Inside the world of business
Division in the troika over the merits of austerity
The troika is back in town and going through the Government’s books once again. But this time it may be different as the gulf between the members on how best to approach the problem of overly indebted countries has widened appreciably since they were last here.
In particular, the IMF has started to question publicly whether too much austerity too soon may be counterproductive in such situations. In a rather technical study published around the fringes of its recent annual meeting, the fund said it had underestimated the multiplier effect of cutting Government spending – the basic point being that excessive fiscal tightening can set in train a vicious cycle from which the economy cannot escape.
Something of a rethink may be under way at the IMF on foot of its recent experiences, but other members of the troika don’t seem to be for turning. If anything, the position of Germany and other advocates of austerity seems to have hardened in recent months, chipping away at recent commitments made by the EU leaders and the European Central Bank.
This will all contribute to the mood music for the current visit, although the fact that the Irish programme remains on track means that no showdown is expected.
But it is becoming very clear that to guarantee a successful Irish exit from the programme at the end of next year there will have to be some concessions around debt.
Or as Reza Moghadam, the IMF European head, helpfully points out in the latest edition of the fund’s online magazine, IMF Survey: “Further support, in line with euro area leaders’ statements on improving the sustainability of the well-performing programme, could help lock in these [Irish] gains.”
Interesting timing.
ECB's reputation hinges on success of bond-buying scheme
The indication by European Central Bank executive board member Jörg Asmussen over the weekend that Ireland and Portugal are not yet eligible for the ECB’s forthcoming bond-buying programme once again brings the issue into the spotlight.
On September 6th, the ECB outlined plans for its new bond-buying programme, to be known as the Outright Monetary Transactions, which will also be available to countries in a bailout programme which are regaining bond market access. At what point Ireland will be regarded to have reached this juncture will be a key issue for the State and the NTMA.
Meanwhile, the world is watching to see if Spain will tap into the new programme following the official establishment of the European Stability Mechanism last week.
The subject of bond-buying was also a topic of debate at the Dublin Economics Workshop in Galway over the weekend. Rather than a panacea for all problems, Ciaran O’Hagan of Société Générale argued that bond-buying programmes incentivise bond holders to sell, as long as prices are held above market clearing.
Instead, he argued, the ECB should be trying to engage bond investors, and he called on the ECB to provide more clarity as to how much it is planning to buy, and for how long.
In contrast, Conall McCoille of Davy argued that a strategy of “constructive ambiguity” was the best route for the ECB, pointing out that the threat of the ECB acting as a lender of last resort would be sufficient to stop hedge funds selling short government bonds.
In other words, it’s a bit like the Cold War – the ECB has an unlimited arsenal with which to threaten the market, but if it is forced to act, the policy has failed.
The debate around bond-buying is a healthy one. Europe’s first foray into bond-buying in 2010 had distinct limitations – most notably the seniority of ECB debt in the creditors queue had the effect of reducing investor interest in holding weak government bonds.
The new programme is significantly different.
While Europe has been criticised for a lack of decisive action in tackling the euro zone crisis, it is important that this intervention, however welcome, is executed in the right way.
Cost-cutting under the microscope
Whatever about the IMF’s change of heart on the value of austerity, there appears to be a growing conviction that Ireland is paying little more than lip service to the concept of structural reform under the bailout.
Yesterday’s front page article in this paper read in part: “Experts from the EU, IMF and ECB are becoming increasingly frustrated with how the Coalition is implementing the bailout by cutting services to the public rather than tackling vested interests”.
If indeed they are, it’s not before time. The Government has been dithering on property tax, and equivocating furiously on water charges, despite Ireland being the only OECD member state without the latter in place.
Meantime there is no serious evidence of solid structural change. New entrants to public service may have their terms of employment changed but no steps will be taken to address the unsustainable explosion of the service during the boom years. The Taoiseach is on record as saying there will be no rowing back on the Croke Park deal, saying he will not break promises he has made. Well some promises anyway.
Any hope that legacy issues will be addressed once the agreement has run its course fade as the Government seems set to hasten agreement on Croke Park II.
If, with the economy on the brink and their hand on the tiller, the troika cannot pressure Government to fundamentally alter the manner in which it conducts the management of its public purse and relations with those it employs, it can have little expectation of such reform once it departs. And that merely runs the risk of our benefactors having to revisit these shores.
Time is running out for the troika to institute the sort of change that can properly put Ireland Inc back on a long-term sustainable path. If they have realised its lack, that at least is a first step.
Quote of the day
"The news flow on the US economy keeps getting better" – Chris Williamson, Markit economist, on news that US retail sales rose 1.1 per cent in September
Today
Central Bank governor Patrick Honohan addresses the Chartered Accountants Leinster Society
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