Tuesday, 30 July 2013


This is the title of a recently published book by Donal Donovan and Antoin Murphy, which  should be required reading for anyone who wants to understand how an economic boom can destroy a country.(It is published by  Oxford University Press)
Thanks to cheap credit, and rapidly rising property prices, Ireland experienced a property bubble between 2000 and 2007. This bubble led to such a radical distortion of its economic structures, and to such an increase in debt, that full recovery will take 20 years.

The distortion took the form of a doubling in the size of the construction sector, large and uncompetitive pay increases across the economy, and rapid increases in numbers of people employed in the public sector. 

In just five years from 2001 to 2006, the numbers employed in the health sector grew by 20,000 or 25% .By  2009, Nurses salaries in Ireland were the third highest in the OECD and  Ireland spent more on pharmaceuticals per person  than any OECD country, except the US, Canada and Greece. 

The share of the workforce in the public sector reached 29%,  as against 19% in Germany.  The numbers in top grade positions in the civil service grew by 86% between 2000 and 2006.

Rates of Social welfare benefits, paid   to those unable to work because of illness, age or unemployment, grew by 67% in real terms. While public sector pay rates have since been reduced substantially, these benefits have not been.

Bubbles misallocate human capital. Instead of choosing careers and skills, for which there is enduring global demand, talented people were drawn by quick rewards into activities for which demand is inherently temporary, like construction. 

Vital educational and training opportunities were lost. A generation of young people were misled.

House prices had already risen by 133% between 1994 and 2000. These increases were justified by rapid economic growth, immigration and new family formation, all of which created a  genuine demand for housing. The trouble is that the increase in house prices continued on after 2000, and was  financed by excessive lending, which created an expectation that the only way house prices could ever go, was up. 

For example, mortgage lending by Allied Irish Banks increased by 139% between 2003 and 2008. Meanwhile, on top of this, AIB lending  to developers to buy land, on which future houses might be built, increased  by 332%! 

The assumption seemed to be that demand for housing could go on growing to infinity.
The revenue of the Government became unhealthily dependent on  property sales  such as  stamp duty, capital gains tax, and VAT on house sales. Property related revenues reached  18% of all revenues in 2006, whereas they were only been 8% in 2002. 

But once house sales stopped, the revenue stopped too, leaving a huge hole in the Government’s budget. The revenue could disappear overnight, but the increased in spending could only be reversed  over many years.

How could mistakes like this be made?

This question is very thoroughly analysed in this  book.
The authors identify two tendencies of Irish policy making, whether in the public or private sector,  that were fatal

1.  “Silo tendencies” within institutions, where people only think about their own immediate responsibilities, and do not question wider assumptions.

2. A “consensus approach” which encourages a single view to be taken of any issue.

At a wider level in Europe, and in the Central Banks, there was an underlying assumption that markets were so efficient, and participants in them  sufficiently wise,  that prices would always find their own level, without a crash.

This was backed up by academic work by economists like the Nobel laureate, Robert Lucas, who argued that a technical solution had been found to  depressions. The ECB Financial Stability reports did not question the consensus, nor did the IMF.

This book deals thoroughly with the mistaken belief that the whole problem was due to the Government giving a blanket guarantee to the banks on 29 September 2008. 

It concludes that, while the guarantee proved to be very expensive, the alternative to giving it at that late stage would have been much worse. 

A sudden collapse of the Irish banking system, and a chaotic collapse in the economy and in international confidence in the country, would have been a probable consequence of declining to give the guarantee then. 

The really blame worthy mistakes were made between 2000 and 2006, when  huge and unsustainable increases in bank lending, and government spending, were allowed to take place.

Sunday, 21 July 2013

WHEN THE MONEY RUNS OUT......The end of Western Affluence.

That is the title of the latest book by Stephen D King, Group Chief Economist with HSBC, which I read  last week.
King is a strong critic of his own profession of economics, believing it over emphasises the insights one can derive from mathematical models, and underestimates those one can derive from a study of economic history.

As in his previous book “Losing Control....the emerging threat to Western prosperity”, he draws heavily on illustrations from economic history, which in themselves are interesting and entertaining, even apart from their current relevance.
The earlier book showed that western prosperity is, in terms of human history, very recent. 
It occurred because, for about 150 years, western nations could rig the rules of the game in their favour, either through
  • colonialism (European nationalities controlled 84% of the world land mass in 1914, as against a mere 37% in 1800), or through
  • a combination of military, financial and technological dominance.

 It is all over now. That dominance was already fading long before the financial crisis of 2008, and will not return.

The western growth rates of the 1950 to 1973 period are not repeatable.

China’s rise is simply a return to a relative position vis a vis the west, that it enjoyed for 1000 years up to 1800. 
He also criticises many economists for forgetting that physical resources in the world are scarce, and, as the population, prosperous enough place those demands on those resources, grows, the  cost of those resources to purchasers in the west will rise.
It is against this background, that he disagrees with those who argue that economic problems can be solved by either

  • western governments  borrowing and spending more, or
  • western central banks  engaging in “quantitative easing” through  buying  bonds to increase the money supply.

Neither of these methods will bring back  the exceptional late twentieth century  growth rates, on the basis  of which  western governments made unaffordable long term promises of health care, pensions, and the like.

All such initiatives  can do is slow down, and also prolong, the difficult adjustment process towards a lower growth rate.

Neither governments, nor central banks, will persuade consumers to start spending again, if consumers do not believe such stimulus policies can be sustained in the medium term. As long as consumers remain worried about their own future, they will prefer to save, rather than spend.

Most Governments cannot borrow more for a sustained period to stimulate the economy, because their existing debts and pension promises are already incredibly high. Consumers know this, and it is this lack of credibility such “stimulus” that destroys consumer confidence, and makes people save rather than spend, no matter how much a government borrows and spends in the short term .

Consumers are simply not as gullible as some Keynesian economist might like them to be.

Meanwhile the central banks’ policies of low interest rates, which incidentally were one of the causes of the financial bubble in the first place, are not a credible way out of the financial bust.

This is because   many consumers now depend, for their eventual pension, on private pension funds. Artificially low interest rates decimate the income of private pension funds. Consumers, who are worried about whether they will have a pension when they retire, will tend to save more, rather than borrow more , no matter how low interest rates are kept.

King says the shortfall in UK private pension funds is £312 billion, apart from government pensions for which there is no backing fund at all.

Unfortunately, public discussion in the media rarely makes the connection between pension fund deficits, and artificially low interest rates, supposedly designed to “stimulate” the economy.

Instead, the SAME people often blame the central bank for not making interest rates even lower, and  the pension fund managers, for not having returns high enough to meet pension obligations.
Quantitative easing, and the Liquidity Coverage ratios under the Basel III rules, give preference to the issuance of debt by governments. They help indebted governments find a market for their bonds.

But this is at the expense of bonds issued by business sector, which do not benefit from these rules, and have to have a higher interest rate. This damages investment, in favour of artificially prolonging unviable government entitlement programmes. How long can this distortion last?
King  believes that income inequality adds to the tension in society, which tends to increase anyway when the cake is not growing, and when  people can only get more, if other people get less.  How is it that Japan has much lower levels of income inequality than the US, the UK, or Ireland?

Economic stagnation also leads to a search for scapegoats. Anti Semitism grew up in Germany during the 1873 to 1879 depression, which also led to anti Chinese feeling in America.  

But King offers relatively few ideas for remedying the situation.

Indeed one feels that he believes that we will simply have to accept lower living standards, and share out the sacrifices as equitably as we can, while preserving sufficient economic freedom to ensure that innovation continues. 
He does argue that government expenditure that favours the young, should be spared from cuts. He favours temporary regional fund transfers within the EU to ease the plight of countries in crisis, because others foolishly lent them too much money.
This entertaining and honest book, by an economist, demonstrates the limitations of economics itself.

Economics, unlike medical, chemical, engineering, or agricultural science, does not produce new wealth.

It simply helps us to analyse what has already happened, after the event! 

Friday, 12 July 2013

The Birth of the Nazis

I was in Berlin when I read “The Birth of the Nazis, How the Freikorps blazed a trail for Hitler” by Nigel Jones (Robinson Press).
Order had collapsed in Germany in 1919, after the end on the First World War. 

Imperial Germany had financed the Bolshevik take over in Russia in 1917, to get Russia out of the war, so Germany could concentrate on defeating the British and the French before the American troops arrived on the Western Front in large numbers. It had then imposed a humiliating peace on Russia, depriving it of a third of its territory.
Now, in 1919, the boot was on the other foot. 

Germany itself had been defeated, forced to accept humiliating peace terms, and there was a real possibility of a Communist takeover in Germany itself. Germany had a proportionately much larger industrial working class than Russia and was therefore at a more suitable development stage for Communism, according to the Marxist dialectic.
The German Army had lost the war, but it wanted the blame for the resultant peace terms to fall on civilian politicians. A Social Democrat led coalition government was formed which had the unenviable task of agreeing the Allied terms. The country was broke, and many people were starving.
The Army tried to have it both ways.  In the event of refusal to accept the Allied terms an Allied invasion was in immediate prospect.
General Hindenburg advised the Government “We cannot count on repelling a determined attack by our enemies” but avoided the responsibility himself by saying.  “ As a soldier, I would perish with honour rather than sign a humiliating peace”. 

This responsibility shifting technique of blaming politicians, while not facing up to military and fiscal realities, was common among many demobilised and underemployed soldiers, who were to form the nucleus of the Freikorps. It is a well developed technique for  reality avoidance that we even see in our own enlightened times, on lesser issues!
The Social Democrat led Government faced an even more immediate threat, an attempt to seize power, similar to that in Russia two years earlier, by a group calling for all power to be handed over to soldiers and workers councils on the Soviet model. There were mutinies in the armed forces and the elected Government lacked the means to assert its authority.
So the Social Democrat led Government had to turn to irregular forces, drawn from people who had little sympathy with the Government, but who wanted, even more so, to prevent a Soviet style revolution. Thus the Freikorps were born. 

They succeeded, brutally, in their immediate task, and Germany enjoyed a democratic Government for ten years. But when the global depression came in 1930,Freikorps members provided a  force that propelled the Nazis into power.
This book gives a very good insight into two turbulent years of German history. It explains some of the present day antipathy between Social Democrats and Communists in Germany.
It also throws light n the chaotic, violent, and unstable state of mind, brought about by the suffering and brutalisation imposed by Great War, that existed between 1919 and 1921 all over Europe, including in Ireland.

Saturday, 6 July 2013


The allegations, by Edward Snowden, that the United States National Security Agency(NSA), for which he worked, spied on diplomatic missions of the European Union in Washington and New York, and even on the building where EU Summits take place in Brussels, are very serious.
They require a deliberate and sustained response, not something exaggerated, or that will last only for a one day news cycle, and later expose contradictions in the EU positions.
The truth is that fundamental values are at stake here for the EU.

The founding idea of the EU was that relations in, and between, states should be governed by rules, rather than, as previously, by raw power. States, and individuals, should be equal before the law.
The Snowden allegations, if true, reveal a grave breach on international law by an agency of the United States government.

This is not something that can emoted about in the short term, and then later  brushed aside, with a worldly wise and jaded shrug, on the basis that ”everyone is at it.”


The law on this matter is crystal clear. The Vienna Convention of 1961 codifies the rules under which diplomats and embassies do their work. But the rules themselves go back, in customary international law, to the 16th century.
The 1961 Vienna Convention has been ratified by the United States. Indeed the US relied successfully on that Convention in the International Court of Justice, when its own diplomats and Embassy were interfered with by Iran in 1979.

It is in the national interest of the United States to ensure that this Convention is respected, without question, and as a matter of routine, in order to ensure protection for its own missions abroad.
 The Vienna Convention says, in article 22,
 “the premises of a(diplomatic) mission shall be inviolable”. 
”A receiving state shall not enter them, except with the consent of the Head of Mission” 
“The receiving state is under a special duty to take all appropriate steps to protect the premises of the mission from any intrusion.”
Article 24 of the Convention says the “archives and documents of the mission shall be inviolable” and Article 27 extends similar protection to it correspondence. 
The Snowden/Der Spiegel allegations suggest that listening devices were placed in the EU Mission in Washington, without consent, which would be a blatant breach of Article 22. No such consent was given in my time in Washington.

They also suggest that the NSA hacked into the computer system of the EU missions, which would be a clear breach of both article 24 and 27 of the Vienna Convention.
Reacting to these allegations, US figures, like the former head of the CIA, made no reference  at all the US obligations under international law, to the US interest in protecting diplomacy, or even to the unfairness and  bad faith involved in spying on partners with whom one is supposedly negotiating in a transparent way. Instead he sought to dismiss them, by hinting vaguely about intelligence gathering by some EU states.

But what is alleged was not a case of the US reciprocally countering supposed illegal activities by  some EU states. It was hostile and illegal activity, by the US, directed against the EU itself, and the EU does not do have either the capacity, or the authority, to carry on any reciprocal surveillance of US missions in Europe, and does not do so. The ex head of the CIA knows that perfectly well.
In any event, I do not understand the point of what the NSA was supposedly doing. The activities of the EU Missions abroad, and of the Council of Ministers in Brussels, deal with subjects on which the facts are well known, and on which negotiating options are also fairly obvious. They can be easily discovered by US officials, simply by asking. They do not involve sensitive questions concerning the security of the United States, which is supposed to be the concern of the NSA. 
There will, very occasionally, be commercially sensitive and confidential information shared with the EU Mission in Washington by European or American companies, which might be useful to its competitors.   Apart from the illegality involved, the NSA would have no legitimate reason to seek out, collect, or share that sort of commercial information.
I believe what is involved here is a case of a security bureaucracy gradually extending is role, and engaging in “mission creep” just because it can, and because nobody is stopping it. The missions of Agencies are often lazily defined, and open to multiple interpretations. That may well be the case with the NSA.


What should the EU do now?

I will start by saying what it should not do.

It should not suspend the negotiation of a possible Trade and Investment Pact with the United States. In fact, it should recognise that these allegations strengthen the EU’s hand in these negotiations, in the sense that the US now has to demonstrate its good faith.
Nor should it expect an early, full, or contrite admission from the United States of what might have happened, or make that a precondition for anything.
Instead, The EU should adopt a twin track approach
It should continue with the trade and investment negotiations, as if nothing had happened. 
But, simultaneously and separately, the EU and its member states should follow the example set by the United States itself in 1980, and take a case in regard to these allegations of breaches of the Vienna Convention, to the International Court of Justice in the Hague. This assumes that it can obtain sufficient documentary evidence of the Snowden allegations from Mr Snowden, or from Der Spiegel.  Pursuing a legal route would depoliticise the issue in the short term, and allow time for things to cool down.
Surveillance technology has advanced a great deal since 1961 when the Convention was concluded. A new judgement from the International Court in this case would be helpful. It would re-establish and modernise the norms of behaviour we would want all countries to respect in future, notably emerging powers like China. 
President Obama, who, probably more than any previous President, understands the  significance of international law, and who wants to bring countries like China fully within its strictures, should welcome such a robust reaffirmation of the Vienna Convention. 

Monday, 1 July 2013


These are really important questions that are seldom discussed. But if Europeans do not have a well understood consensus about them, we will find it increasingly difficult to build the sort of integrated economic unity, that is required by our present difficult economic situation. This is because values, and economics, cannot be separated.

A recently published European Values Survey ,conducted in all European  countries, shows that Europeans have widely divergent views about what constitutes a good life, about mutual obligations, and about individualism and community. When approaching common EU questions, each nation will tend to assume its approach is best, or indeed the only valid,one and may be quite uninformed about what others think and why. That is not a recipe for harmony and unity. And there is no common conversation in Europe about the things that are important.
The concept of EU citizenship goes back to the Maastricht Treaty. (Article 17 of current EU Treaties)

A promise of common citizenship implies a shared set of values, that encompasses shared rights, and, of necessity, and as the Treaties say, shared obligations.

A right without an obligation is a logical impossibility. If someone has a right, some other person, or group, has to be on hand and willing, to ensure that it is vindicated. 
The concept of European civilisation goes back even further.

Europeans once felt comfortable invading other parts of the world, because they felt they had something special, a special set of values, or some special knowledge, that they could bring to those parts of the world, that would not enter there, without some form of compulsion, and that the benefits would exceed the costs of the compulsion.

Of course, there were selfish reasons too, but Europeans were able to live with their consciences because they felt they were, ultimately, doing good.
The construction of the European Union, going right back to the 1950’s, proceeds from the assumption that Europeans share a set of values, that justify a pooling of sovereignty that would enable them to defend those values .

It also presumes the existence of some form of shared European civilisation that distinguishes Europeans from Asians, North Americans, Africans, and South Americans.

Some might sum up these ”European Values” up as simply, democracy and the rule of law.

But these concepts will only work if there is a minimal shared understanding, across Europe, of what they mean in practice. That is not something that can be delegated to lawyers in the European Court of Human Rights. Lawyers can only do their job well, and without hubris, if there is a minimum consensus on basic questions like these. 

What should law say?

How far should majority views, in a democracy, intrude on private lives?

Should people be treated exclusively as individuals, or do families have rights and obligations?

When does a life become human, and when should it begin to enjoy human rights?

Democracy cannot easily survive if people views, of what should be done collectively are totally divergent, and  if there is no underlying consensus. Democracy was brought down in the 1930’s in most of Europe because that necessary consensus had ended. That could happen again.

The Rule of Law will not survive, and laws will not be enforceable in practice, unless there is some shared sense, across Europe, of what the law should say, and of how far law should go in regulating our behaviour. Law needs some shared view of what is private, and what is public, and how far it should go in regulating the former.

Elites cannot go too far beyond the consensus in society when imposing, through the courts in Europe or nationally, their views of what the law should say.
This is especially so in a Europe of 500 million people, where so many different views are liable to exist.
If we are to proceed to create a society in the European Union, based on shared, and, to some degree, mutually enforced , values , we need to establish if such shared European values really exist.

And we need some mechanism for discussing these values with one another, across Europe, in a mutually respectful way.

It cannot just be a question of those countries or groups, who deem themselves to be the most “advanced”, “enlightened”, or “progressive” in their values, using their skill  in the legal system, and their access to Judges, to enforce their values, through European law, on those deemed by them  less progressive, enlightened, or advanced. That will not work, and will eventually provoke a reaction, and not necessarily one that will be welcome.
“Le Monde”, the French newspaper , on  19 June  reported on a recently published  European Values Study which showed dramatic differences  between Europeans in what they believe should be  the role of society, and of the individual. The Study chose 19 indicators to measure how “individualised “ were the values of Europeans in all 47 European countries. 
Among the indices of individualisation were the following 
  • adherence to a relativist value system, rather than one based on  a set of principles
  • a belief that one expresses and develops oneself primarily through paid work (as distinct from family responsibilities) 
  • a belief that one should  spend one leisure time according to personal taste 
  • a belief that one should choose ones form of family, with each member of a couple having a separate set of friends, choosing to have or not to have children, choosing to marry or not, 
  • a belief that homosexual couples should adopt children 
  • a belief in liberal abortion laws 
  • tolerance of  divorce, adultery, euthanasia and suicide

The survey ranks countries by the proportion of their population that was “individualised”, according to these measures, in 2008.
The most “individualised” country in Europe is Sweden, where 84% of the population had this set of beliefs.
 In contrast with Sweden’s 84% preference for individualism, support for that view is only at
 7% in Cyprus,
 10% in Malta, 
19% in Romania,
 22% in Croatia,
24% in Latvia,
 26% in Greece ,and
 28% in Bulgaria

Just across the Baltic Sea from Sweden, in Estonia, only 24% had the same opinion as the Swedes. Even closer to Sweden, only 20% were of that opinion in Poland, which means that 80% of Poles did NOT agree with the Swedish view!

After Sweden, the next most “individualised” country was Iceland ( 83%), followed by Denmark 78%, Finland (69%), Netherlands(68%) and France (67%).

There were many contrasts, even between close neighbours.

Britain was at 54% on the individualised belief scale, whereas Ireland was only at 34%, implying that almost 2/3rd of Irish people did not have an individualistic view in 2008.

Spain was at 61%, whereas Italy was only at 24%, a truly remarkable difference between two counties, often put in the same box!

The Czech Republic was 52% “individualised” while Slovakia was only 36% .

Germany is only at 52%, while its neighbours Denmark and Netherlands, as mentioned already, were at 78%, and 68% so, respectively.

Newer members of the European Union simply do not share the highly individualistic preferences of  some of the older EU states.

It is important that European institutions, including the ECHR as well as the EU, take note of what Europeans actually believe, as distinct from what the people administering these institutions personally believe themselves, or decide Europeans believe  ,having looked into their own hearts.
Malta is as much part of Europe as Sweden! 
Italy is as European as France!
European Courts can only be used to impose “European norms” when we have first debated, in a genuinely European electoral process, what those norms are and should be in future. We do not have such a process at the moment. Judges and regulators need democratic guidance, and we need a Europe wide venue for this.