, and deciding  how much  bricklayers are paid  per hour by comparison with carpenters.

That’s politics, and this is a political negotiation. It is the way it has to be. No one is going to show their full hand until the moment they are satisfied that everyone else is going to show their hand too.

But commentators criticise the outcome of individual meetings as if it was not a political negotiation, but an academic exercise, and the 17 euro zone leaders were  “Platonic guardians” unconstrained by anything except the requirement to produce a theoretically symmetrical outcome.

For example, one notable commentator (Wolfgang Munchau in the Financial Times) announced recently that the crisis was going to last 20 years, just because Angela Merkel had not accepted that there would be joint euro zone insurance of deposits in euro zone banks, before she had seen the details of exactly what level of central scrutiny of their banks, the other countries would accept, so as to ensure that they would not take a free ride on the backs of German depositors.

What did he really expect? Mrs Merkel will not show her hand until she absolutely has to, any more than Enda Kenny or Francois Hollande will.

Likewise, it is unrealistic of people, like Nouriel Roubini, to  demand that the size of the  ESM fund be doubled  or trebled at this stage, before anyone knows for sure whether the  intended beneficiaries of an enlarged ESM will do all that is required of them, to deserve the money.  Uncertainty about the size of the fund, and doubt about whether it will be big enough in all circumstances, is essential as an incentive to get debtor Governments to do the things they need to do, to be sure they do qualify for the fund, if they need it. 

The Euro area Summit statement of 29 June said it was “ imperative to break the  vicious circle between banks and sovereigns.”.

But it also said that, for EU funds to be directly invested in banks,  an “effective (European) supervisory mechanism” would have first have  to be established, and that any injection of funds would have to be accompanied by conditions that would be  “institution specific, sector specific, and economy wide”.   So a deal will have to be negotiated in respect of each individual bank, each national banking sector, and each country.
According to a paper published recently by the highly regarded  Brussels based think tank, the Breugel Institute,  a  European Banking Union  would require decisions on at least 8 big questions

  1. whether to include countries not yet in the euro
  2. whether  to bring all banks under direct EU supervision, or just the big ones
  3. the scope of an EU wide deposit  guarantee, as to the  amount covered and whether there would have to a local contribution, without which the system might be abused
  4. an EU wide system for closing banks  down and distributing the losses between  shareholders, different classes of creditors, taxpayers and other banks in the  country in question and elsewhere. Associated with this is the question of requiring all banks to draw up “living wills” to say what would happen if they go out of business
  5. Some form of limited  euro zone wide taxing capacity to act as a back stop if  the deposit guarantee fund proves insufficient.
  6. how to  distinguish between past, and potential  future liabilities
  7. the proper focus of euro zone bank  supervision. Should it be on capital ratios, liquidity ratios, business models, diversification or other variables? Should different  types of banking be separated from  one another, or  does a  mixed system make it easier to get over  short term  difficulties?
  8. what to do about Britain, which wants nothing to do with the euro or a a European Banking Union, but still  wants unfettered access to euro zone financial markets  on the same terms as everyone else.

These are difficult political issues and they will need to be resolved in a way that is BOTH theoretically sound, AND politically balanced, between all the 27 countries in the EU. Patience  will be required.

Saturday, 7 July 2012


Antonia Frasers biography of King Charles the Second was first published in 1979 by Weidenfeld and Nicholson, and it has been sitting on my book shelf, unopened, for a long time. I finally got around to reading it last month and it was well worth the time. By ancestry, Charles Stuart was a quarter Scots, a quarter Danish, a quarter French and a quarter Italian, and yet from 1660 he was King of England, Ireland and Scotland. Both his mother, his paternal grandmother, his only brother James, and his wife were all Catholics but, until he became Catholic himself on his death bed, he was a member and head of the Church of England. 


He was married to Catherine of Braganza, but they had no children. He had numerous mistresses, and six of his illegitimate sons became Dukes. In fact his descendants make up a big portion of the English aristocracy. Apparently the late Princess Diana, as well as both the current Duchesses of Cornwall, Camilla, and also the Duchess of York, former wife of Prince Andrew, are, all three of them, directly descended from King Charles the Second in this way. When Princess Diana’s son, Prince William, becomes King, a direct descendant of Charles the Second will finally be on the throne , over three hundred years late! When his father, King Charles the First, lost the Civil War to Oliver Cromwell, and was subsequently executed, the younger Charles had to spend a great deal of time in exile in continental Europe, often leaving unpaid bills behind him, and living in the homes of supporters, like Thomas Preston, Viscount Tara, whose family still live in County Meath. 


Mainly, he was subsidized during his exile by King Louis the Fourteenth of France. He eventually was restored to the throne in 1660 because Richard Cromwell, successor to his father Oliver as Lord Protector, was unable to maintain order and security, and the head of the English Army, General Monck, felt that order could best be secured by the restoration of the monarchy. Even after his restoration to the throne, Charles had to rely on subsidies from King Louis the Fourteenth, because the English Parliament was inclined to impose unwelcome conditions on any money it might vote to cover the Kings military and other expenses. This, of course, constrained Charles’ foreign policy. 


It was during the reign of Charles the Second that Oliver Plunkett was condemned to death on trumped up charges. Charles did not do anything to stop this happening, despite his private Catholic sympathies. It was also during his reign that the Phoenix Park in Dublin was set aside as a public park. Apparently one of Charles former mistresses wanted it for herself, but she was blocked by the Earl of Essex, who was the Lord Lieutenant of the time. Antonia Fraser’s book is an entertaining account of Charles’ relationship with his wife, his mistresses and with his brother James. He managed to keep them all reasonably happy. It also brings out how central religious questions were in seventeenth century politics, notwithstanding the disorderly private lives of many of the leading protagonists. Charles was forced to accept a Test Act which excluded from public office all who did not attend Church of England services. The persistent attempts to exclude James from succession to the throne, simply because he was a Catholic, were a recurring theme in Charles’ reign. James did succeed when Charles died, but was overthrown by a military coup d’etat led by his son in law, William of Orange. As with Charles, Louis the Fourteenth came to James’ aid, sending an army to Ireland to fight in his behalf along with James’ Irish supporters. They were finally defeated at the Battle of Aughrim, in Co Galway, in 1691.

Wednesday, 4 July 2012


I have recently finished reading two books on the Labour Government in Britain, which held office from 1997 to 2010.
They are both by the same author, Andrew Rawnsley.
The first is “Servants of the People, the inside story of New Labour” and covers the first term of Tony Blair.
The second is “The End of the Party, the rise and fall of New Labour” and covers Tony Blair’s second and third terms, and the premiership of Gordon Brown.
New Labour held office during a period of strong economic growth, with plenty of resources available to facilitate reform.  They were remarkably good at winning elections, better than Labour had ever been before. But what has Britain to show for these 13 years?
Their achievements include the completion of the peace process in Northern Ireland, the establishment of devolved Governments in Scotland and Wales,  and an increase  the comparative   incomes of the  least well off 20 per cent of people in British society.
It is difficult to identify much else that stands out.
On the debit side, the proportion of national income absorbed by Government services rose from below 40% to almost 48%, with little evidence of increased consumer satisfaction with the performance of either of the two big services Government provides, health or education .
Tony Blair wanted to introduce more far reaching reforms to the health and education services, but was frustrated by his Chancellor, Gordon Brown. As Rawnsley puts it,
“Gordon was not necessarily against reform. He was against any reform proposed by Tony. It was all a question of authorship”.

Gordon Brown controlled the domestic agenda from the Treasury, expanding the power of that Department far beyond taxation and normal public expenditure control. And Tony Blair acquiesced in this, in a way that weakened the position of the Cabinet as a whole.
Labour added 3600 new criminal offences to the statute book and brought the British prison population to new highs. Interestingly, it is a Tory Minister, Ken Clarke who is now looking for ways to reduce the prison population.

New Labour engaged Britain in two new wars, in Iraq and Afghanistan, the first on what proved to be false pretences, and the second without having learned anything from history.
Tony Blair is portrayed in these two books was well intentioned, vacillating, and short termist on domestic policy. But, on the issue of Iraq, he was passionate, coldly determined, and almost messianic. Importantly, when Blair was at risk of being toppled because of Iraq, Gordon Brown rallied to his cause and helped him win over MPs, whose votes were critical.
Tony Blair wanted to bring Britain into the euro, but in order to be sure to win the 1997 election promised to have a referendum on it. A referendum on a currency matter is a dubious idea.

Gordon Brown then invented five, supposedly scientific, “tests”,  that would have to be passed to determine when, or whether, Britain might actually join the euro. These tests were, in reality, not scientific at all, but subjective and political, but, because the analysis was to be done in the Treasury, they served to give Gordon Brown a veto on the topic. 
It is hard to understand how Tony Blair, as Prime Minister, allowed Gordon Brown to overrule him on an issue which was so important to him personally. As a result of Tony Blair’s failure to lead his own Government on this question, Britain is now further away from the rest of the EU, than at any time since the 1950’s, and may indeed leave the EU.

 Rawnsley claims that, on domestic policy, while Blair  had  many ideas, and favoured new ways of doing things, he  “lacked sustained interest in the mechanics of delivery” and was “almost wholly uninterested in civil service structures”, which Ministers need to understand if they are to translate policies into results.
Ministers did not stay long enough in any job to master it. The average term of a Minister was just 18 months. The Conservative/Liberal Democrat coalition, perhaps because it is a coalition, seems to be avoiding that mistake.

These two books are very long, one is 508 pages and the other 761 pages, but they are worth the time.
They show how different Government is from Opposition.
In Opposition, a party need to roll out new initiatives every few weeks to ensure it is not forgotten.
In Government, it needs to stick to a few priorities, and relentlessly hound the civil service machine to ensure that these priorities are  translated into results on the ground as quickly as possible.