The Sustainability of Europe

I’m not sure how likely the types of changes worried about in this article are:

http://www.guardian.co.uk/world/2011/may/12/europe-to-end-passport-free-travel

but if they come about, I think that it’s likely that the EU won’t only not develop further, but will at least weaken, and perhaps fall apart.

On the other hand, if they manage to muddle through a few more years, the economic situation might improve and it becomes far easier to do the bailouts properly, both financially and politically.

I suspect that at least one CTer disagrees, and is more optimistic.

Yes, that would be me.

1. I think one needs to appreciate how small a problem Greece is. It’s much smaller than Lehman Brothers – the aggregate national debt is about the same size as the balance sheet of LEH, and while Lehman creditors lost 90% of face value, everyone agrees that a 50% writedown on Greek debt would be much too much.

2. And to be aware that the can-kicking policy is working, whatever Martin Wolf thinks. One year ago we were talking about “PIIGS”. That included Italy, a G7 country. Nobody remotely believes that Italy is in trouble now. Spain is very nearly off the attention list too and probably will be once the caja restructuring exercise is completed. That is not at all bad progress. This has gone from being a potentially systemic crisis to a genuinely peripheral one.

3. It might have been better fortune if we’d been able to leave a few days’ gap between the Krugman/Winecoff Wars and this thread. If elites make policy in the USA, why exactly do we think that German and Dutch taxpayers are going to be able to force the issue on this one? After Bulgarian and Romanian EU accession, the Euro itself, reunification at Ostmark parity and having American nuclear missiles for forty years, I think we can pretty much establish that “the German public will not stand for this” is a pretty weak forecasting tool.

4. Ireland will vote through treaty changes in exchange for the money. I am afraid to say that with the conditionality on the lending program in place, the basic way in which the EU institutions manage their relationship with Ireland is going to be summarised by the doctrine of “it puts the lotion on its skin or it gets the hose again”.

5. This is a case where JQ’s usually excellent point about the mutual incoherence of different levels of realism (at the level of states vs at the level of individual voters) doesn’t apply. The question is not one of whether people identify themselves as European – it’s whether they think that causing a great big sweaty crisis is going to hit their pocketbook or not. I suppose we will have a good test case here, but I don’t think that the political constituency for tearing everything apart in a fit of pique is anything like as strong as it appears. Even the True Finns are actually not causing anything like as much trouble as expected.

6. I don’t see how can-kicking exacerbates problems. Relative to what baseline? If we decided to face up to the truth &c &c &c, and put Ireland and Greece into default, then even if the expected benefits accrued and Ireland was able to obtain as good an economic outcome as Iceland, things would still be pretty crap and I really doubt that things would go appreciably better for EU institutional legitimacy. In the meantime, as I say, every year’s can-kicking makes the problem a little smaller and easier to solve in economic terms.

Greeks, Portuguese and Irish people don’t like being at the sharp end of imposed austerity.

Also actually, I think that the Plain People of those respective nations might not have quite the skewed view of the world that their local equivalents of Bild or the Irish Independent portray for them. Because really, who are the villains here, and who “imposed” the austerity? Greece had a crisis because it spent ten years using borrowed money to paper over serious social fissures. Ireland had a crisis because it accidentally-on-purpose handed over the keys to a bunch of property speculators. Portugal, somewhere between the two. It’s obviously more complicated than that, and all, but whatever the outcome of the internal blame game, these three countries are having austerity forced on them because they’ve run out of money. The pernicious Germans and the EU institutions are helping them, by lending them money, on much better terms than anyone else is proposing, to smooth out and lessen the austerity. They aren’t forcing contractionary budgets on them out of sheer cackling evil, or by way of revenge for embarrassing them in the past. Neither Ireland (post the bank bailout), Portugal nor Greece were in a position where Keynesian stimulus was an option, as they had borrowed in foreign currency and reached an explosive debt path.

By the way, if Ireland wants to be building bridges with the rest of Europe, sending fucking Jedward as their representative to the Eurovision Song Contest was a bit of a courageous move.

9: humbly agreeing to deliberately lose Eurovision in this way might be quite a good PR move.

Are we ready to ask whether the whole EU was a mistake to begin with? It is easy to say “It doesn’t matter now! We are stuck with it and have to save it, because the costs of failure are too high!” If it was a bad idea, even if one Europe is committed to now, those who advocated it should at least re-evaluate the reasoning and values that led them to support it. Even if you think the basic project still worthwhile, relative not to the costs of failure but to the status quo ante, you might think how it has gone so badly wrong, if you think it has, and what you should have insisted on as the condition of your support. All I’m hearing here is “how do we save the EU?” Not why it is worth saving. If the answer is just “cost of failure”, well, that is pretty pathetic. This was pretty much imposed on Europe against the popular will, and support from the left seems to have had a lot to do with faith in elitist technocracy and a sentimental cosmopolitanism. How do those values look in light of where we are?

One year ago we were talking about “PIIGS”. That included Italy, a G7 country.

It did? I thought the Is were Ireland and Iceland.

If elites make policy in the USA, why exactly do we think that German and Dutch taxpayers are going to be able to force the issue on this one?

If elites make policy in the USA (and thus by implication in other countries, if we assume that the differences in political systems aren’t relevant), why should the man on the street in Athens or Dublin be on the hook for sovereign debts?

Greece had a crisis because it spent ten years using borrowed money to paper over serious social fissures.

Isn’t this just the sort of nation-as-person metaphor that we tore apart a few months back as a way of looking at international relations? Why does it make any more sense for international finance? Greece didn’t have a plan, a set of Greek rulers did. Now the Greek people are expected to pick up the tab? On what basis? Why would or should they accept such a demand? And since, ex hypothesi, the underlying problems have gone unsolved for ten more years, do they even have the capacity to do so?

A real independent country could monetize, devalue, inflate away the problem and although creditors might grumble, they would know it was a risk they had taken (and received their risk premium for) when they made the loans. Hard money very much *is* being imposed on the periphery against both their will and their interests.

The pernicious Germans and the EU institutions are helping them, by lending them money

This is a contradiction in terms. Lending someone money at interest makes them poorer and you richer. That’s not the kind of help that helps. If they *really* wanted to help the periphery they’d institute some policies aimed at encouraging their population to buy more Greek goods and take more vacations in Greece, or something like that. Or, for that matter, if the EU had the sense of community that a real nation does they’d make actual transfer payments to their poorest regions.

Incidentally, on the whole borrowing thing, I don’t suppose my acquaintances are a representative sample of the Irish population, but what seems to really piss people off is that fact that if it wasn’t for being in the Eurozone, we could just call in the IMF which, for all its faults, has a better understanding of the needs of debtors than the ECB. But the fact that Tim Geithner peers over the IMF’s shoulder is a complication.

But one aspect of the can-kicking that is different from the US is that the EU periphery really could run out of access to borrowed funds. Ireland and Greece simply can’t borrow at their current bond yields. So it’s a game of chicken with the collision point rather closer than for the US.

Really? As opposed to US states and municipalities? Are you sure? Has anybody done a comparative study of European vs. American austerity policies yet?

“I don’t think that this will lead to the collapse of the European Union. I do think that it is likely to result in very long-lasting institutional stagnation”

What is this, if not more can kicking? In fact, with the much vaunted ‘recovery’ actually benefitting fewer people than last time around, even an economic uptick represents more can-kicking. Look at the proposals to reform the banking sector in the UK – this against the background where most people, outside a small number in London and the Home Counties, feel significantly worse off. Ditto a US recovery against rising unemployment and lower labour market participation.

I think even those of us who knew that apathy was possible, underestimated it’s effect in reality.

chris in #17: “If elites make policy in the USA (and thus by implication in other countries, if we assume that the differences in political systems aren’t relevant), why should the man on the street in Athens or Dublin be on the hook for sovereign debts?”
That’s what peasants are for.

dsquared@5

I take it you have not been following the European banking crisis too closely.

Firstly the problems of the peripherals are many and varied.

Greece is not a fully functioning country, it moved from the reign of the generals to a highly corrupt state with damaged legitimacy to which a large proportion of the citizenry felt no obligation to pay taxes. It needs more than just debt forgiveness, it needs the space and encouragement to remake itself – of all the PIIGS it needs the most sympathy and help.

Portugal has severe inequality which it tried to address with large public projects at the same time we had a global financial crisis. They were unlucky and Spain has a milder version of the same ailment.

Ireland is the most relevant to the overall question of the EU’s legitimacy because it was used as an example to other states as to what happened if you threatened the European financial system in its current configuration. We have been lent money, at extortionate interest rates, to keep the European banking system whole by keeping our Zombie banks alive. The message is clear – Europe is about the German export sector, making the Euro the world’s hardest reserve currency and giving France the impression it still enjoys global clout.

No one has come out well of the current crisis except bank bondholders and groups with large Euro positions, you can expect a polite disengagement from the political elements of the EU from the peripherals while Germany and France do a Ratzinger and work on a smaller, but more devout, Mittel-EU.

All pretty sad.

piglet: From a fiscal standpoint, the EU and the US are not comparable at all. (The constituent states of the two bodies are somewhat more comparable, but what matters here is that the central authorities of the two zones are not comparable: they are vastly different in size — fiscally speaking.) That is to say, the central authorities of the US spend over 20 percent of the US GDP; while the central authorities of the EU spend less than 2 percent of the EU GDP. This observation is a commonplace among specialists on the subject. For confirmation, please consult the writings of Perry Anderson, Paul Krugman, or Sverker Gustavsson. (Disclosure note: I translate for the last-mentioned chap.)

It did? I thought the Is were Ireland and Iceland.

Nope. To be a member of the PIIGS one had to be a member of the Euro. Italy was the second (or first) “I.”

dsquared @7: What about contagion? Can we be so confident that a Hellenic default would not raise the borrowing costs of (roughly) similarly situated countries to the point where those countries too come close to default? I don’t think the problem is so much the size of Greek debt, as it is what the default would imply about the risk of other countries.

I’m a little less sanguine about the possibility, even if I’d agree that it probably won’t happen.

As to the cost of can-kicking politically, it’s obviously unpleasant for everyone involved while it occurs; and once it is over, the structural problems that allowed the can to exist in the first place will remain, but with the added obstacle to change of the resentments formed by all the kicking.

I don’t see any alternative though, and it’s also plausible, alternatively, that when conditions are better, enlightened self-interest on the part of nations will spark institutional reforms.

Now, for what it’s worth, I went to high school and college in New Mexico, where “U.S. out of N.M.” bumper stickers were fairly common — 150 years after the Mexican War led to the territory’s annexation.

To be even more positive about all this: maybe over time the insight will grow that, economical chit-chat aside, this situation is the result of competition between countries, and that therefore what is needed is to eliminate competition between countries. Once we are there we might see a union-wide policy that no longer punishes the poor to keep the rich affiliated to one country or another but one that taxes the rich for the specific benefits they enjoy for being able to live in a perfectly stable union.

There is much for Europe to be envious about, politically, towards the US but fairly distributed risks and rewards is not part of it. Whatever Krugman’s good intentions his analysis of going for debt followed by economic fragmentation was completely off and probably somewhat of a self-fulfilling prophecy.

@38: if that were true then there would not have been any financial crisis anywhere. Low-taxes Ireland was hot and everybody wanted a part of it; having the euro or not was inconsequential.

What would have worked was demanding that in order to join the Euro, low-tax Ireland should change into normal-tax Ireland. If we’d have done that, nobody would have lended more to the Irish banks than they would have lended to others.

dquared@36

The fact that your answer to Greece needing help is “Screw em! solidarity aint what the EU is about.” is rather telling.

I will skip the corporation tax bait, that is simply Sarkozy playing the tough guy to shore up his dwindling political base. Tax is never going to be set to benefit Mitteleurope without there being a European budget, which there is never going to be. Yawn.

It is true that Ireland’s problems are largely the result of its banking system, and that it is a major priority for Euroland to stop Ireland’s insane property bubble from taking down the whole euro area, but again let’s be real here. Letting your entire banking system go bust is not exactly a silver bullet solution, is it?

The big lie! Excellent.

Ireland’s inability to secure funding on the bond markets is primarily a function of the socialization of private banking debt and the large amount and high interest rates of the borrowing necessary to do so. It is a nice irony that Germany gets to turn a profit on the Irish public protecting German banks from an inability to price risk, but then that is the story of modern capitalism. Moral hazard is strictly for the little guy,or the little state.

This socialization of banking debt had to done as the normal resolution process for a failed bank (screw the shareholders, save the depositors as much as is possible, if there is a carcass left let the senior bondholders fight over it) would have caused European investors pain (the poor dears) and exposed just how fragile the rest of the European banking system is (German Landesbanken,I am taking about youuhooo).

Ireland is screwed because the balance of European political power is such that saving the current configuration of the EU financial system is a higher priority then the welfare of its citizens and the remaining sovereignty of the non-conforming states.

It is this, not too shocking, revelation which has started to call the legitimacy of the EU into question. If the project has become chiefly about protecting capital Jean Public might wonder if it was worth pursuing, and the efforts to use the PIIGS as a punching bag are just part of the show intended to distract from this sad state of affairs.

Capital co-opts political power to protect capital. Same ole same ole with the same ole apologists.

The fact that your answer to Greece needing help is “Screw em! solidarity aint what the EU is about.” is rather telling.

I have never written the words which you put in quotation marks, and in fact I am wholly in favour of the EUR100bn package of concessionary loans already given to Greece, support the extension of further loans (also on subsidised interest rate terms) and would even be in favour of a correctly handled writedown, all in the name of European solidarity, and all despite the fact that Greece is the country in which the domestic electorate is most culpable for its current problems and in which the average voter benefited the most from the run-up of the debt.

You will perhaps understand how your first paragraph does not dispose me particularly well toward the rest of your comment. Nor does the fact that you just skip over the fact that Ireland apparently wants to continue to pursue the policy of being an onshore tax haven, and that there is something inconsistent between demands for “solidarity” from larger European states, and an ongoing attempt to raid their tax base. This self-pitying dishonesty is becoming all too characteristic of the Irish political class at the moment and it is no more attractive than the bombastic and arrogant dishonesty of the boom years.

This socialization of banking debt had to done as the normal resolution process for a failed bank (screw the shareholders, save the depositors as much as is possible, if there is a carcass left let the senior bondholders fight over it) would have caused European investors pain (the poor dears) and exposed just how fragile the rest of the European banking system is (German Landesbanken,I am taking about youuhooo).

Mate. Please. Have a bloody word with yourself:

1. It is the Irish banks whose losses are a multiple of GDP, not the Landesbanks. Germany has a massive fund allocated to bailing out the Landesbanks, and their losses are likely to be a fraction of the Irish banks.
2. The Irish banks failed to price risk correctly, to a much worse extent than anyone else. It was the Irish banks that fuelled the Irish property bubble, not the German banks.
3. The main creditors of the Irish banks are the Irish people through their deposits. That’s why they had to be saved. “European investors” could have seen your financial system implode and shrugged it off, but you would have been rather more inconvenienced when the ATMs stopped working and the pension cheques didn’t clear.

Ireland is screwed because every single financial institution in the country went hog wild and lent stupid amounts of money to property developers (in Ireland), using money largely borrowed from the Irish people. The fact that Ireland simultaneously turned itself into a tax haven and thus managed to link its financial system with that of other countries is not exactly exculpatory. Ireland is not guaranteeing the debt of Depfa Bank plc and the other German-Irish banks; the state is bankrupt because of Bank of Ireland (its largest bank, which actually predates the Republic), Allied Irish Banks (its second largest bank) and Anglo-Irish Bank (the private bank of the Irish political class). None of this is the Germans’ fault, is it?

Kevin just wants to be able to blame others. That’s not unlike a lot of other Europeans.

chaz 28, Peter 29: not remotely answering my question. I am asking for comparable numbers about austerity (i. e. budget cuts) in US versus EU. And Peter, try reading other people’s comments before pretending to answer them.

P O’Neill 30: “This US vs EU comparison stuff ain’t hard.”
Maybe it ain’t hard but nobody seem to have comparable numbers. The article you are linking to is completely worthless. “Paradoxically, despite this grim picture, it is actually Europe that should be envious of California”. That was written last November. Who is taking stuff like that seriously?

Guido: I think you mean SB – Kevin (here and on his website) is actually facing up to reality and trying to take on the challenge that Fintan O’Toole set out clearly in his book – to take a lot of the very real benefits of the boom in cultural terms, to accept the consequences of the crash and to try to think about building a new politics and economics in Ireland.

Meanwhile, SB has decided to double down on self-pity, accusing me of harboring racist sentiments about Irish people and suggesting, absurdly, that Irish tax policy was simply aimed at stopping Ireland’s industrial base from fleeing to Germany. Apparently the Dublin financial centre was built because “international investors” randomly decided to throw capital at the Irish economy, seeking “higher returns”. And the Irish people are being prevented from enjoying the benefits of the magic solution of declaring their entire banking system insolvent. And a 5.7% interest rate is “absurdly high”, because if Ireland left the euro and defaulted it would probably issue bonds on the same terms as Norway. Or something.

SB, you really don’t understand as much as you think you do. The “Irish people” are being shafted, by their own political class and their own banks. They’re not paying for foreign banks’ losses, particularly not German banks (the German taxpayer is paying for those). There would not have been any great benefit from declaring the Irish banking system bankrupt; quite the reverse. The decision to guarantee BoI and AIB was unavoidable and the decision to guarantee Anglo-Irish was nothing to do with the ECB. Ireland has been lent EUR87bn, on terms which are perfectly reasonable, and which would have been subsidised even more if the Irish government was prepared to negotiate in anything approaching good faith. The Irish political/business/financial community is being blamed for a lot of things, but this is because a lot of things were their fault.

‘I believe that the problems of the EU periphery are a manifestation of the power of international capital and the increasingly warped structure of EU political control while you believe it is basically down to national fecklessness in small countries and Ireland being the only country in the world to culpably miss the fact that there was a property bubble. Stupid, greedy paddies. You’ve never liked them anyway.’

This seems to me like a very uncharitable misreading of what dsquared actually said, and I don’t think accusations of racism are likely to help the issue.

To try to help clarify things, can you please explain what you mean by ‘the increasingly warped structure of EU political control’?

I have to confess to not understanding your position so far. You seem to be attributing blame to Germany for things it seems blameless of. It wasn’t the German banks who fuelled a ludicrous property bubble. It wasn’t the German government who guaranteed the debts of every bank in the country.

You seem to want the German government to advance Ireland either an interest-free, condition-free loan(s) for several years going into the future, or for a system of transfer payments from the centre to the periphery. Even if you believed that was somehow ‘right’, ie the moral thing to do (and I don’t actually), I’m sure you can see why it simply isn’t politically feasible.

(ah, the spirit of “never use preview” strikes again – by “a sufficiently better long term debt position in the penultimate paragraph above I mean “a sufficiently better long term debt position to offset the significant disadvantage to Ireland of having blown up the banking system”.)

Damn! Sorry about doing it again, but will somebody please close the italics tag before I wreck what’s left of the thread? Thanks.

I think the counterfactual is just too far away because you have to assume away the entire cute-hoor political class of the last twenty years. Your alternative history couldn’t have had the tax-haven policy, couldn’t have had the co-option of the government by the property/financial nexus … I’m not seeing it.

We had the cute-hoor political class and the co-option of the government by the property developers back in the 1970s too, but when property bubbles burst the big banks didn’t go under. They just used up some of the huge provisions (by the standards of the time) which the Central Bank insisted they build up in the boom years.

The assumptions I’m making are pretty uncontroversial I think. In particular: the banks wouldn’t have borrowed huge amounts of euros if the Irish pound was their reporting currency and the only currency which they could borrow from the Central Bank. So the bubble, if any, would have had to be financed by Irish depositors funding Irish pound mortgages. When the crunch came, a devaluation would have shrunk the real value of debt, which is precisely what needs to happen. But the experience of the period 1970-2000 would have led us to expect a boom to end in just that way, which is why I think the Central Bank would either have prevented it, or dealt with it reasonably effectively when it happened.

What’s the “tax-haven policy” got to do with it? The transfer-pricing sector, or whatever you want to call it, lives a life of its own. Its contribution to GNP is mostly just the wages it pays to Irish employees. It really has nothing much to do with the problem, except insofar as Google employees and suchlike were just as likely to be buying property as anyone else. That and the fact that it’s about all we have left, which is why nobody is entertaining the demand that we should risk shrinking it in return for an inconsequential reduction in interest rates. The interest rate is academic if the principal is 150% of GNP, since there’s no realistic prospect of repayment.

On the MOPE meme, I largely agree with you. But you’re the one who likened Ireland to the helpless victim of a serial killer who proposes to turn her skin into a lampshade, if I remember the story correctly. Not even John Waters goes that far.

… Kevin (here and on his website) ….

Presumably you have some other Kevin in mind. I have a blog of sorts, but nothing serious.

Sorry, yes, I got you mixed up with Kevin O’Rourke.

The tax policy was intrinsically bound up with the financialisation of the Irish economy – recall that it started out as a specific industrial subsidy. And the biggest users of Irish tax dodges were the Irish banks themselves. Unlike in the 1970s, the creation of a bubble was government policy, which is why the counterfactual needs to assume that away too.

The Icelandic banks did have to raise kronor deposits and borrow internationally and they managed to fuck things up just fine – remember that money was cheap internationally those days and the Irish banks would have had no trouble raising Euro at low rates. The only way to have stopped them converting those euro into IR£ would have been capital controls, which you couldn’t have imposed while remaining in the EU.

Btw, while a debt/GDP ratio of 150% is high, it’s not at all unbearable. Plenty of places have had higher debt ratios at higher interest rates than 6.7% and recovered.

piglet 47:

No, I don’t have directly comparable figures on US cuts vs. EU cuts. But I do believe it’s reasonable to presume, given certainly underlying (and quite drastic) structural dissimilarities between the two entities, that the cuts in Greece involve a “much bigger dose of government spending [being] taken out of the economy” (as Chaz claims in 22)than in California.

My presumption here follows from these premises:

(1) There hasn’t been any far-reaching austerity program at the federal level in the US yet. (Although to be sure it certainly seems, grimly enough, that this will be changing soon.) The Obama stimulus may well have been, as among others Paul Krugman has argued, badly insufficient; yet it wouldn’t appear to be the, all the same, that any large-scale cuts have been instituted at the federal level in the US over the last couple of years.

(2) The larger part of government spending in California comes from the federal government — not from the California state government, or from lower-level governments in that state.

(3) Premises 1 and 2, taken in combination, mean that the great bulk of government spending in California will remain intact even if truly drastic cuts are instituted by the state government there.

(4) Greece is in a different situation, because the proportion of government spending in Greece which is represented by the (relatively stable) expenditures of the EU central authorities represent such a tiny proportion of overall government spending in Greece. It is instead the expenditures of the Greek central government, together with those of lower levels of government in Greece, that account for the overwhelming proportion of overall government spending in Greece. And these expenditures, of course, are being cut drastically — without the relatively stable expenditures of the EU central authorities being able to mitigate the impact of the cuts in anything other than an extremely small measure (since the expenditures of the central EU authorities are so small).

Putting these various pieces together, I believe there’s pretty good prima facie reason to believe that, as Chaz puts it in 22, a “much bigger dose of government spending [is being] taken out of the economy” in Greece than in California.

You’re certainly right, though, that I don’t have any directly comparable figures on this question. Still, I hope I’ve set out some halfway believable reasons for my presumption here: that the cuts in overall government spending in Greece right now are more drastic than the cuts in overall government spending in California right now. I would be very surprised indeed — given the structural differences between the EU and the US that I’ve outlined — if the cuts in overall government spending in California prove to have been higher than those in Greece. But I’ll certainly be interested to see any directly comparable figures on these cuts, if anyone has any.

No, I don’t have directly comparable figures on US cuts vs. EU cuts. But I do believe it’s reasonable to presume, given certainly underlying (and quite drastic) structural dissimilarities between the two entities, that the cuts in Greece involve a “much bigger dose of government spending [being] taken out of the economy” (as Chaz claims in 22) than in California.

I’m not looking to compare Greece and California – it’s US and EU we are supposed to compare. And we shouldn’t compare just one level of government, but all, from the municipal to the federal.

I was actually curious what sort of bullshit the Irish were telling themselves about why they had a god given right to allow corporations to dodge taxes. The Internet comes through again!

piglet: “I’m not looking to compare Greece and California – it’s US and EU we are supposed to compare.”

Youch, that’s tricky. There’s so much variation — both in the US and in the EU — between different regions, states, etc. I suspect the differences in this regard are rather greater in the case of the EU than in that of the US. I must hasten to add, though I haven’t read anything which addresses this issue directly; it’s just a general impression on my part. Which states in the US are being hit least hard by government austerity? Connecticut, maybe? Which states are being hardest? California, perhaps? I haven’t gotten the impression, at any rate, that the variation in this regard is as great in the US as it is in the EU.

Where the EU is concerned, let’s take the case of my country (Sweden) and compare it with that of Greece. The austerity being imposed in the latter country, of course, is famously severe; in Sweden, by contrast, there’s essentially no austerity being applied right now.

This is not to say, by the way, that everything is hunky-dory in the latter country. No indeed! The present bourgeois government in Sweden is systematically — although perhaps rather quietly — shifting social and economic resources away from the least favored and towards the privileged. Still, while these developments are most unfortunate, they do not mean the government is presently pursuing austerity in respect of overall tax-and-expenditure levels.

Or, if we prefer to restrict the comparison to members of the eurozone more specifically, we might compare Finland or Austria or Germany on the one hand, with Greece or Portugal or Ireland on the other. Here too, the variation in degrees of austerity is enormous.

In any case, you’re of course perfectly welcome to compare austerity in the EU overall with austerity in the US overall. Doubtless that’s an interesting inquiry in its own right. Speaking for myself, though, I find the issue of the worst-hit cases within the two entities (i.e., the US and the EU) to be the most interesting and important question. It is namely in connection with the worst-hit cases that the design flaw in today’s monetary union in Europe shows up most clearly. That is to say, in a monetary union which is operating unaccompanied by a fiscal union, the effect of asymmetric economic shocks is especially difficult to correct or to compensate for. On account of this design flaw, we get outcomes like that seen in Greece today: a terrible debt trap, with no future in sight but years of grinding austerity. I’m frankly not sure what ought to be done now, now that things have reached this pass. But I do think, at least, that there’s an important lesson to be learned here for other countries that might ever consider introducing a common currency. Said lesson is this: If you decide to set up a monetary union, then set up a fiscal union at the same time! Or, if you’re not willing or able to set up a fiscal union, then don’t set up a monetary union either! A monetary union without an accompanying fiscal union is like a car with an accelerator but no brake. A car like that shouldn’t be driven — not, at any rate, until it gets a brake to go with its accelerator.

piglet: “And we shouldn’t compare just one level of government, but all, from the municipal to the federal.”

That’s what I was doing (within the specific Greece and California cases, at least). Indeed, my whole point hinged on so doing. I was claiming that, in view of the pronounced structural differences between the US and the EU, it is reasonable to presume that the cuts in overall government spending in Greece right now (from all sources: EU, national, municipal, etc.) are more severe than the cuts in overall government expenditures in California right now (from all sources: federal, national, municipal, etc.).

Still, as you quite rightly point out, I don’t have any directly comparable figures here: neither for the large-scale comparison (EU vs. US), nor for the smaller scale comparison — the one that I personally find most interesting (Greece vs. California). All I have here is a reasonable presumption, based on (I hope) some halfway sensible reasoning.

dsquared@

Btw, while a debt/GDP ratio of 150% is high, it’s not at all unbearable. Plenty of places have had higher debt ratios at higher interest rates than 6.7% and recovered.

I’ll just repeat what has been said repeatedly elsewhere about banking on a recovery from a very high GDP/debt ratio.

* Plenty of places have also ended up having to default with high debt ratios
* If default is inevitable extending the agony exports even more of your countries resources.
* A fixed exchange rate with your trading partners makes an export led recovery more difficult.
* A domestic recovery is extremely unlikely if you are pursuing serious austerity to service foreign debt.
* If a domestically fuelled recovery is not possible than recovery is also very much dependent on there not being another economic shock to your trading partners.

The proposed bleed yourself better approach to economic security has more than a few weaknesses, and it is based on the same combination of breathless optimism about economic growth and the success of market liberalism as the policies that brought us all here.

These beatings will continue until morale improves.

Well, I agree with dsquare. But then I am german and the germanophobic conspiracy theories tend to annoy me. A few points:

a) Ireland was like Iceland a poster child for neoliberal policies. And now, instead of revising this policies, they vote another neolib party (FG) into office and demand of Christian democratic/social democratic countries (Germany, France , Netherlands, Austria, Finland etc.) to rescue them, without any cost.

b) The crisis did strike Ireland in autumn 2008. At this point the Irish government to issue the idiotic blanket guarantee to the banks. To the consternation of the rest of Europe. The bailout, where the rest of Europe and the ECB indeed pressured Ireland, happened two years later. Most of the socialization of bank losses happened in these two years. Now these two years are somehow vanished from the collective irish memory.

c) 5.8% is indeed to high. But that was invented for Greece. But let’s say Greece and Portugal and Ireland would get the loans from the other countries at cost. That would mean 3.5% from Germany, 3.7% from the Netherlands, 4.0% from France, 4.5% from Italy. On average 4.0% or so. And that would change the big picture exactly how?

d) Ireland is a tale of bankrupt banks. But that is’nt the problem in either Portugal or Greece.

e) A transfer union is a nice idea. But wouldn’t that mean transfers from Ireland to Eastern Germany? (Both Greece and Portugal actually receive around 5% of their gdp in transfer payments from the EU).

im@71

e) A transfer union is a nice idea. But wouldn’t that mean transfers from Ireland to Eastern Germany? (Both Greece and Portugal actually receive around 5% of their gdp in transfer payments from the EU).

Absolutely. Germany’s self funded reunification was an amazing and wilful act of discipline (though I question whether it should have been so fast), Germans have also suffered the Hartz labour reforms (which I was shamefully unaware of until this year) and I believe that Germans are by and large underpaid and, as a result, under consume. Western Europe generally has not done enough for Eastern Europe, and the market reforms we heaped on them instead were, in my opinion, sinful.

To go further back Germans should have enjoyed a higher standard of living and Ireland’s should have been lower for at least the last decade, it is natural that Germans now expect some payback after the two decades of toil since reunification started.

Sadly at the exactly the same time we have encountered another crisis of capitalism, a crisis that can not be dealt with without confronting the state of the EU financial system, controlling the extent of tax arbitrage and eliminating the tacit approval of tax avoidance by large corporations (Google’s double Irish for instance).

Unfortunately at the very same time that these measures need to be taken both Germany and France’s ruling coalitions political interests mitigate against them, so here we are with an EU suffering from a real crisis of legitimacy and the periphery enjoying old style IMF market reforms.

>Really I think it comes down to the fact that if you want an international/EU-wide finance system, you need to handle it entirely at the EU level. >

Yes. But wasn’t and isn’t the system in place. The ECB ist not the Fed. Financial regulation is a national matter. And that failed in Ireland. By the way the bankrupt banks are nor evil foreign banks – except Depfa – but the “Irish” banks of the Irish banking sector. And regulation is a national matter because states like Ireland blocked a union-wide regulator.

A sane resolution process was not possible because Ireland didn’t have the laws in place – like other countries – and the Irish government decided in autumn 2008 to guarantee everything. Back then nobody asked the ECB for their opinion. The government would have been forced to admit that the banks were bankrupt. And insurance of the deposits alone would have been quite expensive. And some of the bond-holders are of course in Ireland. Now perhaps, as rumoured, the ECB did demand this or that in late 2010. But that was two years later.

a) Ireland was like Iceland a poster child for neoliberal policies. And now, instead of revising this policies, they vote another neolib party (FG) into office

Yup. That’s what happens when your government and your opposition are both neoliberal. But if that seems awful to you, just think how terrible it is for the Irish! Poor bastards.

b) The crisis did strike Ireland in autumn 2008. At this point the Irish government to issue the idiotic blanket guarantee to the banks. To the consternation of the rest of Europe. The bailout, where the rest of Europe and the ECB indeed pressured Ireland, happened two years later. Most of the socialization of bank losses happened in these two years. Now these two years are somehow vanished from the collective irish memory.

That’s a good point. I tend to forget the amount of time involved. At this point if Ireland drops the bank guarantee, they’re not stiffing the right people. But even so, the situation is not tenable. If Ireland needs to default then the other Europeans should help them do so. Or, if Merkel, Sarkozy, and co. strongly want to avoid an Irish default, then they need to actually bail Ireland out–with grants, not loans.

Is the Irish Labour party not neoliberal? I thought that they were, along with both major parties in the U.S. and all three in the UK. I’m not really an expert on Ireland though. Just to be fair we should note that most neoliberals to not consider tax evasion and property bubbles to be key tenets of their ideology.

In any case, saying what the Irish people could or could not have done is a mug’s game. The Irish people could have formed a new party that was socialist, social democratic, libertarian, revanchist, or whatever you like, and they all could have voted for it. The fact is that the existing political structures and the prevailing political views among the public were geared towards neoliberalism, so that’s what they got. These things do not turn on a dime.

This situation could in fact lead to the collapse of the European Union, or at least to its fundamental reconstruction.
Apart from the diverging and conflicting interests and agendas between the member-states of the European periphery (PIIGS) and those of the center (Germany, France, Netherlands etc.), the EU also has to deal with its own structural problems that are most apparent in its multidimensional, extremely complex, bureaucracy.
If Greece turns default, it will cause a chain effect, first because its main creditors are Germans and French and second because other countries with similar problems such as Portugal and Ireland will have to endure greater pressures from the markets, potentially leading them to the same fate with Greece. Furthermore if Spain also asks money from the European safety mechanism, then the Euro will not be a viable currency any longer and will be destroyed.
I have written a series of articles on my blog regarding these issues.
In case you are interested here is the link. Thanks.
http://protes-stavrou.blogspot.com/search/label/Economic%20Crisis

What you say here is true. Especially the issue about the sentiment of belongingness to European institutions. No one in Europe feels “European”. National identities are still dominant.

john@83

On neoliberalism in Ireland.

Even from the last election the intellectual influence of the neoliberals in Irish politics was quite diminished – we only ever had one out and proud neoliberal party (the Progressive Democrats, no seriously) and even at the height of Ireland’s enthusiasm for the American model there was never a wave of privatizations or efforts to”reform” our quite generous social welfare system. In contrast good old non-neoliberal Germany eviscerated its social welfare provisions in the early noughties with little fanfare.

I am not sure neoliberal every really captured the state of Irish politics, they were more like low tax Gaullists.

Sadly despite their small numbers the PDs did enormous damage as they were in several coalition governments. They were a collection of odious barely green Thatcherites, the most repellent of which (Michael McDowell) shamelessly stirred up racist tensions in order to curry popularity. The light touch regulation fetish was originally theirs, it gelled nicely with the Irish fetish for property (which has long cultural historical roots). It is also notable that the two main Irish newspapers were (and indeed still are) both compromised by rightism, the editor of our newspaper of record (The Irish Times) was a former Progressive Democrat TD (MP/congressperson) and the other main broadsheet, The Irish Independent, has a ferociously right wing editorial line controlled by a tax absentee media magnate (Tony O’Reilly) with very strong neoliberal tendencies.

With the two quality newspapers intellectually committee to right wing economics and the state broadcaster historically resistant to anything that sounded too left wing there was precious little hope of voices of warning being allowed.

Chris Bertram@82

The urge for punishing the future children of the nation for the sins of omission of the previous governments are rather odd and distasteful. The property boom in Ireland notably suited the elite more than the working class and yet the enthusiastically endorsed punishment will overwhelmingly affect the worse off.

Contrary wise the loss of savings that a bank resolution might have entailed would have seen a more equitable distribution of loss with those who had benefited most from the bubble also suffering the most. Reparations and austerity on the other hand leave the elites untouched, in fact sometimes even more influential thanks to deflation.

Contrary wise the loss of savings that a bank resolution might have entailed would have seen a more equitable distribution of loss with those who had benefited most from the bubble also suffering the most.

see, this is still the silver bullet solution of the bank default.

I’m really no longer interested in arguing with someone who constantly accuses me of bad faith or racism, so I will conclude this part of the debate with a hearty “Go And Fuck Yourself, Idiot”. Perhaps Kevin, Walt, IM, Chaz or someone else would like to make the case that declaring the banking system bankrupt would have been the right policy for Ireland, and we can continue?

I am, as indicated, perfectly happy to continue the argument, but not with you.

Perhaps Kevin, Walt, IM, Chaz or someone else would like to make the case that declaring the banking system bankrupt would have been the right policy for Ireland, and we can continue?

I’m at a disadvantage for two reasons: I’m going out for a beer and I don’t altogether disagree with you. However I think it was possible to rescue enough of the banking system to meet Ireland’s needs without incurring anything like the liabilities we did. If Brian Lenihan had been wiser and better advised, he could have liquidated Anglo and put AIB into some sort of administration which enabled it to do its day-to-day business without any committment to existing creditors. Of course new deposits would have had to be guaranteed but there’s no reason I can see why bondholders shouldn’t have been left to sweat it out. If I wanted to put numbers on this I would just plagiarise Karl Whelan’s posts at the Irish Economy blog. If you think he’s wrong about anything important, I’d suggest that’s worth a blog-post rather than a comment.

Now I’m off to the pub. Good night.

Maybe I’ve lived in the US for too long, but the actual law seems like a weak constraint on governments in emergencies. (Anyway, couldn’t the Irish parliament pushed through the necessary law in under a day?)

Would the IMF’s haircut plan have been impossible under Irish law?

The counterfactual should be —

Dump Anglo and Irish Nationwide to their secured bondholders. The depositors (which contain a significant yield/demutualisation chasing bunch anyway) get mostly covered by deposit insurance and above that, they get Parexed (partial deposit freeze). The saves about 35 billion euro, and the sovereign is a lot better position to ringfence the other problems. But I also want the luxury of no NAMA in the counterfactual, in its own way as disastrous a decision as the original guarantee, since it put all the worst assets on the fiscal balance sheet.

walt@94

Maybe I’ve lived in the US for too long, but the actual law seems like a weak constraint on governments in emergencies.

Indeed, the legal aspect has been wildly overstated as a barrier to bank resolution, the state had no legal obligation to backstop bank losses indefinitely and could have allowed the guarantee to lapse on a number of occasions, or instead chosen to narrow its terms (the Danes did this). What happened instead was the interests of the Irish sovereign and the European financial system parted ways and guess who won?

A clue: Money (more precisely, the hard euro).

On the IrishEconomy.ie blog, where these things have been debated in great detail for many months, my best description of course of the logic of the bailout was as follows:

The banking bailout and the gradual slide to bankrupting the state to help keep the current European financial system whole started its journey as pragmatic and restorative, moved through necessary and purgative, passed unfair but unavoidable to reach its final destination – suicidal but dignified.

There were then, as now, horror stories about the ATMs being out of action for weeks, (followed inevitably by the total collapse of society and cannibalism) if we attempted a commando style bank resolution process and it ground on. In retrospect it seems like it would have been a better way out, morally and fiscally.

As a not at all amusing postscript, after the bail out, the state is now literally and figuratively invested in re-inflating the property bubble as it owns so much of it, either directly through NAMA or implicitly because of the new orthodoxy that the government has to continuously make up bank losses on over valued property loans.

Make no mistake, the bailout is about preserving rescuing European financial capitalism from itself without hurting the value of the Euro or assets, but it is being done in the interests of widows and orphans.

D^2, I recall you being terribly superior about anyone who thought the US Senate supermajority was a real constraint on passing the US healthcare law. There was no law; there was only power. If Obama really wanted, he could just crush these arrogant scorpions. Suddenly, in a far worse fix, it’s impossible to push through a short bill in a legislature that had a stable working majority and no such bollocks?

Suddenly, in a far worse fix, it’s impossible to push through a short bill in a legislature that had a stable working majority and no such bollocks?

The thing is, what would that short bill actually say? It has to say something like “Irish bankruptcy law is now rewritten, retrospectively, so as to subordinate certain classes of bondholder in bankruptcy and allow selective default on instruments that were previously pari passu with deposits. Furthermore, we are 100% sure that this is both constitutional in Ireland and compatible with all relevant European law”. That’s quite some draftsmanship.

And then once you’ve passed it, what now little man? The Irish Parliament isn’t actually allowed to pass “A Bill To Compel Foreign Private Sector Creditors To Finance AIB”, so it comes right back up against the initial reason for guaranteeing the banks in the first place – solo, they were experiencing a bank run, and if they weren’t able to roll over their short term credit, then they wouldn’t have enough money to pay their depositors (I am at a loss to understand why people think that this possibility is some sort of science fiction outcome that clearly couldn’t happen). You would have had less government debt, but about the same ratio to GDP, because things in the real economy would have been incalculably worse than they actually are.

The basic problem here is that in the absence of a local central bank which is the local monetary authority, the “make the bondholders share the pain” slogan only works if you have someone prepared to either lend or give you more or less unlimited short-term working credit in euro. Since a massive writedown of that sort could quite easily have knocked over the entire euroland money market (unlike Greece, Ireland is substantially larger than Lehman Brothers), it could never have been a realistic possibility, which is why the IMF (who apparently hadn’t learned the lesson of September 2008) were so firmly knocked back when they suggested it.

Iceland could and did pass such a bill, because they were then able to recapitalise the banks with newly printed kronor. Ireland couldn’t, unless it was prepared to go the full Argentina, leave the euro and introduce capital controls.

Minor factual btw: my actual point of view with respect to the Senate and healthcare was that if the Democrats couldn’t pass a main manifesto commitment when they had a 60-vote supermajority, then there was no point to them as a party. I ended up assuming that the consequent was true, not that the antecedent was false.

By the way, Walt has lived in the US too long; the purchase & assumption powers of the FDIC have been written into US banking law for the last 70 years, which is why the US authorities can move fast when they have to. The UK, Germany and Denmark passed similar powers for themselves recently, in non-crisis situations. In Ireland, on the other hand, people only noticed that this might be a useful thing to have when it was too late.

I wish I could go to bed but this can not be let go, its an issue that cuts right to the heart of what the obligations of government are and how much power capital has been gifted in the EU.

The Irish banks were in a untenable situation, not just illiquid but insolvent, but that problem was spread among everyone with a financial interest in them, every kind of bondholder, every type of creditor and every depositor. How those loses were apportioned was a technical detail, but as always, when you owe someone a billion, they are in trouble, not you. Deals could have, and would have, been struck with the state doing the very minimum necessary to protect depositors to a reasonable level. Old banks would have been would down and new ones created (despite dsquared’s opinion that the Irish are unsuited to drafting complex legislation.).

The division between the sides of the argument on restructuring therefore remains as it was before. The pro bailout camp claims that the necessary cleansing and apportioning of losses in the European financial system that bank resolution would entail would be an appalling vista and that its current configuration must be protected*, with the supporters of bank resolution and restructuring saying that not only would it would it be just but that the longer accounting for the losses is put off the more money will be transferred from the citizen and the state to private investors and the greater the economic loss.

Choose your sides and enter the fight.
—
* Remember, when investors lose money it is the better off widows and orphans who get hurt, and we like them.

Recapitalising the losses of the Irish banks on a going-concern basis costs around EUR40bn (of which quite a significant proportion has actually been provided by private capital markets), while declaring them bankrupt could easily have made this a problem stretching into the hundreds of billions as short term obligations became due while loans couldn’t be liquidated; banks tend to lose a lot of value very quickly when a bankruptcy lawyer shows up . Unlike some of their stupider citizens, the Irish government realised that Bank of Ireland and AIB were genuinely “too big to fail” compared to the size of the Irish economy, and that since the Central Bank of Ireland can’t print money, there was no possibility of replacing them with brand-new institutions on the Nyi Landsbanki model.

Furthermore, it needs to be remembered that Ireland is currently in primary deficit. The debt associated with the bank bailout is not affecting the degree of austerity, because the depth of the austerity plan is simply what has been agreed by Ireland and its international bankers – if you owe someone a billion, and you need to borrow 2 billion more, then you don’t get to make that joke. At some point in the future, it will probably be agreed among all concerned that some writedown of the debt (possibly including some alteration of the guarantee or restructuring of BoI and AIB) will be carried out. But it will be done so on a sensible legal basis (which will take time to work out), as part of the general European post-2013 approach to sovereign debt workouts, and in a context which allows the money market to keep functioning. Simply trying to slap down a default, completely unannounced, in October 2010 was about the stupidest and most counterproductive way possible to try to obtain debt relief, and the suggestion that the Irish government was using this as some sort of threat against the rest of Europe is something I’d consider absurd and libellous if it was made about anyone other than the neoliberal chancers who formed the government of the time.

Krugman also thought that about quite a few American banks though and he wasn’t right.

The thing is, as I say, these banks probably do need to be restructured, taken apart and put back together again and potentially (depending on outcomes for the Irish economy) that might involve writing down their debts. But this is going to have to be a drawn-out process, revised as more information comes in, carried out with as little damage as possible to Ireland’s reputation, and with the co-operation of the EU partners. Unilateralism could be very damaging indeed unless and until Ireland is capable of establishing primary surplus, or unless it makes the decision to actually leave the euro.

And for the mean time, the anti-EU sentiment is really very unedifying. Taking the Irish Independent point of view, the negotiating position appears to be:

1) France and Germany should have given Ireland a no-strings grant of EUR87bn; certainly making lending conditional on any requirements of Ireland is tantamount to fascism.
2) There is something sneaky and underhand about wanting to prevent a Euroland banking crisis; the only thing that the ECB should be considering is the interests of Ireland
3) Global investors and financial capital are the villains here, which is why they must be offered a 10% tax rate to keep attracting them
4) Ireland doesn’t really need a banking system of its own, it’s not like it was ever a financial centre or anything. Shutting down the banks would be “equitable and tenable”, and depositors would be made whole from the “insurance fund”, which is a completely different thing from the government.
5) Remember all the problems were the fault of the French and Germans in the first place, for forcing all those loans down the throats of the Irish property market.
6) And 94% debt/GDP (the level of this ratio in 1993) is an unbearable burden, and 6.7% an outrageous interest rate. Ireland cannot sustain 6% debt service costs. Any and all payments made on EFSF loans come directly from the mouths of widows and orphans – see 3) above, it is literally impossible to raise corporation tax.

Can you see how the rest of Europe might not find this particularly constructive? The Irish government can, which is why it doesn’t make these arguments.

The bottom line here is that the debt service issue is a technical one, not a moral one, even though there are distinctly moral aspects to the way in which the debt bubble was built up. The question of what Ireland does and doesn’t need to do in terms of paying and servicing its debts has to be decided purely on the grounds of what leads to the best outcomes. When on the one hand you have a party (the EFSF, France and Germany) which is prepared to lend you large amounts at below-market rates, conditional on your co-operation, and on the other hand you have no way of printing currency, the idea of unilaterally repudiating guaranteed bank liabilities is a pipe dream. If someone wants to make a moral case for a much (even) more generous bailout, then go ahead, but it’s really quite difficult to argue that there is something intrinsically nefarious in those two countries trying to protect their own financial systems from the fallout of Ireland’s property bubble.

I’m not going to try to address all the issues ds raised about bank restructuring, as I am feeling out of my depth. I guess my ideal scenario is pretty straightforward:

1. Ireland passes whatever law it needs to to seize and restructure the banks.
2. Ireland guarantees (possibly domestic-only) depositors up to some level, and future depositors entirely, and freezes everyone else as they proceed with restructuring.
3. The banks seek to raise new capital, which should not be impossible because the new creditors will come ahead of all the frozen folks and there are presumably some real assets in Ireland. Maybe they even give a state guarantee on this.
4. The Irish banks’ foreign creditors/partners get hit by this as well. Their own governments step in to help them as above or leave them to handle things privately. Ireland is not involved in this.
5. And here’s the key: To the extent that the private sector is not willing or able to finance the bank restructuring and the government deficit, the ECB steps in to fill the gap. The ECB does this because they are helpful people and they do not want the Irish economy to collapse. If they are so not feeling virtuous, the ECB does this to prevent an Irish collapse from spreading to the Continent. I sort of understand that the ECB is unwilling, and maybe unable, to do this, but it is frankly hard to grasp. The Fed would do this stuff without a second thought.

That ideally starts in 2008, but better late then never. It ignores everything that happened before the crisis; it does not assign blame at all. It ignores disputes about tax sheltering and other matters; I wouldn’t object if the Continentals decided to force that in, but it’s really a separate issue. It gives Ireland the funds it needs to avoid austerity and maintain economic growth. It rests on ECB and the member states acting with compassion, solidarity, and cooperation.

I imagine that in reality, if Ireland actually went down this path step five would break down: the ECB fully financing an expansionary fiscal policy would be changed to full financing of extreme Irish austerity. But that happened anyway, and it’s not a law of nature, but rather a conscious decision by the ECB and the other member states. And I bet there are some stupid, little-known EU rules getting in the way at various points, but I think it would be seriously worth considering just flouting those rules. That stuff can be argued over later, if anyone even wants to bring it up.

And in the future, if the euro members are not willing to adopt centralized financial regulation, then they need to drop the euro and drop the financial system treaties, and go back to pure local responsibility.

Chaz: the trouble is:

1. As soon as you start doing this, short term financing seizes up for the Irish banks because the interbank market doesn’t want to be a creditor at step 2. At this point, somebody has to meet the financing roll; unless you can persuade the ECB to do this, it has to be the Irish government.

2. “Domestic depositors only” not consistent with the treaty of Rome, and you have now definitely annihilated the short term interbank credit.

3. It might, might be possible (you would probably need to create an entirely new institution and indemnify its shareholders against legal claims on the predecessor). There are plenty of real assets in Ireland (it’s an OECD country! and quite a rich one!), but establishing a valid and unassailable legal title to them for your recapitalised bank would be quite difficult; unless your legislation in 1) was really perfectly drafted there would be a substantial common law claim because Irish corporate law really was not previously drawn up so as to facilitate this kind of phoenix restructuring. Even if all this is done perfectly, it could take months to execute. At this stage, a “sovereign guarantee” from the Irish state is unlikely to help very much.

4. What you are describing here is a Europe-wide (more likely, global) financial crisis, potentially much more disastrous than September 2008 was. As I keep saying, there is nothing particularly nefarious about the fact that the ECB, Sarkozy, Merkel et al would rather Ireland not do this.

5. The issue here is that the treaty establishing the ECB really does not give it this role. The ECB’s legal powers are pushed to the limit going as far as it has done. Since the money you are pumping into the Irish banking system is basically lost for the ECB, it needs somebody’s fiscal authority to indemnify it against the loss – this is how the Fed and Bank of England do it.

Because the ECB isn’t quite set up technically in the same way as other central banks, Euroland recently created a special fiscal fund to do the kind of job you’re talking about. The EFSF is the mechanism set up to express the European solidarity that you’re talking about, and it’s lent EUR87bn to Ireland. That came on terms and with conditions, but it has to be so, doesn’t it – the Fed doesn’t have the problem of lending to sovereign countries that can do what they like with the money, and Ireland currently isn’t even volunteering to stop raiding the French and German corporation tax base.

The bottom line here is that Ireland is much better off *not* causing a European and domestic financial meltdown than causing one, because it still needs someone to lend it the primary deficit. It would be better off still if it got a no-strings gift of that money, but I don’t see how that counterfactual can be a basis for policy.

daniel@114

The bottom line here is that Ireland is much better off not causing a European and domestic financial meltdown than causing one, because it still needs someone to lend it the primary deficit. It would be better off still if it got a no-strings gift of that money, but I don’t see how that counterfactual can be a basis for policy.

Ireland would not have been forced into an IMF/ECB bailout without having taken on the bank bailout. There is a headache inducing circularity to the argument that we could not have let the banks suffer the consequences of free movement of capital because doing so would have prevented us from borrowing the money to save the banks from the consequences of free movement of capital.

Before Ireland’s Kamikaze bank dive for the Eurozone it did have a very large primary deficit but not so large than any IMF or ECB help would have been required, Ireland went from a bad but manageable 114% to a a bloody awful 132% in 2010 thanks to the second last round of bank recapitalization.

S0 the counter-factual, for Ireland, is what would have happened if we decoupled the banks from the state, not how good things would be if we got an 87 billion gift for the banks.

The logic, for Ireland at least, of forcing all the banks involved to acknowledge and restructure the debts seems difficult to argue.

However, and this returns at last to the original subject of this posting, the real arguments were political ones, Merkelism and the CDU would have taken a hit, Sarkozy would have had to look for another diminutive enemy and the Euro project would look in serious need of re-engineering (and devaluation), none of these seem like pressing moral issues so why exactly is Ireland the bad capitalist economy?

Alex@118

Does dsquared really work in the financial sector? That would explain some things.

In the Irish blogs discussing these same issues, there seems to quite a sharp division of opinion between those who work in banking and those who do not about the necessity and desirability of a bail out and the general requirement to coddle financial capitalism.

To me it seems as if a philosophical commitment to the intrinsic rightness and necessity of the current configuration of the EU financial system (and extensive knowledge of the particulars of the complex credit flows so vital to modern civilization) are more prominent in these peoples calculations about the appropriate solutions than any idea of the common good, or whether we need a radically different financial system.

The same financial institutionalization (see what I did there?) is also widespread in the various establishment figures, in both Ireland and the EU, who are in charge of finding a solution. Policy by the banks, for the banks.

This obviously does not reflect well on the executive institutions of the EU, it is at least part of the reason for the alienation from them that is now so widespread.

And can we get a bit reality based here?

1. We did in fact try the idea of “let’s not bail out the bankers, it’s all their fault anyway and it probably won’t cause too much of a problem”, in September 2008 with Lehman Brothers. The results were disastrous, weren’t they? So why would they be any less disastrous if Bank of Ireland and AIB had both simultaneously been declared bankrupt last year? What would the consequences have been for Portugal and Spain?

2. I was unpopular in the Icesave thread too but I was right then too. In the case of Ireland, the actual government has been reasonably sensible (apart from the 10% corporation tax policy) and has negotiated in good faith with its European partners. All of the xenophobia, self-pity and unrealism has come from the Irish Independent and its epigones, and they are explicitly advocating a beggar-my-neighbour policy which would have made the crisis worse. People might not realise this (I can only hope they don’t understand the consequences of what they are saying), but all this talk about “an equitable and tenable solution” and “solidarity” on the part of France and Germany is actually describing a policy under which Ireland would have made a fairly crude threat to create a crisis unless it was given more generous terms. A crisis, by the way, which France and Germany would have survived, but Portugal and Greece might not.

3. 94% is not an unbearable ratio of debt to GDP (it is what Ireland actually had in 1993, at higher interest rates; even the 125% of the current 2013 projection is actually where it was in the 1980s) and 6.7% is not an absurdly high interest rate. As figure 2 of the Finance Ministry’s latest report on the stability program shows, Ireland in 2015 will be spending a substantially lower proportion of its tax revenue on debt service than it was in any year before 1992. The problem in Ireland is private sector debt, not public. This sort of propaganda is actually quite harmful, as it encourages young Irish workers (who by and large don’t have the mortgage debts that are the real problem) to believe that the Irish economy hasn’t got a viable future, which is a clear danger of self-fulfilling.

4. Even if you want a radically different financial system, it does not follow that the best way to achieve it is to swiftly destroy the one that we currently have. This also seems rather obvious to me.

Further, do you not think that you’ve BACAI quite a lot as a matter of tone and style?

Not really, no, although things were bound to go downhill after the first accusation of racism. On that general subject, however, you must be aware that I am not ashamed of the job I do, and your apparent low regard for the honesty and quality of my advice has not been so great as to prevent you from asking for it on a number of occasions. FFS.

A person could get confused, what with the explanation for the necessity of the Irish bank bailout moving from the simple pleasures of watching Ireland get the hose or the cream, Ireland’s special culpability in the GFC, our status as Europes most evil tax haven, our MOPEry (very Slugger O’Toole), the shocking injustice of French and German investors losing money in a common financial market, the potential collapse of the otherwise totally fine European banking system and, now, finally – poor old Portugal and Spain, who have always been in our hearts.

What cads we were.

and 6.7% is not an absurdly high interest rate.

How about we just say it is an intentionally punitive interest rate for the largest, least willingly taken, bailout? Iceland rejected repayment terms for Icesave at less than half these rates (3%) over a 35 year period.

Your points about the sustainability of the reparations with a fixed exchange rate have been addressed repeatedly elsewhere but “wildly optimistic” just about sums it up.

alex@122

I do not believe Daniel is English, but for better examples the kicking of chalk dust you could have chosen (43)

This self-pitying dishonesty is becoming all too characteristic of the Irish political class at the moment and it is no more attractive than the bombastic and arrogant dishonesty of the boom years.

and I have a special place in my heart for (56) which sort of comes from left field.

….from my point of view sitting half a mile from the North London Irish Cultural Centre…

I am not an anti-Semite, as my position here only 600 meters NW of a synagogue conclusively proves.

All the unattractive features of nationalism on display here at once:

1) It cannot seriously be argued other than that Ireland had an unusual role among European states in the creation of the financial bubble

2) It cannot seriously, etc etc, that Ireland pursued a very unusual tax-haven policy

3) “French and German investors losing money” here presumably means “French and German investors losing money because the Irish government decided not to pay them, while being bailed out by the French and German governments”.

4) Whatever the flaws of the European banking system, they would hardly be helped by an intentional and disorderly default on the part of its largest offshore centre

5) It cannot seriously, etc etc, that the contagion risk to Portugal and Spain was considerable in October 2010, and that if Ireland had defaulted on its sovereign or bank debt, Portugal and Spain would have been next.

6) The EU has repeatedly expressed willingness to renegotiate the Irish loan rate (and Ireland is in fact not paying 6.7% on the element that has been drawn down).

7) The facts about debt sustainability are what they are. The Finance Ministry’s figures on public debt service are accurate. Ireland has a problem with private sector debt, not public.

Everyone, including the current government of Ireland (and Fintan O’Toole and Mick Fealty, and all the other left-wing Irish commentators who you have snide remarks about), agrees that the previous government of Ireland carried out very bad economic policies and is responsible for the current mess. The European institutions are helping and ought to be gaining legitimacy. And here you are, with seven flavours of “not our fault, everyone else was doing it too, and anyone who suggests otherwise is a racist”.

Over time, there does have to be a difficult debate of how the Irish banking system can be managed down to be less of a threat to the eurozone, and how much external help can be given to keep it functioning for the benefit of the Irish economy. Please don’t join it.

a difficult debate of how the Irish banking system can be managed down to be less of a threat to the eurozone

Put it another way, if your nuclear reactor goes all Fukushima Daichii, you should expect the neighbours to ask you a lot of difficult questions right after you finish borrowing fire engines.

Daniel: Krugman also thought that [quite a few American banks were too big to save] though and he wasn’t right.

This is news to me; details please?

In the blog-post I linked to he is defending himself against a charge of inconsistency, in that he argued in favour of the US saving banks and against Ireland doing so. As he very reasonably says: “putting taxpayers on the hook for 5 percent of GDP is one thing; putting them on the hook for 60 or 70 percent of GDP, something quite different.”

…and not radically dissimilar from the addition to UK public sector debt created by putting NR, LBG and RBS on the books. Notably, including the Irish exposure (not Irish government guaranteed) that RBS and LBG ran up. Maybe the UK government should get Germany and France to pay that off and all.

Henry@126

shay – if you really want to keep insinuating that dsquared is an anti-Irish racist, you will very rapidly move from being a not-especially-insightful commenter to a not-especially-insightful-and-now-comprehensively-banned-former-commenter.

Understood, this is your community and I am just passing through.

dsquared@125

Everyone, including the current government of Ireland (and Fintan O’Toole and Mick Fealty, and all the other left-wing Irish commentators who you have snide remarks about), agrees that the previous government of Ireland carried out very bad economic policies and is responsible for the current mess.

My criticism of both Fealty and O’Toole comes from the international left, not Ireland’s milquetoast variety of revisionist liberal. O’Toole is ten years too little late to the anti-capitalist party, and it would not be Fealty’s kind of crowd.

As for Lenihan and Cowen, they were first fools for the PDs, then dupes to the banks and finally cowards in front of the ECB and European commission; it is thanks to the Irish political classes reflexive submission to whatever line the current EU elite thinks is the most politic that we renewed the bailout again and again and never confronted the false narrative that European solidarity is chiefly about protecting the market from itself.

One more time: No free movement of capital without free movement of losses.

For the absence of doubt, Shay’s contributions have BACAI for some time. Not so much chalk dust as Cantona-leaping into the front row.

What does BACAI mean?

138: Fetch the oscilloscope, I think I make out the world’s tiniest violin?

there was that ridiculous treaty everyone signed and forgot about

No I can’t accept this; the equal treatment of foreign (actually EU; you could screw US accounts as hard as you liked) and domestic depositors is a pretty fundamental principle of the Single Market, and Icelandic banks would never have been allowed to set up in the UK in the first place (and certainly not to have set up as branches which didn’t pay into the UK scheme) if they hadn’t agreed to it. Though I am not sure that the Irish banks had all that many guaranteed deposits overseas which would come back to the Irish deposit scheme – AIB UK is a British bank, as are the UK operations of BoI.

This is a Europe-wide crisis, so why is Ireland being asked to carry the whole load?

Ireland isn’t really being asked to carry the whole load; it’s being asked to carry the Irish bit. Which is large, but that’s because the Irish financial system is large. But I can’t think of any other basis on which to arrange things because the EU is actually not a political union – Ireland is a sovereign state which makes its own decisions about banking regulation and tax policy, which it’s hard to ask France and Germany to underwrite. It is certainly possible to see a future in which the burden was fully shared in the event of crises, and in which decisions on the Irish budget and the development of the Irish offshore financial sector were made co-operatively across Europe, but this would require exactly the sort of new treaty which Henry (I think correctly) points out would be almost impossible to pass in Ireland at the moment.

It fits with the argument that they are not actually trying to help Ireland, but just giving Ireland the minimum aid necessary to keep it cooperative

I think you really are underestimating how large “the minimum aid necessary” here is – it is EUR87bn after all, and the interest rate really isn’t all that outrageous (particularly since it is risk capital for France and Germany and the Irish newspapers are openly talking about defaulting on it!). Ireland would be much, much worse off if it didn’t have the EFSF helping it.

Can it really be that NO ONE had the authority to print up more euros, until the EFSF?

Yes, unfortunately, and what’s more everyone knew that the Euro didn’t have a lender of last resort, but they thought this didn’t matter as the prudence and conservatism of the ECB would mean there were no bank crises. I was at the BoE at the time and we were literally aghast. I am profoundly glad that the UK didn’t join.

The other euro members could be a lot more helpful if they wanted to

They couldn’t be that much more helpful, realistically – they have their own budgets to make and the sums of money involved are big. What they could do is negotiate the rate on the EFSF loans down, and they have said they will do this. But it is going to involve a transfer of political power out of Dublin (Lisbon, Athens, etc) and into the EU technosphere and this is also going to be unpopular.

Daniel: … it is risk capital for France and Germany and the Irish newspapers are openly talking about defaulting on it!

This is misleading. Only the lunatic fringe talks of defaulting on debt to IMF/EU institutions. Economically literate commentators arguing for default have a ranking in mind: depending on how bad things get, the creditors should take a hit in something like the following order: (1) unguaranteed bank bonds; (2) bank bonds guaranteed by the state (which would probably mean large depositors also); (3) government bonds.

AFAIK there is no legal justification for discriminating between (2) and (3) — but IANAL — but there is a strong moral argument that people who bought government bonds, before the bank guarantee was issued have been treated shabbily.

Colm McCarthy’s complaint about the interest rate on EU lending is precisely that the lender has IMF-style preferred creditor status. (Granted there are legal issues with that claim.) Talk of the risk they are running sits awkwardly with the fact that they want the private sector to start buying Irish government bonds in 2012. They are asking the private sector to step up in the same breath as they are highlighting the (lesser) risk they themselves are running.

I see deposit insurance as a part of the safety net, something a government does for the benefit of its citizens, and not as some moral responsibility a state has to foreign depositors of whatever bank happens to be legally established in their jurisdiction.

You do realise the Icelandic banks weren’t accepting deposits from British savers out of charity? They were doing it to make a profit. I mean, it wasn’t as if Icesave was some sort of weirdo split-cap up my arse whizz bang investment. It was a fucking deposit account. I think it is a fairly minimal expectation that if you put your money in a bank account that the bank should give it back to you when you ask them. It is not some sort of special privilege. In fact it is the opposite – it is an enormous privilege to be trusted with other people’s money and it comes with special responsibilities. It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.

Given all that’s happened, I’d be tempted to go with that 1930s Senator from North Dakota who thought the answer was that the NYSE was a gambling hell and should be padlocked, but I am aware that this is a controversial view:-)

If the Icelandic government didn’t want to guarantee the deposits, perhaps their banks shouldn’t have been accepting them. If you don’t want to accept deposits from foreigners and take on the responsibility that goes with *just holding on to people’s money – not doing nine-way CDO-of-CDS hedges – just deposit taking*, stop doing it.

It’s the responsibility of the national central banks. It was kept out of the treaty establishing EMU precisely because the Germans didn’t want the money creation of the euro area to be held hostage to dodgy peripheral banking systems. It was a design error that everyone knew they were making.

investors have been made whole

They of course haven’t. Equity holders have been close to wiped out and the bonds are currently trading in the 60s.

… they must have known that the Irish government (like any government) was on the hook for its financial system.

There’s a fair amount of space between being on the hook for the financial system as a whole and being obligated to pay off AIB bondholders, never mind the likes of Anglo.

I sense a generation gap here. Many of the most interesting moments of my generally dull working life were caused by banks going belly-up: Bankhaus Herstatt, Franklin National Bank, Continental Illinois and some whose names I don’t even remember. I know things have changed, but I presume there are still analysts who advise senior management on counterparty limits. Traders still get sacked for breaching those limits. What’s the point, if governments are liable anyway? In that case the only limits that matter are country limits. Whatever became of capitalism?

If that’s really what banking has come to, then economies of scale dictate that Ireland should get out of banking completely. We don’t try to compete with Airbus and Boeing, even though they are far less effective than banks when it comes to high-speed shredding of taxpayers’ money.

I presume there are still analysts who advise senior management on counterparty limits. Traders still get sacked for breaching those limits. What’s the point, if governments are liable anyway?/i>

Governments aren’t liable for backstopping the financial commitments of everyone in the market, just some of the commitments of some of the players. If you have a swap with, I dunno, Delphi or someone, and Delphi goes under, then you lose out.

What’s the point, if governments are liable anyway? In that case the only limits that matter are country limits. Whatever became of capitalism?

Unfortunately, nobody’s really come up with a solution to this one since Walter Bagehot first made a version of the point in the 19th century.

Thanks very much Shay; I similarly apologise for being snotty to you.

Peter 144:

You’ve been worried that describing austerity in the EU really harshly would yield the impression that austerity in the US hasn’t been that bad. And I’ve been worried that describing austerity in the US really harshly would yield the impression that austerity in the EU hasn’t been that bad.

Maybe what I am wary of is the “everybody knows” attitude. “Everybody knows” that fiscal union blah optimum currency area blah blah PIGS blah blah blah deficits, but nobody seems to be much interested in the actual data. Let me add that the whole enterprise of US-EU punditry is highly loaded. People are so heavily influenced by all sorts of preconceived notions. Maybe it’s naive to think of data as an antidote but I have no better idea.

The results were suboptimal.

If you’re expecting optimal, try some other planet. If you think the Lenihan solution dominates the Paulson solution, please check your work.

You do realise the Icelandic banks weren’t accepting deposits from British savers out of charity? They were doing it to make a profit. I mean, it wasn’t as if Icesave was some sort of weirdo split-cap up my arse whizz bang investment. It was a fucking deposit account. I think it is a fairly minimal expectation that if you put your money in a bank account that the bank should give it back to you when you ask them. It is not some sort of special privilege. In fact it is the opposite – it is an enormous privilege to be trusted with other people’s money and it comes with special responsibilities. It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.

If the Icelandic government didn’t want to guarantee the deposits, perhaps their banks shouldn’t have been accepting them. If you don’t want to accept deposits from foreigners and take on the responsibility that goes with just holding on to people’s money – not doing nine-way CDO-of-CDS hedges – just deposit taking, stop doing it.

You seem to be conflating the Icelandic banks with the Icelandic government. The Icelandic government did not take any deposits. Maybe you think the government is responsible because they allowed Icesave to operate abroad. I would ask you, is there any government, anywhere in Europe, that prohibited its banks from accepting foreign deposits? When the idiots all got together and signed the Treaty of Rome, were they planning on having 30-odd separate, national banking systems?

Since Icesave was essentially a British and Dutch operation–Icelandic depositors only being a small fraction of its capital–who was best placed to regulate it? The government of Iceland, population .25 million, or the Bank of England, based in a large country home to the world’s biggest financial center? Was it reasonable for the British, whose institutions possess more financial expertise than Iceland’s, to assume that tiny Iceland could guarantee all those deposits? Hell no. Every European country instigated this mess the second they signed the Treaty of Rome. They are just as responsible as Iceland.

If you still insist on blaming the Icelandic government for not having perfect regulators, then I must add that you are also conflating the Icelandic government with the Icelandic people. Is it reasonable to expect the Icelandic people to take on vast British losses because they, who know nothing about finance, elected some guys who appointed some guys who were not excellent regulators?

And finally, no matter who you want to blame, is it a sound plan for Gordon Brown to say, “Iceland will bail out every British depositor without limit,” even though they’re obviously too small to do so? Is that a mature way to behave?

You say, “It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.” As I said above, I completely agree with that. But the society British people live in is the United Kingdom.

——————

Peter, I’m not sure if you meant to, but you seem to be implying that the situation in the U.S. is just right-wing action and not austerity. That was true under Bush, but not now. As piglet said, local governments are being forced to make drastic cuts. State politicians are using that to push right-wing agendas but austerity is the theme of the day. Still, while the cuts to local services are quite devastating, the direct economic impact is not nearly as great as what’s happening in Greece and Ireland.

If you use the word “socialism” your comment might get held.

But, why am I cheating? Did they add a swear filter recently? I’ll just repost:

Alex: You seem to be conflating the Icelandic banks with the Icelandic government. The Icelandic government did not take any deposits. Maybe you think the government is responsible because they allowed Icesave to operate abroad. I would ask you, is there any government, anywhere in Europe, that prohibited its banks from accepting foreign deposits? When the idiots all got together and signed the Treaty of Rome, were they planning on having 30-odd separate, national banking systems?

Since Icesave was essentially a British and Dutch operation—Icelandic depositors only being a small fraction of its capital—who was best placed to regulate it? The government of Iceland, population .25 million, or the Bank of England, based in a large country home to the world’s biggest financial center? Was it reasonable for the British, whose institutions possess more financial expertise than Iceland’s, to assume that tiny Iceland could guarantee all those deposits? Of course not. Every European country instigated this mess the second they signed the Treaty of Rome. They are just as responsible as Iceland.

If you still insist on blaming the solely the Icelandic government for not having perfect regulators, then I must add that you are also conflating the Icelandic government with the Icelandic people. Is it reasonable to expect the Icelandic people to take on vast British losses because they, who know nothing about finance, elected some guys who appointed some guys who were not excellent regulators?

And finally, no matter who you want to blame, is it a sound plan for Gordon Brown to say, “Iceland will bail out every British depositor without limit,” even though they’re obviously too small to do so? Is that a mature way to behave?

You say, “It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them.” As I said above, I completely agree with that. But the society British people live in is the United Kingdom.
—————————
Peter, I’m not sure if you meant to, but you seem to be implying that the situation in the U.S. is just right-wing action and not austerity. That was true under Bush, but not now. As piglet said, local governments are being forced to make drastic cuts. State politicians are using that to push right-wing agendas but austerity is the theme of the day. Still, while the cuts to local services are quite devastating, the direct economic impact is not nearly as great as what’s happening in Greece and Ireland.

I do no understand why I need a cheat in the first place.

My belief – which could be complete bullshit – is that the forbidden word contains within it the trade name for a certain pill.

Unicode, why the hell not. Alex: You seem to be conflating the Icelandic banks with the Icelandic government. The Icelandic government did not take any deposits. Maybe you think the government is responsible because they allowed Icesave to operate abroad. I would ask you, is there any government, anywhere in Europe, that prohibited its banks from accepting foreign deposits? When the idiots all got together and signed the Treaty of Rome, were they planning on having 30-odd separate, national banking systems? Since Icesave was essentially a British and Dutch operation—Icelandic depositors only being a small fraction of its capital—who was best placed to regulate it? The government of Iceland, population .25 million, or the Bank of England, based in a large country home to the world’s biggest financial center? Was it reasonable for the British, whose institutions possess more financial expertise than Iceland’s, to assume that tiny Iceland could guarantee all those deposits? Hell no. Every European country instigated this mess the second they signed the Treaty of Rome. They are just as responsible as Iceland. If you still insist on blaming the Icelandic government for not having perfect regulators, then I must add that you are also conflating the Icelandic government with the Icelandic people. Is it reasonable to expect the Icelandic people to take on vast British losses because they, who know nothing about finance, elected some guys who appointed some guys who were not excellent regulators? And finally, no matter who you want to blame, is it a sound plan for Gordon Brown to say, "Iceland will bail out every British depositor without limit," even though they’re obviously too small to do so? Is that a mature way to behave? You say, "It is an absolutely minimum feature of any reasonable society that your savings do not just vanish randomly into thin air unless you deliberately choose to go gambling with them." As I said above, I completely agree with that. But the society British people live in is the United Kingdom. ————————— Peter, I’m not sure if you meant to, but you seem to be implying that the situation in the U.S. is just right-wing action and not austerity. That was true under Bush, but not now. As piglet said, local governments are being forced to make drastic cuts. State politicians are using that to push right-wing agendas but austerity is the theme of the day. Still, while the cuts to local services are quite devastating, the direct economic impact is not nearly as great as what’s happening in Greece and Ireland. If this posts I will be annoyed.

Chaz 171: Yes, I meant to say that it was under Bush that the “right-wing but not austerian” point applied. As for the situation now, austerity is indeed being applied in vast areas of the US, above all at state and local levels. I certainly didn’t mean to imply anything else. However, even where the present situation is concerned, my argument was that it’s a reasonable supposition — on account of the structural differences between the EU and the US that you mentioned in 22 — that the degree of austerity being applied in Greece right now is more severe than that which is being applied in California right now. (However, I don’t have any directly comparable figures which demonstrate this — piglet was quite right about that. All I have here is a reasonable supposition.)

As for the distinction between austerian policies in particular on the one hand, and right-wing economic policies more generally on the other — well, my point in stressing the distinction so strongly was that I didn’t want to give anyone the impression that I thought US economic policies — taken in an OVERALL sense — have been anything other than well to the right of those followed almost anywhere in Western Europe (at pretty much any point over the last 40 years or so, say). The US welfare state, needless to say, is famously sparse and thin; US trade unions are famously cowed; the health-care system, as all the world knows, is … (I don’t need to spell out the misery here; you know the list.) And the question of austerity accounts for just a small slice of this larger overall picture. Indeed, US economic policies have rather often been, as compared with those applied by many West European countries, fairly non-austerian. But that doesn’t mean they’ve been anything other than well to the right of the latter — in an overall sense, anyway — for quite a long while indeed.

In sum, I thought the discussion would benefit from a clear distinction between right-wing economc policies in general, and austerian economic policies in particular. It’s perfectly possible, for instance, for a country with public-sector spending of 20 percent of GDP to be much more expansionary (or much less contractionary) with regard to aggregate demand than is a country with public-sector spending of 50 percent of GDP. It’s one thing whether a country’s economic policy has (overall) an expansionary or contractionary impact on aggregate demand; it’s another thing whether said country has a large or a small welfare state, whether its trade unions are strong or weak, etc.

Discuss: There is a guaranteed net social benefit to having a private banking system that still needs to have a full government guarantee.

There would have to be several dense theoretical works on this, seeing as how we bet Western civilization on it, right?

There are, but IMO few of them are an improvement on “Lombard Street”, Walter Bagehot’s original work. The basic problem is that if you look at the history of state-owned banks (and even more so that of municipally-owned banks), they are really terrible too.

You seem to prefer the policies of Hoover, Mellon and Brüning. You an austrian or what?

Scroll up a bit and you’ll find me telling dsquared that Krugman is right about the folly of the Irish bank rescue. So yes, smart-arse, you can place me in the Krugman branch of the Austrian school.

Chaz, just a meta thing: soc|al|sm does trigger the moderation filter here because it has the substring c|al|s. Some of us wish this would get fixed, as it is probably the leading moderation trigger in these parts, but no one is fucking with you on this.