John Bruton

Opinions & Ideas

Category: Europe (Page 2 of 2)

THE CONSTANT SEARCH FOR NOVELTY IN ANNUAL BUDGETS LED TO THE 2008 CRISIS, AND IS NOT THE WAY FORWARD NOW… EXPENTITURE CEILINGS SHOULD BE REALISTIC AND MEANINGFUL

The Spring Economic statement by the Irish Government  has come in for criticism, mainly that it contains “nothing new”.

This sort of criticism is understandable from the point of view of a media ,for whom novelty is what gets attention. 

But  a search for novelty  is what got Ireland got into difficulty in the first place.

The persistent search for novelty and “new initiatives” in annual budgets, every year from 2000 to 2007,was one of the reasons Ireland overspent, and got itself into a crash. Novelties in annual budgets eviscerated the tax base, and led to unsustainable spending commitments. 

At that time, if the budget had not contained some sort of big new announcement every year , the Minister would have been open to the criticism that he lacked “vision” or “imagination”. 
Now the same chorus is beginning to be heard again. Memories are indeed short.

The Spring Statement does not contain any such novelties,  but from the point of view of the public, if not the media,  that is a very good thing. It restores an important sense of perspective.

The important perspectives  in the Spring Statement are that 

  • Growth in Ireland was 4.8% last year and will probably be 4% this year. This is the highest growth rate in Europe
  • 95000 new jobs have been added since 2012, and the IDA plans to attract a further 900 new investments by 2019, adding 80000 new jobs
  • net emigration is likely to cease next year, on present trends
  • The government deficit of spending over revenue was 15 billion euros, and it is now 4.5 billion euros

In his contribution o the Spring Statement, the Minister for Public Expenditure said again that the government is “now planning expenditures on a multiyear basis”, and  that Departments are operating under “multi annual expenditure ceilings”.

He also drew attention to the fact that the ageing of Irish society will add 200 million euros per year to health costs, and that the high birth rate will necessitate the appointment of 3500 extra teachers by 2021.

In fact, next year, the natural growth in demand for existing services public spending will on its own increase spending by 300 million euros, without ANY change in policy

This natural upward pressure on spending will mean that the setting of expenditure ceilings  for each Department will be a difficult task, requiring honesty and courage. 

This natural increase in spending, without policy change, needs to be spelled out for each Department, and separated completely from any increase that is due to a policy change.

In recent years, the expenditure ceilings for one or two major services have been repeatedly breached. A ceiling that can be too easily breached will not keep out the rain!  It certainly imposes no discipline on local management.

This sort of breach in an expenditure ceiling can, of course, be easily explained, if there has, for example,  been an unexpected increase in unemployment. It is less understandable if the demand for, or the cost of, normal health services has been underestimated .

It should be possible to predict the level of demand for, and the cost of, health services a few years ahead, on the basis of known facts about the age structure of the population, and to separate that from increases in spending that arise from unexpected one off factors. 

The budget system should incentivise local managements, who know their services best, to make the necessary savings and reallocations in time.  That job cannot be done as easily by Merrion Street.

If a Department exceeds its agreed annual expenditure ceiling, there ought to be a special procedure whereby both the Minister, and the Secretary General, of a Department, provides an early special statement to the Dail. This could be provided for in Standing Orders .

The Minister would account for, and quantify any policy changes, unexpected events, or recalculations that account for an excess, and the Secretary Genera would account for any lapses in expenditure management.

That procedure would ensure that future expenditure allocations would  be “evidence based”,  which is one of the  goals of the Minister for Public Expenditure and Reform.  It would add to the seriousness of the Estimates process and impose better accountability.

THE SOURCE OF ECONOMIC SUCCESS IN THE 21ST CENTURY….EACH COUNTRY WILL HAVE TO RELY ON ITS CHILDREN’S SKILLS AND INGENUITY IN AN INCREASINGLY COMPETITIVE WORLD

A lot of attention is being given to the competition Europe and the United States will face from economic growth in Asia over the next 25 years.

A survey conducted by the World Economic Forum shows that Asia is the most optimistic part of the world about its economic future. And optimism is essential to investment!

The OECD has estimated that between now and 2060, GDP per capita will increase eightfold in India, and sixfold in Indonesia and China, whereas it will merely double in OECD countries, which include Europe and North America. This will affect the balance of power in the world. It is interesting to note that two of the top three Asian dynamos are democracies, India and Indonesia. And both of them have substantial Muslim populations.

The source of economic growth can be summed up in two words…innovation and population.

UNBLOCKING EUROPE’S ARTERIES TO RELEASE INNOVATION

If a country has an innovative and well educated population, open to trends in the global market, able to understand them and identify the needs of the world that it can meet, and with an economic and governmental structure that allows speedy allocation of resources to those needs, and  away from less efficient uses, it will have a higher growth rate.

This is why there is so much emphasis on “structural reform “ in OECD,IMF and EC advice to countries. Structural reform is designed to clear the arteries of the economy, and allow blood to flow more quickly to the activities that will yield the best return.

For example, if a country has disproportionately expensive, slow or overly elaborate legal system that will be a blockage in the arteries. If a country has disproportionately high electricity prices because it uses electricity prices to subsidise uneconomic generation for regional policy purposes, that will block arteries. Likewise if it has disproportionately costly or slow broadband communications, avoidable skill shortages, unwillingness to recognise genuine foreign qualifications, work disincentives for particular groups, or a distorted market for credit that does not favour productive activities,  all these things are blockages in a country’s economic arteries.

Such blockages can also apply at supranational level too. It has been estimated that the lack of a single market for digital services in the EU is blocking the arteries of the EU economy to the tune of 260 billion euros, the lack of a true single financial market is doing so to the extent of 60 bill euros,  the lack  of an integrated energy market to the extent of  50 billion euros, and  the lack of a single services market (including non recognition of skills certified in other countries) is blocking the arteries of the European economy to the extent of  235 billion euros.
Interestingly, a European Parliament staff paper shows that one of the slowest countries to implement the structural reforms urged by Heads of EU governments since 2011, is Germany. And one of the fastest, on paper at least, is Greece. These are reforms that Germany’s own Chancellor recommended along with her colleagues. One of the problems is the delays at the level of the Lander.

To put it all another way, and using some economic jargon, Europe has a choice. According to the EU Ageing Report, the EU can stay on its present course, and, as in the last 20 years, have a total factor productivity growth rate of only 0.8% pa. 

Or it can make changes which could lift its total factor productivity growth rate to 1.1% per annum up to 2020 and 1.4% per annum thereafter. A slow, longterm, return perhaps, but a real one all the same.  And in the long run, enough of you will be around for that to matter!

STRUCTURAL REFORMS HAVE DIFFERING POTENTIAL BETWEEN COUNTRIES

Some countries, not Ireland, have been artificially held back by top heavy bureaucracy, that prevents their societies from allocating resources to where they will get the best return.

Societies can fail to allocate resources well, or block good reallocation of resources, by political vetoes, and constitutional limits. 

The reforms necessary  include reforms to the labour market, but to a much greater extend they involve freeing up markets for the sale of goods and services, from electricity, to professional services, to government services, as I have mentioned already.

Of course, freeing up the arteries will not solve the problem, unless there is blood flow of commercial innovations based on good R and D, accompanied by an innovative and flexible culture within Government, within educational institutions and in the general population.

Between now and 2060, according to the OECD,  the countries with the biggest upside potential, for extra  growth  that might come about as a result of the implementation of structural reforms,  are China, Slovakia, Poland, Greece, India, Indonesia, Italy and Russia. 

At the other end of the scale, some countries that already have relatively efficient systems, and are  getting the benefit of reforms made in the past. These countries include the UK, Netherlands, Ireland and the USA. 

It is good that Ireland is in that position and that is an indication that the reforms we made over the last 40 years or more have yielded fruit. And this is despite the fact that Ireland still has, to a degree , many of the  rigidities I mentioned earlier, and has room to improve in those areas.  

On the other hand, other competitor countries, like China, Poland, Slovakia and Greece have even more room to improve, or  more upside potential than we do , and may thus pose a bigger challenge to us,  as soon as or if  they get their act together.

Already comparatively efficient countries, like Ireland, the Netherlands, the US and the UK,  will have to look elsewhere than structural reforms on their  own, if they are make extra gains. They will have to run faster and faster just to hold their current relative position.

STRUCTURAL REFORMS ALONE NOT ENOUGH……THE NUMBER OF YOUNG PEOPLE WILL MAKE A KEY DIFFERENCE

In every society, young people are the innovators. My own sense is that the crucial determinant, of  relative success in the 21st century as between countries, will be the proportion of young people in a country, and the relative mental agility of those young people, in comparison to those in other countries .

Their potential will be influenced by formal education, but not only by education. It will also be influenced by what happens to them as children, before they ever go to school.

Other things being equal, a country with a large elderly and middle aged population and few young people, is unlikely to produces as many innovators as a country with a large youth population. It is also likely to have more political veto points.

To an extent, each society decides the sort of future it wants to have, when it decides how many children it will have. Societies in many European countries, including Germany, Spain, Italy and many East European countries have decided to have few children, and that is a choice they have made, perhaps unconsciously, about the future profile, and potential, of their country. 

For example, partly as a consequence of differences in past birth rates, the OECD calculates that from 2018 to 2030, Ireland’s potential employment growth rate will be 1.2% per annum, and France’s will be 0.2%.

In contrast, Germany over the same period, will experience a potential employment decline of 0.6% a year, and Finland faces a potential employment decline of 0.2% per year. 

These differences partly explain why Germans and Finns see limits to their ability to bail out other countries, like Greece. They know will soon have fewer people at work, supporting an increasing number of retirees, and they will want to hold their money back for that. Unfortunately for it, Greece has a similar problem of an ageing and diminishing workforce, and an increasing elderly population.

Pensions are already 14.5% of Greece’s GDP, 13.8% of France’s GDP and almost 11% of Germanys’, as against just a little over 5% of  GDP in the UK and Ireland. That difference explains a lot, at least as much as the supposed doctrinal differences between German “ordo-liberalism” and  Anglo Saxon Keynesianism!

It is true, as Keynesian economists argue, that coordinated demand stimulus, by countries that can afford it, would help Europe’s economy achieve its jobs potential, without risk of inflation, and that can  come from countries whose fiscal positions are strong, but the judgement as to which European country can do that, has to take some account of differences in the ageing profile of each country.

Incidentally these differences also illustrate the foolishness of anti immigrant sentiment in Germany.  Germany’s 6.6 million immigrants paid in 22 billion euros more in taxes and contributions, than they took out in benefits, and some of that surplus is helping pay the pensions of native born Germans. I expect the same may apply in France.

In fact, the EU Ageing report, to which I referred earlier, estimates that 55 million immigrants will have to come into the EU by 2060, to make up for the decline in our native born workforce because  past decisions on family size. That can change, of course.
Meanwhile, Africa’s population will have increased by 28% by 2060 and Asia’s population will have slightly declined.   

EUROPE’S YOUTH PROBLEM……..A WASTED GENERATION?

In the next fifty years, on unchanged present trends, the overall working-age population of Europe will drop considerably, from last year’s peak of about 300 million to 265 million. This will be a significant blow to nearly every aspect of the Eurozone economy.

At the same time, the old-age dependency ratio–a fraction or percentage expressing the ratio of residents over the age of 65 to those under that age–will rise from 28% (recorded earlier this decade) to a staggering 58% by 2060.

The causes of this challenge are in Europe are manifold: declining fertility, advances in old-age care, the residue of baby-boom demographics. But the impact will be serious.

This is made even worse by the fact that so many of today’s youth in Europe are unemployed. The longer they are unemployed, the less relevant their skills become, and the harder will it be for them ever to get a well paying job. Their life time earning potential is being radically diminished.

The experience of long term unemployment is devastating.  That is a huge medium term problem. I heard a representative of the Gallup polling organisation, who do in depth polls that the experience of long term unemployment was worse, for the person involved, than of opinion and studies of public psychology, say that his organisation’s finding was the death of a spouse.  Imagine what that also does to future earning potential and self confidence!

Mario Draghi has recognised this, as the central European problem of today.

He said in his  speech at Jackson Hole last year

“The stakes for our monetary union are high. Without permanent cross country transfers, (which he did not expect will happen), a high level of employment in all countries is essential to the long term cohesion of the euro”

I would emphasise two words in that sentence….. “all” and “essential”…..

“ ALL” countries in the euro must have a high level of employment. 

And the head of Europe’s Central Bank says this is “ESSENTIAL”  for the euro.

Not the sort of language you would expect from a Central Banker of the subject of employment, which shows that solving Europe’s unemployment problem is essential to the survival of the euro, and thus the avoidance of immense financial instability and wealth destruction, that would flow from a break up of the euro.

Even economists, like Martin Wolf, who opposed the creation of the euro, argue that its break up would be an unmitigated disaster at this stage. The break up of the euro could herald an era, between the countries now in the EU, of  arbitrary savings destruction, of national protectionism, of competitive devaluation,  and  of mutual litigation and recrimination, that would destroy the interdependence that has allowed the European Union itself to be a structure of peace in Europe for 60 years. 

We would not be going back to the 1980’s, but to the 1930’s. 

And Mario Draghi has linked finding a solution to high unemployment is some European countries(like Greece and Spain) to finding a way to avoid that. That is what is at stake.

TODAYS PRESCHOOL CHILDREN WILL HAVE A HEAVY ECONOMIC BURDEN TO BEAR……, 

But, in the longer run, we have another problem. We will soon not have enough young people at all in Europe.

From 2030 on, Europe’s working age population will decline and the number of retired people depending on them will increase. There are four Europeans of working age today for every one retired person. By 2060, there will be only two.

To be precise, Europe’s labour supply will remain stable up to around 2023, and decline thereafter, by about 19 million people, up to 2060.

As a result of these trends, Europe’s relatively small number of pre school and primary school children of today, will, later in their lives, have to support a proportionately much larger retired population, than will their competitors in India, China, and Indonesia.

Europe will be like a horse carrying extra weight in the “global competitiveness horse race” of the mid 21st Century.

In Europe, the OECD projects that, from 2014 to 2030, the increases in public expenditure on health, long term care, and pensions, will range from increases of 6.3 percentage points of GDP in Luxembourg, through 5.6 percentage points in Belgium,  and 4,8 points in Finland to 2.7 points in Ireland, down to  1.4 points of GDP in the UK, to a mere 0.8 points in Italy and 0.7  points in Poland. This is the difference made by pension and entitlement reforms in the latter countries.

If young people are to be able to have  the future earning capacity to bear these extra burdens ,it is essential that as small children today get every developmental educational advantage now, no matter what the present income status of their family.

That is not just a matter of social justice, although it certainly is that, it is a matter of pragmatic self interest for today’s, eventually to be retired, workforce and electorate.

But what sort of educational investment will make a difference?

Increasing the teacher /pupil ratio may help, but the evidence on that in ambiguous. Some countries with high teacher ratios do less well than do others with proportionately fewer teachers.

In fact, it  may be before children go to school at all that the  biggest improvements in intellectual ability can be achieved.

…………SO THEY NEED EXTRA SUPPORT FROM THE EARLIEST AGE

I recently read a report prepared for Vietnam by the World Bank on how that country could improve its educational performance.

The report said bluntly

“Much of the inequality in learning outcomes, between different types of young Vietnamese observed in primary education and beyond, is already established before the age of formal schooling”
This may be caused by physical poverty, including bad or insufficient nutrition, which will stunt a baby’s mental development. Similar poor nutrition will be found in a minority of homes in rich countries too.
But things, like that,  that can be explained by lack of money, are not the only factors affecting a child’s mental development.

The World Bank Report goes on

“The brain development of young children’s highly sensitive to stimulation and interaction. The more parents and care givers interact with a young child, for example through talking, singing or reading, the better are the conditions for brain development”

The report suggests that, in Vietnam, babies from better off families have more of this sort of stimulative inter action with parents and care givers, than do babies in poorer families.

But the general  point about what makes a difference applies at all income levels, and if very small children , as they develop, only see their parents for an hour or so each day, and spend the rest of the time away from them, they may lose out on mental development, no matter how well off they may be materially.

If these World Bank views about intellectual development are true, they deserve an urgent response from parents, crèches, and government at all levels here in Europe.

If we are going to depend on a smaller number of children to support our welfare systems over the next forty years, we must do everything we can now, to enhance their earning capacity, especially by ensuring that they have a happy and stimulating childhood, from the earliest age.

That may be the most important long term economic stimulus of all!
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Speech by John Bruton, President of IFSC Ireland, and former Taoiseach, at the dinner  of the Institute of Chartered Accountants in Ireland in  the Convention Centre, Dublin at  8pm on Thursday 29th January
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THE EU IS A UNION OF RULES…NOT A UNION OF FORCE

CHANGE THE EU TREATY RULES ON DEBTS AND DEFICITS, IF NECESSARY…. BUT DO NOT BEND THEM 

The European Union is a union of sovereign states, who are sovereign in that they are entirely  free to leave the EU. This freedom to leave means that the EU is not a “super state”. There is no coercive force, no EU army, to force Britain or any other country to remain in the EU. Britain enjoys a freedom, within the EU, that colonies did not enjoy within the British or other European Empires.
 
Britain is thus entirely within its rights in considering the option of leaving the EU, although that does not mean that such a course would be wise.

The EU does not exist on the basis of coercion. It exists on the basis of common rules, or Treaties, applicable to all, interpreted independently by the European Commission and the European Court of Justice,  that EU have so far countries freely abided by, even when particular decisions were not  to their liking. If countries started systematically ignoring EU decisions, the EU would  soon disappear.

One set of particularly important set of EU rules are the ones that apply to budget deficits and debts of EU countries within the euro zone. These rules have been incorporated in EU Treaties and in Treaties between Euro area states. One of the provisions is that if a country has an excessive deficit, it must reduce that deficit by an amount equivalent to 0.5% of GDP each year until it gets its deficit below 3%.

France and Italy, big states that were founder members of the EU, have both produced budgets for 2015 that do not comply with the rules.

Initially the European Commission objected, and both countries have adjusted their budgets a little.  But, even after these revisions, the budgets are still in breach of the EU rules.

Some will argue that it is the rules that are at fault, not France and Italy. Inflation is negative, so debts increase in value, while prices are falling.

Countries are caught in a debt deflation trap of a kind that was not envisaged when the rules were drawn up.  But that is an argument for changing the rules, not an argument for ignoring them or pretending they have been complied with when they have not been.

But changing the rules would require EU Treaty change, and nobody wants to change the Treaties, because a Treaty change would have to be unanimously agreed among all 28 EU states. Other states fear that would be an opportunity for Britain to use the lever of blocking  a Treaty change to revise the fiscal rules, with  which it might otherwise agree,  simply as a means of getting  a concession of British demands for

+  a restriction of free movement of people within the EU,  
+  vetoes for a minority of national parliaments on EU legislation and
+  the  scrapping the goal of “ever closer union” within the EU.

This is a form of blackmail, but it has happened before in EU affairs.

But if the EU is unable to change its Treaties, because of blockages like this, the EU will eventually die. Necessary EU Treaty change cannot be dodged indefinitely. The EU will atrophy if it cannot change its Treaties, in the same way that states would wither, if they could not change their constitutions from time to time.
 
In a recent commentary, Daniel Gros of the Centre for European Policy Studies has criticised the European Commission of Jean Claude Juncker for failing to either 

a.) Insist that France and Italy stick by the existing fiscal rules or, if not
b.) Call for a revision of the rules to take account of the exceptional deflationary conditions that exist

He  is right .

AS TENSION MOUNTS OVER UKRAINE…….SALUTORY LESSONS FROM 1914

I have just finished reading  “Sleepwalkers, How Europe went to war in 1914” by Christopher Clark, Professor of Modern History in Cambridge.  He describes the statesmen who stumbled into War in 1914 as “sleepwalkers, watchful but unseeing, haunted by dreams, yet blind to the horror they were about to bring to the world”.

A web of interlocking commitments, designed to give individual countries security and peace behind their own borders, ended up tumbling the whole continent into War.

Austro Hungary had a defensive pact with Germany. Russia set itself up as the protector of Serbia. France  gave Russia a blank cheque in the Balkans because it needed Russian assurances against Germany. Britain had a rather more vague understanding with France.  It feared any Russian rapprochement with Germany because Russia could threaten British interests in India.
So, when Franz Ferdinand was murdered in Sarajevo by assassins that had come from Serbia, the possibility that all these dominoes might fall in the  direction of war opened up. But it was only a possibility. 

Serbia could have taken resolute action to root out the conspiracy behind the assassins before Austria issued any ultimatum. Austria could have issued a more temperate ultimatum. Serbia could have given a less evasive response.  Germany could have restrained Austria.

Russia could have held back from full scale mobilization in support of Serbia, and France could have made it clear that it did not wish to get involved in supporting a Russian attack on Austria so long as Germany stayed out too. Britain could have said it would remain neutral in a German war with France, so long as Germany respected Belgian neutrality.
The interlocking commitments between countries that led to war were not, according to Christopher Clark, “long term  features of the European system, but the consequence of numerous short term adjustments” made in the immediately preceding years. 

The War was not inevitable, but suited some leaders to pretend to themselves afterwards that it was, so as to avoid facing the consequences of some their own omissions, ambiguities and evasions.
Some of the issues involved are still current.

How does one pursue a criminal conspiracy launched from another jurisdiction? If the European Arrest Warrant was in place could Austria have obtained the extradition of some of the conspirators from Belgrade without threatening war?

Christopher Clark says Austria’s ultimatum to Serbia was milder than the one NATO issued to Serbia in 1999!

As we see a drift towards a confrontation between Russia and the West over Ukraine, the lesson I draw from this book is that leaders must not just think of the next move, but of the likely counter move, the move after that and so on, bearing in mind that nothing is inevitable until it has actually happened, and that they usually have more choices than they are willing to acknowledge.

CAN GERMANY BAIL OUT ALL OF EUROPE?

There is a tendency, whenever a euro zone country gets in to difficulty, and needs help from its neighbours, to blame Germany for the severity of the terms imposed, and to say there is bullying involved.

In both Greece and Cyprus, we hear references to the Second World War, as if offering Greece a low interest loan to keep its state functioning , was equivalent to a military invasion, of the kind Greece experienced in 1941.
There is also talk of  the “solidarity” that Germans ”owe” the rest of the rest of the euro zone, even though  any money Germany might pay has to be raised from German citizens, under the German tax system. This is the way it has to be done, only because there is no common euro zone tax system, applicable to all euro zone citizens, from which the money might otherwise come. Indeed those who call most loudly for “solidarity” would probably be the first to object, if a common euro zone tax system, equally applicable to all euro zone citizens, was proposed.
Others criticise Germany for insisting  on “austerity” in spending by countries that are spending more than they are earning, as if there was some alternative to spending less in those circumstances. The fact is that some countries, including Ireland, are still spending more than they collect in taxation, even after one has left out of account the interest paid on past debts. Such countries have what is called a “primary deficit”.

Ireland had a huge primary deficit in 2010, has a small one today, and hopefully will have a tiny primary surplus next year. 

But if it is  to reduce its debts, and  thus not be vulnerable to disaster, if there was to be a sudden increase in international interest rates, of the kind that occurred in 1979/80, Ireland will have to have a primary surplus for many years to come.

That is the only way to reduce the debts it ran up through the primary deficits it ran in the recent past. This is not something “imposed by the Germans”, it is imposed by the rules of mathematics, and by compound interest in particular.
Of course there is one alternative-inflation-  the alternative of inflating debts away. Inflation devalues everything. It reduces the value of money, and in so doing, it also reduces the value of debts…….and, of course, of savings.

If inflation is greater than the rate of interest, debts will reduce. But the value of pension funds, of bank deposits and of life assurance policies would also reduce. Inflation would mean falling living standards all around, because, if a country is to stay competitive, wages would have to increase at a slower rate than prices. Those on fixed incomes would see their living standards decline even more, because they could buy much less each year with their fixed income.

Inflation is very hard to keep under control, once it starts to take hold. Germany tried to inflate away its First World War debts in the 1920s, and the experience was a complete disaster. Understandably, it does not see inflation as a solution to Europe’s debt problems today, and nor should we. 
Some argue that Germans themselves should spend more and save less, and say this would help other countries in Europe. This is already happening to some extent . German imports were 10% higher in 2011, than they were before the recession, whereas almost every other European country is importing less now that it was then.   It is fair to say that Germany’s balance of payments surplus, at 6% of GDP, is very high indeed, too high, and that this surplus is not being used all that wisely. Germany could do more to free up its own internal market, and the OECD has been critical of it on that score, but that offers a long term, rather than a short term, solution for the rest of Europe.
It is also important to deal with the myth than Germany is a terribly wealthy country, that it can afford to bail everyone else out.

Germany’s present competitiveness is of recent origin. A dozen years ago it was the “sick man” of the European economy, struggling with the unexpectedly high costs of absorbing East Germany. 
Germany got a big bonus from the opening up of China, which imports a lot of German engineering goods, while other European countries( eg.Italy) have lost for the  same reason, because Chinese consumer goods are undercutting them in their specialist markets.
Germany is an elderly country, with far more people approaching retirement age than are preparing to enter the work force. 
Probably for this reason, its medium term growth potential, and thus its medium term debt repayment potential, is low, by comparison with other countries in Europe. 
The OECD did an estimate of real growth potential for different countries from 2016 to 2025. Its estimate for Germany was  only 1.2% pa over the ten year period, for Netherlands 1.4%, for Italy 1.5%, for Portugal 2.1%, for Spain 2.3%, and for Ireland  it  was projected to be 2.7% a year!
German families are apprehensive about the future, and if those OECD figures are to be believed, it is hard to blame them.
German families do not FEEL wealthy.

Only 44% of Germans own their own home, as against 58% of French people, 69% of Italians, and 83% of Spaniards. According to a recent Bundesbank study, the average household wealth in Germany is  195,000 euros, as against 229,000 euros in France, and  285,000 in Spain.

This is the reality with which German politicians have to cope.

It does not mean that they are always right, but it does mean that they have to be cautious. It also means that Germany alone cannot solve Europe’s  financial problems.

THE EURO CRISIS – WHERE WILL IT VISIT NEXT?

The bailout of Spain’s banks over the past weekend was necessary, but it may not be sufficient.
Spanish banks are carrying a lot of bad debt from the construction bubble there. The banks have not properly acknowledged this debt in their books, and this has sapped investor confidence in them.
House prices in Spain have not adjusted downwards as much as they have in Ireland, and Spanish competitiveness has not improved as much as Irelands’ has. Unit labour costs remain high, although Spanish exports have been fairly buoyant.
The new Spanish Government has introduced sweeping labour market reforms that will improve Spanish growth potential in the next few years, but that is not immediate enough to kick start the Spanish economy today. The true financial position of many Spanish regional governments is obscure, and that saps confidence too.
Greece, despite all the austerity, still has a big balance of payments deficit. In other words, Greeks are buying more abroad than they are selling there. Until that is tackled, nobody will want to lend to Greece. It seems Greek banks are using cheap ECB money to lend to some Greek consumers who are spending it abroad.
Meanwhile, other Greeks have experienced big wage cuts, but, because the distribution system in Greece is riddled with monopolies and restrictive practices, Greek prices have not come down along with wages. This is why many Greeks are angry.
It is not so much that Greece has had too much austerity, it is that it has had the austerity in the wrong places. So far, that problem has only been tackled on paper, because the Greek system of public administration is weak.
Portuguese banks have a big exposure to a possible Greek collapse. Total Portuguese exposure to Greek debt comes to 7% of Portuguese GDP, as against a comparable exposure of 5% for France, 4% for Germany, and 2% for Ireland.  Relative unit labour costs in Portugal have hardly come down at all since 2007, whereas they have come down substantially in Ireland and Greece. All this makes Portugal particularly vulnerable to a loss of confidence that might come, if Greece defaults again.
The recent decline in voter confidence in the government of Mario Monti  in Italy is also a big worry. His reform programme is only beginning to take effect, and the fear has to be of a return to populist politics, of a kind that would stop  long overdue action Monti is taking  to clear the arteries of the Italian economy, and lift its growth potential .
Two issues, growth potential and   political capacity to implement decisions, are at the centre of our present dilemma.
The OECD has done some calculations on the growth potential of various countries from 2016 to 2025, making assumptions based on growth or decline in the working age population and likely productivity growth. These estimates show huge differences between euro area countries. OECD thinks Ireland has a growth potential in that period of 2.7% per year, whereas Germany only has a  growth potential of  1.2%!  This is explained by the likely decline in Germany’s working age population.
Interestingly, Spain has a growth potential of 2.3%, whereas Greece and the Netherlands are deemed to have a potential of just 1.4%, and Italy 1.5%, almost as low as Germany. These figures, if valid, may explain why Germany is emphasising productivity and is unwilling to underwrite the debts of other countries, unless and until it is first fully convinced that those countries will achieve or, better still, improve their growth potential.
These figures also imply that some of the countries receiving help today, might be  the ones having to help others in  15 years time! They should also be taken into account by  the outsiders who are offering so much  self interested free advice to Germany
The other part of the problem is capacity to make and implement decisions at EU level. A currency depends on confidence, and confidence comes from knowing that  quick action can be taken in a crisis.
Although the European Union has done a lot, in the past three years ,to remedy the original design flaws in the euro, it still has a very long way to go, and the markets may not wait another three years.
For example, a banking union in the euro zone would need strong capacity to close down banks in individual countries, to require agreed bail ins by bondholders, as well as the provision of funds to guarantee depositors. The difficulty is that the decision making system of the European Union is not designed to make, and implement, complex and controversial decisions like this, quickly.
The EU system is designed for deliberative and consensual legislation, not speedy crisis management.
To make decisions, the EU has to bring along countries that are in the euro, countries that are not yet in the euro, and also countries that never want to be in the euro at all but want to share in all the benefits of the single market.
If an unforeseen problem comes up, the EU has to amend its treaties, and that requires ratification in 27 countries (and a referendum in at least one of them!). 
The EU has to cope with a decision making process that emphasises the national, over the collective European, interest.
Not only is the Council of Ministers structured to favour the pursuit of national interest,  even the European Parliament still allocates its own big jobs on the basis of national quotas, something it would be quick to condemn if it happened anywhere else in Europe!
Increasingly, because no European leader, like the President of the Commission, has  a direct mandate from the  European people, the really important decisions are being made by the 27 heads of Government, who each  do have such democratic mandates in their own countries.
But each of these women and men are “part time Europeans”, so to speak. Their day job is running their own countries (and getting re elected if they can). They meet less frequently together than national cabinets do, and when they do meet, there are 27 of them in the room.  That makes it difficult to get into the depths of any question, or to look beyond the immediate problem.
I believe the crisis is of a seriousness that  it requires us to step outside the  conventional ways of thinking, and  tackle the economic and political problems of Europe together in one package. If necessary, leaders should continue meeting until they have worked out a global blueprint, covering the present banking crisis, the Greek issue, structural reforms to lift growth potential, and enhancing democratic decision implementation.  Sometimes, the more issues are in the mix, the easier it becomes to find balancing compromises.
We do not have much time, and we need to remember that we could lose, in five months, something it took over 50 years to create.

European Stability Treaty

The net question in the referendum is whether Irish permanent law should be amended to  constrain  Governments running up debts in future.
In a way, this should not be a controversial issue.
If Governments run up debts, these debts have to be serviced or repaid by citizens.  Prudent citizens should, I believe, be in favour of using the law to prevent Governments piling up unnecessary or wasteful liabilities for future generations. It is very difficult for an individual voter to follow what a  Government is doing with the finances on a day to day basis. So having limits and independent controls should be seen as helping people ensure that their   money is managed prudently by their Government.
Opposition parties, in particular, should favour placing limits on borrowing by current Governments because, if they ever find themselves in office, they will be the ones  who will have to put money aside to pay interest on the previous Government’s   debts, before they can spend any money at all on day to day services or investment  for the future.
If the Stability Treaty is ratified by people on 31 May, the Dail and the people will be much better informed than in the past on what the Government is doing with the people’s money.
An independent Fiscal Advisory Council will keep  the Dail ,and the  people, informed about trends in Government finances. If mistakes are being made in estimating future revenue or spending, the  Dail and the people will have a new means of keeping the Governments finances honest, so to speak.
This searching analysis of Government finances by the Fiscal Advisory Council, and also that by the European Commission, will greatly enhance Dail Eireann’s ability to carry out its  duties under Article 17 of the Irish Constitution. This Article requires the Dail to approve Government spending and taxation. If the Stability Treaty is approved, the Dail will have much better quality information for making these important decisions. Governments will not be able to produce phoney estimates, something of which I had direct experience myself as incoming Minister for Finance in 1981
And, under article 13 of the Stability Treaty, government and opposition parties the Dail will have a new means of observing, and influencing, the economic policies of other EU countries. There will be a new conference of parliamentarians drawn from economic affairs committees from all member states of the euro. As an export economy, we need to have an input into the policies of our neighbours, and this provision the Stability Treaty will help give us that.
Some people are describing the Treaty as an “austerity treaty”, because it places limits on Government borrowing.

But borrowing is not a cure for austerity.

Borrowing is often just a means of postponing austerity.
It is a means of getting the next generation to pay this generation’s bills, without consulting them. And if the interest rate is high, the austerity in the future, will be much greater than anything that would happen if problems were faced up to now.
The idea of placing limits on Government borrowing and debt is not new.
Back in 1992, the Irish people in a referendum approved our joining a Euro currency, and agreed to rules to defend the value of that currency by limiting Government Debts to 60% of GDP, and Government Deficits to 3% of GDP.
Put another way, we agreed that our overall Governments debt would not be more than just below two thirds of everything everyone earned in Ireland in a year, and that that the Government would not borrow additionally, in any one year, more than 3 cents for every euro earned by the country as a whole in a year.
These rules were put in the form of an EU Treaty, known as the Maastricht Treaty, approved by the Irish electorate on 18 June 1992.
Some might ask why we needed a rule like that, about Government borrowing, in a Treaty primarily about setting up a new common currency?
The answer is that, if you want to prevent a shared currency becoming worthless through inflation, you have got to control the amount of money in circulation. One of the ways that money is put into circulation is by Governments borrowing money, and spending it.
Unfortunately we have not been able to keep our word to ourselves.  All over Europe, Governments have got themselves into trouble because they have breached the 60% and 3% limits.

Of course, this was not the only problem, nor the only cause of the economic crisis.

Private businesses and individuals also borrowed and spent excessively. There was too much credit given out, and things were bought, with that credit, for more than they were worth.  The European Central Bank, and the Central Banks of most European states, did not put a stop to this. The same thing happened outside the euro area, in Britain and the United States, so it was not a problem of the euro as such.
 To use an analogy, it was a problem of people, and businesses, acting like sheep, following one another, rather than thinking where they were going.  Meanwhile the fences had been allowed to get into disrepair, parts of the field had no fences at all, and the shepherd had gone to sleep.  
Now we have to put these things right.

The Stability Treaty is only a small part of the solution.

Ireland, and the rest of Europe, needs to reform its banking system.  A functioning economy needs banks. But Banks never again must be allowed grow to be too big to fail. 
Genuine economic growth needs to be promoted, based on developing new products and services that the rest of the world will want to buy. 
The consequences of the ageing of our societies must be addressed honestly.
Confidence must be restored, so that people will feel free to spend what they have. But confidence is only sustainable, if it is based on truth, the truth about what owe, and truth about what we are spending. The Stability Treaty will help us tell ourselves the truth about our own economy, more fully than we did in the past, and in that way it will help restore confidence.

A Yes vote in Ireland to the Stability Treaty will not bring complete certainty. Uncertainties will remain in the European and global economies.   

The EU is a political organisation. It is democratic. All EU Governments have public opinions to consider, not just the Irish Government. The road to a stable, sustainable, and productive economy in Europe will be a long one, probably with some  detours. But the EU has made a start,
    on banking,
    on regulation,
    on monitoring systemic risks and
    on  monitoring economic as well as fiscal imbalances.

There is more to do
    on promoting investment, 
    opening up markets to competition, and
    freeing people to work in other EU countries by  recognising their  qualifications.

But, having served as an Ambassador in the United States, and observed the United States legislative process at close quarters, I can say that the European Union is much further along the road towards dealing with its (admittedly more severe) long term structural and budgetary problems, than the United States is.
The EU system is not deadlocked. It is working, slowly, sometimes incompletely, but it is working. Passing the Stability Treaty is a part of that work. 



Speech by John Bruton, former Taoiseach and current vice President of Fine Gael, at a meeting to launch the Meath Fine Gael  campaign on the European Stability Treaty in the Ardboyne Hotel, Navan, at 8pm on Friday May 4th.


THE FRENCH PRESIDENTIAL ELECTION

I was in France this week,  and had a chance to have a closer look at the  French Presidential Election Campaign.
It is a two round election, with only the top two in the first round, contesting the second  round three weeks later.
At the moment,it is likely the two in the  second  round will be François Hollande, the Socialist(now on 27.5%) and Nicolas Sarkozy (now on 29.5%).
The third and fourth candidates, Jean Louis Melanchon of the  Left Front, and  Marine  le Pen of the National Front are both on 14%, so neither of them is likely to overtake the front runners. Francois Bayrou, the Centrist candidate, is on only 10%.
When voters are asked who they would vote for in a straight fight between Holland and Sarkozy,  they plump for Hollande  by a margin of 8 points.
This is because Hollande  picks up a bigger share of the eliminated candidates’ votes.  For example, Hollande has a margin of 81/3 among Melanchon’s voters, and 40/32 among Bayrou’s.   Sarkozy beats Hollande by 49 to 16 among  Le Pen’s electorate.
Sarkozy’s best chance to win is if he can convert Bayrou’s voters to his  cause, possibly by offering the Prime Ministership to Bayrou, while still holding on to the National Front electorate. This would not be an easy task, because there is little or nothing in common between Bayrou’s electorate and that of the National Front
Some of the campaign debate is about taxing the rich. This is in response to the fact that incomes at the top in France have risen faster than incomes in the middle and lower range.
Clamping down on Islamic militants, and employing more teachers, are other recurring themes.
The fact that France has an excessive budget deficit, has lost competitiveness vis a vis Germany, and as a result has a big trade deficit, is not getting attention from the big parties.

FRANCE’S LOSS OF COMPETITIVENESS

Hourly labour costs in France are now 10% higher than in Germany , whereas ,in  2000, they were 8% lower.
The State in France spends 56% of GDP. Deductions from wages to pay for health and pensions (the retirement age is only 62)  are extremely high and deter job creation. Yet French politicians blame things like the Irish 121/2% tax rate for their problems in attracting investment, rather than the cost of employing people in France itself.
If Hollande wins, he could find himself dependent on Deputies from the party of the Left Front, who favour a complete ban on redundancies, and a 100% tax rate on incomes above 350,000 euros. Hollande himself already favours a top 75% tax rate, and an increase in the wealth tax.
France has a revolutionary tradition and a passionate belief that political action can change things. The difficulty is that globalisation, European integration, and accumulating Government debts,  have reduced political options more than French politicians are willing to  admit.

FREE MOVEMENT OF CAPITAL IGNORED IN THE DEBATE


The policies of the French Left would be very difficult to implement, because as long as France continues to allow free movement of capital, people who feel they are being overtaxed can simply leave the country, and take their money, and their factories with them. 
Free movement of people, and of capital, are requirements of EU and euro membership, and have allowed France to develop world class companies, like Pernod Ricard ,which owns Irish Distillers.
France  is prepared to take the benefits from globalisation, but has not accepted that these benefits come with limitations on what is politically feasible.  
 I believe that the unreality of the debate in France about its public finances, and about its true economic options, could become a threat to the future of the euro.

EXPLAINING EUROPE’S ECONOMY IN JEDDAH

I was in  Jeddah in Saudi Arabia this weekend  to speak at the  Jeddah Economic  Forum. The four day  Forum  has taken place every  year, for the past  ten  years.
Previously it has been addressed by then serving President Mary McAleese of Ireland, and  by then  former Presidents  Giscard d’Estaing of France, Bill Clinton, and George HW Bush of the United  States. John Major and Helmut Kohl have also addressed the Forum.
This year the former Prime Minister of Pakistan, Shaukat Aziz will speak.
Jeddah was founded as a fishing village in 500 B.C. It was incorporated into Saudi Arabia in 1924 after the end of the Ottoman Empire.
Today it is the commercial centre of Saudi Arabia and is  internationally oriented as it is the gateway, through which Muslims from all over the world  pass, on their way to Mecca on pilgrimage.
Jeddah is the headquarters of the Islamic Development Bank, and of the International Association of Islamic Banks.  It was an important place to visit in promoting Ireland as an international financial services centre. Ireland has passed legislation to facilitate the provision of Islamic  finance  from an Irish base.  Ireland also hopes to attract Saudi investment in renewable energy and other sectors.
There is a great deal of construction activity taking place in Jeddah.

GLOBALISATION   –   HOW SHOULD COUNTRIES COOPERATE?

I was asked to speak in a session on “Building Blocks-Models of Regional Cooperation”. The European Union is the most advanced model in the world of regional cooperation and there is a lot of interest in Asia in how it works.
There is a pervasive scepticism in the English language media about the prospects of success of the European Union.  Many of the same people, who predicted that the euro would never even be established in the first place, are now enthusiastically predicting its imminent demise.
But events are proving that EU institutions are able to adapt, albeit slowly, to new challenges.
I explained how the EU works and spoke of the recovery under way in Europe after the economic crisis. It has, of course, been a difficult process.  
Only in the last few weeks have adequate mechanisms been put in place to monitor overdue reforms, and to help remove underlying imbalances in the European economy. These things should have been done when the euro was originally launched in 1999.
During the down turn, Europe lost market share in export markets. Even Germany has had that experience.
If Europe is now to regain its dynamism, it will have to be able to reallocate resources, both human and material, more quickly from sectors where demand is in decline, to ones where it is on the increase.
Restrictive practices and unnecessary rules- in  entry to the professions, in the setting of wages, in education-inhibit the efficient reallocation of resources, and  thus prevent the creation of new jobs.  Getting rid of these restrictions is just as important as restoring the state finances.
 Reports by the European Commission to the heads of EU Governments are beginning to identify these bottlenecks. Passing laws to remove the bottlenecks will be a national responsibility, and vested interests will do their best to slow down progress, as we are seeing in Spain and Italy at the moment.
To meet the challenge of the rising, and more youthful, economies of Asia and Latin America, Europe will also have to put greater emphasis on efficient use of all its limited resources.  For example much energy is wasted in badly insulated buildings.  Only 40% of Europe’s waste is recycled. Huge amounts of food go to waste.  Arable Land is being wasted too. An area the size of Cyprus in concreted over for development in Europe every ten years.
 But the greatest waste of all, is the unemployment of young people.
There is something desperately  wrong with a  situation where, notwithstanding heavy investment in education and free movement of young people from country to country  within Europe,  youth unemployment is  19% in the UK, 22% in Belgium, 28% in Ireland  30% in Portugal,  and 48% in Spain.
 
THE EU IS NOT BECOMING A POLITCAL UNION,  A TRANSFER UNION,  OR A FISCAL UNION—       
IT IS SIMPLY BECOMING A DEEPER “UNION OF RULES”

Notwithstanding the major challenge to the euro posed by the sovereign debt crisis
  + the EU is not, as some suggest,  only able  to meet financial crisis if it first  becomes a political union.  Countries retain their own military forces and thus their own foreign policies.  Their national cultural policies remain unaffected
  +the EU is not about to become a transfer union either.  Countries in difficulty are being offered interest bearing loans, not subsidies. Once the  loans are paid back they will stand on their own  feet.
   +Nor is the EU becoming a fiscal union, because the vast majority of tax and spending decisions will  continue to  be taken at national level. The new EU rules will simply require that countries balance their books. It will for each to decide whether they want to do that at a high, or a low level ,of spending.
The EU is, however, under the recently agreed fiscal compact and other measures recently enacted,  becoming a much  deeper “Union of Rules”. This is a natural  follow on from the  development  of the EU in the past
 Originally , the EU set rules in regard to goods and services, so that these could be freely traded across borders.
 Then, as people moved from country to country, the EU came to set rules on mutual recognition of qualifications and rights to social security.
 With the establishment of the euro in 1999, the EU started to implement rules on debts and deficits.
 Now these rules, which were too weak and imprecise and which were  flouted by nearly every country, are being strengthened and made  automatic.
New norms are being set, on how budgets are presented, on levels of private debt, and on excessive trade surpluses as well as on excessive trade deficits. 
The aim is to ensure that the EU has a consistent economic policy, which will ensure that sort  of difficulties ,which came to a head in  2008, will never  again arise.
This is an evolutionary process. It involves trial and error.

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