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Tuesday, February 07, 2012

EU fiscal compact treaty and Ireland

Philip R Lane, a professor of international macroeconomics at Trinity College Dublin, wrote in today's Irish Times on the fiscal compact treaty that was agreed by leaders of 25 EU countries last week.

Here is my contribution to a thread on the Irish economy blog.

This is a good article focusing on the big picture of what is the start of a process towards a better designed euro system -- better not perfect and for sometime ahead, in for example China's interest to have a second global reserve currency, currently at 26% of total world reserves.

It's good that pressure from Europe helps to improve Irish water standards, forces some action on septic tanks just as a European Court of Justice deadline is about to kick in and eventually maybe will be a catalyst for a credible waste management system.

Twice in a generation, the Irish economy was wrecked and the underlying culture remains the same despite the crash. More intrusive European intervention is a positive development.

There are 101 or more other issues that can be raised and some regard their particular interest as the main issue. The agreement provides a framework to move forward and with 25 countries involved there will be operational changes as time goes on.

German mercantilism is seen as a problem but where we gain, at least in cash terms from the Common Agricultural Policy as does France -- should radical reform be welcome? Why should American multinational companies be able to pay Ireland corporation tax on the sales that are made in for example the UK (e.g. Google)?

Much of the 'whataboutery' can divert attention from the main priority of policy.

Individual countries have to take the initiative to radically modernise their economies over the next decade or else they will remain in the doldrums for much longer.

No amount of German consumption will make a difference if there is nothing to sell. 

Some talk about transfers as if money should be provided for corrupt systems without question. The US federal union is sometimes cited. However, for example West Virginia produces a lot of black stuff but it has not a black economy like Italy's where the national statistics agency Istat says is worth €255bn and €275bn a year, or 16.3% to 17.5% of GDP.

In 1980, Germany had trade surpluses with Italy, Spain and Greece.

In Jan 2010, George Provopoulos, governor of the Bank of Greece, wrote in the FT:
"During the 1980s, Greece had another twin-deficit problem (large and unsustainable fiscal and external imbalances) and its own national currency, the drachma. It waved the magic wand twice, with large devaluations of the drachma in 1983 and in 1985, but in the absence of long-lasting structural adjustment and sustained fiscal contraction. The devaluations were followed by higher wage growth and inflation, with no sustained improvement in competitiveness. Speculative attacks against the drachma were avoided only because of strict controls on capital flows, an option that is no longer feasible or desirable. The twin-deficit problem remained. So much for the magic wand of currency devaluation.”

Problems predated the euro while credit and property booms masked them in recent times.

Spain and Ireland headed the 1993 unemployment rankings of the member countries of the OECD. Spain's rate was at 22.4% and Ireland's was at 15.8%. In December 2011, Spanish unemployment was at a rate of 22.8%; Ireland's was at 14.3% and in October 2011 Greece's rate was 19.2%. Of the 34 member countries (mainly rich countries) of the OECD in 2011, Spain, Greece and Ireland headed the rankings.

Greece can do much better. Its neighbour Turkey was also regarded a basket case a decade ago.

No economy is Utopia but Turkey's budget deficit is now about 1.5% of GNP, but it runs a primary surplus. A decade ago, Turkey's budget deficit was 12% of GDP. In 2002, government debt was 74% of GNP, now it's 39%. A decade ago, Turkey's per capita income was US $3,300. Now it is about $10,500.

As for Italy, the estimate of tax evasion in 2009 was €119.6bn - - almost four times the value of the Prime Minister Mario Monti's recent austerity budget and 28% of the amount  that was collected in taxes - - according to calculations reported last month by the Rome daily 'La Repubblica.'