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France's Dirty Little Secret

by Frank Schnittger Fri Mar 25th, 2011 at 05:52:33 AM EST

President Sarkozy has been leading the posse trying to rein in Ireland's 12.5% corporate tax rate, and, together with Chancellor Merkel, has made any reduction in the interest rate charged on Ireland's ECB loans conditional on an increase on Ireland's corporate tax rate. However a PricewaterhouseCoopers (PwC) study for the World Bank reported in the Frankfurter Allgemeine Zeitung and cited by the Irish Times paints a different picture:

Ireland's corporate tax rate said to be 'average'

President Nicolas Sarkozy of France had no reason to be critical of Ireland, the FAZ said, pointing out that companies pay just €8.20 in tax for every €100 invested in France thanks to generous write-off possibilities on its tax base. This is despite an official corporate tax rate of up to 33 per cent and compares to €11.90 for Ireland. Germany demands €22.90.

Basically the Irish headline rate of 12.5% is very close to the effective rate of 11.9% as there are very few write offs possible from that rate.  France, on the other hand, has an extensive system of write offs and allowances (said to chiefly favour larger Companies) with the result that many large Companies pay very little tax at all and the average effective rate of 8.2% is way below both the Irish rate and the French Headline rate of 33%. Meanwhile the British Chancellor of the Exchequer is reducing the British headline rate of corporate taxation from 28 to 23% over the next 3 years in today's budget.

frontpaged - Nomad


I'm not saying that low corporate taxation is a good thing and would support pan-European attempts to impose higher rates of corporate taxes and a Tobin Tax on financial transactions. I also support EU Commission attempts to develop a common consolidated corporate tax base to prevent corporate tax avoidance schemes designed to transfer taxable revenues from high tax to low tax regimes such as the Double Irish and Dutch Sandwich arrangement which utilises loopholes in Irish, US, Bermuda and Dutch tax laws to reduce overall corporate tax liabilities.  Such schemes typically require loopholes in a number of different tax jurisdictions and cannot be closed off by the Irish tax authorities alone.

But if there is to be a debate on corporate tax systems, let it be conducted on a rational basis and not as an opportunity to take advantage of Ireland's current difficulties and an attempt to bully Ireland into submission to the larger EU powers:

Our rate of corporate tax 'a fetish' for some

SOME COUNTRIES had developed a deep antipathy towards our corporation tax policies, Fianna Fáil leader Micheál Martin told the Dáil last night. "Quite frankly it has become almost a fetish for the representatives of some countries to get excited about them.''

He said as a minister he had debates with colleagues from other countries about the issue, and the House would know Brian Cowen had a "colourful and passionate'' disagreement with French president Nicolas Sarkozy at his last EU council meeting.

"What is amazing about this is that not one shred of evidence has been produced to show that our corporation tax is anything other than a minuscule part of broader European economic performance.

The reality is that Ireland has marketed its low headline corporate tax rate very effectively to attract (mostly US) Global corporates to locate substantial operations in Ireland rather than in other corporate tax jurisdictions in Europe or world wide.  Whether that is the only or the best way to develop the Irish economy is, of course, very much open to question, but it is generally regarded as having been an essential ingredient of the success of the Celtic Tiger. At the moment, the success of this multinational sector is the one thing keeping the Irish economy (marginally) afloat.

What worked well in the past isn't necessarily going to work in the future, and there is no doubt Ireland's economic recovery needs to be put on a broader footing.  The one thing Sarkozy and Merkel are NOT offering Ireland, however, is any alternative strategy for economic recovery.  So long as an ever diminishing austerity spiral into economic melt-down is the only alternative option being offered to Ireland, they can expect the Irish Government to fight corporate tax reform all the way.

The bottom line is that without some sort of tax incentive, there is little reason why any major global corporation would locate in Ireland.  Major corporations gravitate to major markets.  Ireland's supposed educational advantage is another bit of marketing fluff.  The reality is that Irish education is woefully underfunded compared to its European peers and the advantage of being English speaking is being eroded every year that English becomes the more universal lingua franca.

Without a coherent regional, industrial, or fiscal policy, the EU is simply forcing peripheral countries to compete on the basis of taxation and/or lower wage rates. Having been a beneficiary of the reunification of Germany, Merkel has to decide whether she really wants to be the divider of the EU.

Display:
Keep the EU's Hands off Ireland's Taxes - WSJ.com
Interestingly, Eurostat figures show that Irish exchequer receipts from corporate tax as a percentage of GDP--at 2.9% in 2008--are above the EU average of 2.7% and the French rate of 2.8%.

Perhaps most interesting of all, an analysis of the FDI attracted into Ireland suggests that the competition for these investments was primarily from outside the EU. This suggests that for the most part that Ireland is not in competition with other EU member states. By and large the FDI that has come to Ireland would not otherwise have come to Europe. For the EU then, this is not a zero-sum game. Investment attracted to any part of the union is certainly better for the union than investment going elsewhere.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 23rd, 2011 at 08:34:19 PM EST
Ireland Remains Hopeful on Securing Lower Rate - WSJ.com
The euro zone desperately wants the new government to keep the banks afloat and paying their debts, since any renegotiation of senior bonds issued by Irish banks could cause major problems for the rest of the currency area's financial system. That may be an area where the new government has some leverage. Mr. Kenny "has to get the point across to these folks that the burden they are placing on the Irish taxpayer in order to sustain the systemic interests of the European banking system is not just morally unfair but practically impossible for the state to sustain," said Ben Tonra, European politics professor at University College Dublin.

In an interview with state-owned broadcaster RTE, Mr. Kenny said his government will do its best to repay its debts.

"We will not renege on our responsibilities," he said. "We will not run away from our responsibilities, but we need some flexibility from our European colleagues and I expect to get that. It is not just the interest rate. It is flexibility in other matters, in relation to the banking structure that we need assistance on as well."

Mr. Tonra said Mr. Kenny may also have another card up his sleeve. In order to establish a permanent mechanism for dealing with debt crises, changes will have to be made to EU treaties. And under the Irish constitution, that may require a referendum. Both the Treaty of Nice and the Treaty of Lisbon were rejected by Irish voters at the first time of asking, although they passed on a second vote.

The bottom line:  The EU is currently forcing Ireland into a position where it will have to choice but to default and Merkel will not get another referendum past the Irish people.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Mar 23rd, 2011 at 08:56:58 PM EST
She's not going to get any referendum she wants to get through past the Irish people: she'll have a hard time convincing the parties in government to campaign for it, never mind getting it passed.

Are Labour going to be able to campaign for the sort of batshit silly neoliberal stuff she's calling for when they're challenged on the left flank by Sinn Fein, the left technical group and a populist Fianna Fail and against the inclinations of a their own membership?

by Colman (colman at eurotrib.com) on Thu Mar 24th, 2011 at 07:17:45 AM EST
[ Parent ]
I remain unconvinced that there is anything Labour couldn't convince itself of if it meant staying in office, but as I noted below, even I would campaign against any new referendum in current circumstances unless it clearly addressed the underlying structural problems of the Eurozone.  This thing is going to melt down next week once the Bank stress tests reveal an unsustainable recapitalisation requirement and trigger an Irish default on unguaranteed banking debt.  

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 24th, 2011 at 07:38:59 AM EST
[ Parent ]
I just hope someone has spent the last few years working out how to keep retail banking running ...
by Colman (colman at eurotrib.com) on Thu Mar 24th, 2011 at 07:44:05 AM EST
[ Parent ]
There are a number of possible solutions available, if only enough people can pull their heads out of their asses simultaneously.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Mar 24th, 2011 at 09:15:48 AM EST
[ Parent ]
There's a simple solution...

Honohan: Sell main banks overseas | Irish Examiner

THE Governor of the Central Bank has said that the best way to achieve stability in Ireland's banking system is to sell the main banks to overseas players -- but added that he would be "disappointed and surprised" if all of the €35 billion earmarked for the banks, from the IMF/EU bailout, is ultimately needed.


So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Thu Mar 24th, 2011 at 09:38:12 AM EST
[ Parent ]
But only after the Irish state pays all their creditors for them? Cunning, or something.
by Colman (colman at eurotrib.com) on Thu Mar 24th, 2011 at 01:40:51 PM EST
[ Parent ]
Take a bank in dire straits, put all the bad loans in a newly created government holding company, and presto: a working bank and a government holding company that liquidates the loans for whatever they can get.

Sweden, Finland and Norway all did it in the 90ies, so there should be experts to hire if needed.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu Mar 24th, 2011 at 06:34:11 PM EST
[ Parent ]
Already been done with all the big bad loans being put into NAMA - National Assets management Agency.  The problem is the banks are insolvent as well as illiquid, and someone needs to recapitalise them if they are to survive.  Quite why it should be the taxpayer (again) is not clear to me.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 24th, 2011 at 09:16:16 PM EST
[ Parent ]
Frank Schnittger:
Already been done with all the big bad loans being put into NAMA - National Assets management Agency.  The problem is the banks are insolvent as well as illiquid
If the banks are still insolvent, that means the class of assets to be shunted to NAMA wasn't large enough.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Fri Mar 25th, 2011 at 05:45:28 AM EST
[ Parent ]
Just the big loans to developers were shunted to Nama - who generally paid about 40% face value for the assets.  This crystallized enormous losses for the banks (even if Nama still dramatically overpaid).  We are now seeing the "second order effects" of mortgage holders in negative equity and unable to repay their mortgages.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 05:52:14 AM EST
[ Parent ]
It's not clear that convincing themselves to support it will help them stay in office either.
by Colman (colman at eurotrib.com) on Thu Mar 24th, 2011 at 07:44:58 AM EST
[ Parent ]
So the neoliberal nonsense in other countries is a justification for a continuation of the failed irish model.

And that is nonsense:

>Without a coherent regional, industrial, or fiscal policy, the EU is simply forcing peripheral countries to compete on the basis of taxation and/or lower wage rates.<

What economic theory supports this tall claim? You yourself mentioned the english language in the Irish case. Do really want to argue that Denmark or Finland compete on low wages or a tax haven status?

by IM on Thu Mar 24th, 2011 at 06:18:00 AM EST
It wasn't the Irish Corporate taxation model which failed - it has continued to be quite successful in a narrow nationalist sense - but the crony capitalism and crass stupidity which led to citizens being made liable for the private losses of bank investors.

In any case, as I argued above, what worked before won't necessarily work in the future and my advocacy for high corporate tax rates, Tobin taxes and a common consolidated corporate tax base puts the corporate taxation element of the Tiger economy firmly into the past.

It is doubtful you can regard Denmark as peripheral in an economic sense and Finland is an outstanding (and exceptional) success story built around extraordinary social cohesion, Nokia and a few other very successful corporates. Virtually every other smaller peripheral EU economy is engaged in austerity policies, lower corporate tax rates, and lower wage based competition.  I see those trends intensifying in the absence of of EU regional, structural, industrial, and fiscal policies.

Care to outline an alternate strategy for peripheral EU development in the absence of such EU policies?  And let's not assume the Finnish model will work for everyone when everyone is trying to do it.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 24th, 2011 at 06:36:14 AM EST
[ Parent ]
Frank Schnittger:
It is doubtful you can regard Denmark as peripheral in an economic sense

As far as I know, Denmark's economy has traditionally been closely integrated with north Germany. Denmark has also avoided the EMU giving it the option of devaluation.

Frank Schnittger:

Finland is an outstanding (and exceptional) success story built around extraordinary social cohesion, Nokia and a few other very successful corporates

When Finland's banks went bust in the 90ies after the Soviet trade slumped, there was no international effort to make governments accept the bad debts of banks located there. So they avoided the anglo suicide strategy.

Long term I think the central factor is that they entered the EU as rich export-driven economies and as such can be expected to benefit from the institutional problems created by the EMU. The problem is not geographical position or size of country, but that the ban on industrial policy (apart from weapons) benefits the established industrial countries on the expense of the not so established.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu Mar 24th, 2011 at 07:12:15 PM EST
[ Parent ]
Let's have more neoliberal tu quoque, then:

The 24/25 March EU summit

...Back in Berlin, German MPs suddenly realised that €11bn would fall due in 2013 just before the next general election. While the capital injection has no consequences for Germany's Maastricht deficit, or for its own domestic deficit target, it raises the borrowing requirement and precludes a tax cut, which the junior FDP desperately wants to happen in the current parliamentary term. The decision, they fear, would deprive them of the last chance for their single most important political goal. FDP parliamentarians believe that Schäuble consciously agreed to the ESM in order to sabotage a potential tax cut. Schäuble has been fighting against tax cuts ever since he became finance minister. The FDP has now put Merkel under pressure to stretch the payments over a longer period. ...

...

It looks as though a superfluous and economically doubtful German tax cut takes precedence over the integrity and stability of the eurozone.



So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Thu Mar 24th, 2011 at 06:55:49 AM EST
[ Parent ]
That's Wolfgang Münchau of Eurointelligence.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Thu Mar 24th, 2011 at 06:57:44 AM EST
[ Parent ]
If the ESM requires a Treaty change and hence an Irish referendum it simply isn't going to happen.  I doubt Kenny would even put the question to the Irish electorate in the current climate.  Hell, even I would campaign against it having been an active partisan in favour of previous Treaty referenda.

There is no way that Irish taxpayers - having shoulder c. €70 Billion - to bail out private investors in the Irish/European banking system - are going to take on any more responsibilities in that regard and the political mood regarding the EU will simply get more ugly if an attempt is made to increase the Hegemony of Germany et al.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 24th, 2011 at 07:10:59 AM EST
[ Parent ]
Denmark doesn't compete. Denmark is running a structural current accounts deficit (ex carbohydrates, which properly belong in the capital accounts), and has been since 1963.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 24th, 2011 at 08:49:15 AM EST
[ Parent ]
And a DMEuro peg.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Thu Mar 24th, 2011 at 09:36:57 AM EST
[ Parent ]
And a EuroDM peg.

FIFY.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 24th, 2011 at 08:42:20 PM EST
[ Parent ]
But through its carbohydrates it uphelds a current account surplus, if I read this correctly:

Denmark Current Account

Denmark Current AccountDenmark reported a current account surplus equivalent to 7845 Million DKK in December of 2010. Danish economy depends heavily on foreign trade. Denmark is self-sufficient in energy producing oil, natural gas, wind and bioenergy. Its principal exports are machinery, instruments and food products. Denmark imports mainly machinery and equipment, raw materials and semi manufactures for industry, chemicals, grain, foodstuffs and consumer goods. Trade with other EU countries accounts for almost 69% of its exports and 74% of its imports. Germany is Denmark's most important trading partner.

So for the purposes of the structural problems Denmark is not going to get problems until the wells run dry.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu Mar 24th, 2011 at 07:20:58 PM EST
[ Parent ]
Danish peak oil is scheduled for 2012, gas a bit later but still within a single infrastructure lifetime. In the British case, the time from peak to net importer was on the order of five years, so we're talking about structural pressure on the exchange rate from somewhere around 2015.

I hope I've graduated by then, so I can look for employment in a country that isn't going to plunge itself headlong into a decade-long depression out of doctrinaire adherence to a D-Mark peg that nobody even remembers the reason for anymore.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 24th, 2011 at 08:50:54 PM EST
[ Parent ]
Ireland is no longer pressing for an interest rate reduction at the European Council because the penny has dropped that  a 1% interest rate reduction won't solve the problem and would come at the price of guaranteeing even currently unguaranteed banking debt.

The Bank stress test due end March will reveal a re-capitalisation requirement way beyond that envisaged in the IMF/ECB deal and ireland's ability to fund, borrow and repay.  Thus Ireland will then declare the IMF/ECB deal inadequate/inoperable and will default on c. €20 Billion in unguaranteed banking debt - on the grounds that a partial banking default now is better than a wholesale sovereign default later.

The whole Eurozone banking system will go into crisis mode and the Irish payments clearing system may cease to operate for a while until the bondholders decide to do with banks they now own but don't want.

Everyone will jump up and down blaming everybody but themselves (and particularly the Irish) but the bottom line is that it will be a fait accomplit and if the ECB doesn't want to lose c. €150 Billion in liquidity funding it has provided to Irish banks (against doubtful property collateral it doesn't want to own) then it will have to come to some sort of arrangement with the new owners of the banks.

I have come to the conclusion that there is no way to resolve this politically until a real meltdown occurs and Germany/France realise that their current "screw the Irish" game isn't working and can't work.  Kenny is the very last man you would want fighting your corner in this situation, but even he is beginning to realise he has no where else to go..

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 24th, 2011 at 07:32:54 AM EST
Questions: If Ireland does default on €20  of banking debt, what might the repercussions be for Europe at large? What would that mean for Portugal? For Greece? For Merkel? What would the Eurozone banking system going into crisis mean for the economies and the Euro? What would that mean for Ireland as a society and its economy....?

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Sat Mar 26th, 2011 at 05:45:04 PM EST
[ Parent ]
If Ireland does default on €20 bn of banking debt, what might the repercussions be for Europe at large?

They won't. It's just a bank insolvency. Happens every month somewhere in the OECD.

What would that mean for Portugal?

Downgrade, probably. Not that banking debt and sovereign debt have anything to do with each other, but the ratings agencies have their heads so far up their asses that they're unlikely to notice.

For Greece?

Won't do anything. The situation can't get any worse for Greece short of getting booted from the EU or having the French send a naval task force to the Aegean.

For Merkel?

Heheheh. Bad Things. I am so looking forward to that. Hopefully, it'll kill her political career, but that may be a case of unjustified optimism.

What would the Eurozone banking system going into crisis mean for the economies and the Euro?

It will mean that the core will get to start actually paying for the crisis they're causing in the periphery. Won't mean anything for the Euro in and of itself, though. Bank failures is one of those things that happens to happen from time to time - it is the political response, not the bank failure, that poses a risk to the €-zone.

What would that mean for Ireland as a society and its economy....?

Nothing much. This isn't the beginning of the end, it's the end of the beginning.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Mar 26th, 2011 at 06:00:00 PM EST
[ Parent ]
I think the French position is eminently reasonable. You have a high corporate tax rate but also have this aggressive write-off policy, which will spur investment, especially in capital intensive sectors, which are after all the ones that can afford to pay high salaries as their cost mass is dominated by other things than salaries, like capital costs and energy costs.

I argued for such a policy a few months ago here at the ET.

   

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Mar 24th, 2011 at 12:52:11 PM EST
If France wants to charge an effective 8% tax rate on Corporate profits, then that is a matter for France.  However on what basis can it then complain that Ireland's 11.9% effective tax rate is too low?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 24th, 2011 at 12:55:49 PM EST
[ Parent ]
On the basis of... ta-daa, hypocrisy. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Mar 24th, 2011 at 01:01:48 PM EST
[ Parent ]
Hence "France's Dirty Little Secret"

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Mar 24th, 2011 at 01:07:37 PM EST
[ Parent ]
"Hypocrisy" is such a crude word. I prefer "ethical arbitrage."

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 24th, 2011 at 09:47:27 PM EST
[ Parent ]
Hm, yes, but complexity also has the consequence of benefitting large companies over small as information is not held equally (despite being a standard assumption of economics) and a larger organisation can spend more to bring down taxes a percent.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Fri Mar 25th, 2011 at 09:18:11 AM EST
[ Parent ]
As well as that, I suspect many of the tax "allowances" are specifically targeted at larger globally mobile businesses in strategic sectors which France wants to attract - and are thus not available to smaller indigenous companies.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 10:11:03 AM EST
[ Parent ]
Inasmuch as the tax rebates relate to capital expenditure, that doesn't really matter. Only large corporations can muster the sort of capital intensity that merits such rebates.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 25th, 2011 at 12:04:22 PM EST
[ Parent ]
But a big company can use the loopholes and as a rule, the more complexity the more loopholes.

As an example a recent documentary about how IKEA does not pay taxes mentioned that they bought a recently constructed refinery and then rented it out to the oil company that built it for a couple of years, after selling it back. This allowed IKEA to make deductions for capital investment.

The local furniture store will not do similar things as they do not have a division of tax lawyers to think up such tricks.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Mar 25th, 2011 at 04:49:58 PM EST
[ Parent ]
Depends on how you define a "large". Even a small company with just a few hundred or a thousand employees can be capital intensive. Like a small power utility which owns hydro or wind plants, or a research company, or a niche hi-tech manufacturing company.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Mar 25th, 2011 at 07:46:28 PM EST
[ Parent ]
Meanwhile, there's hopeful news from the summit.

A few things to note about these news:

  1. Portugal is not committing economic Seppuku, and will not be able to do so for some months - which is hopefully too long to maintain the fiction that DeutcheBank is solvent. Once there is no longer any pretense that Germany can avoid contagion, the pressure on the peripherals is going to lessen. The public can't distinguish between ten billion € and a hundred billion €, so the domestic gain from further antagonising European partners drops markedly once it becomes clear that the costs will reach ten figures no matter how hard you try to squeeze blood from the stone.

  2. The Irish government is dragging its feet on making deals until it knows the facts - whatever misgivings I may have about Fine Gael, this is leagues ahead of Fianna Fail in terms of strategy. Hopefully, they are dragging their feet because they know that the stress tests will show that the banks are still zombies even after all the bailouts, and are planning to use this fact as air cover for a partial default.

  3. The Serious People have begun talking about restructuring German and French banks. This is hopeful, and at least a year ahead of my own schedule (I had predicted that they'd go through two or three attempts to paper over the problem with the EFSF and various successors before beginning to talk about bank restructuring).

  4. The German "competitiveness" pact was going to blow up - spectacularly - within a very short time, because it's economically insane (and the next best thing to mathematically impossible for member states to adhere to). The sooner it blows up, the less damage it will do before it's scrapped.

  5. The Serious People are talking about greater unity among the countries being targeted by the deficit errorists. Again, this is months to a year ahead of my own over/under. And the sooner we get concerted pushback against the mercantilists, the sooner we can start discussing actual solutions to the real problems, as opposed to phoney-baloney "competitiveness pacts."

The guests in the studio are quite good. The dude with the greasy hair and blue suit is better than the portly guy in the striped suit, but even the striped suit is better than anybody in Danish public discourse. The only other Serious Person I've seen who had a similarly clear view of the reality on the ground is Münchau. The foreign correspondents they tubed in, on the other hand, are mostly useless. They could have been cut from the program without loss of generality.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 24th, 2011 at 09:54:13 PM EST
The portly guy in the stripped suit is Pat Cox, former President of the European Parliament.  He is a politician, not an economist. The greasy guy is Constantin Gurdgiev who has consistently been one of the best economic commentators arguing the unavoidability and inevitability of default. 270% debt to GDP ratio for Ireland conveys the sense of reality.  This whole crisis needs to be reframed from Ireland versus Germany (the German framing) to taxpayers versus private investors in banks, the more correct framing.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 05:27:58 AM EST
[ Parent ]
I actually would like to frame the Euro crisis as the Growth and Stability Pact versus everyone, because the GSP is macroeconomically illiterate.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Fri Mar 25th, 2011 at 05:41:10 AM EST
[ Parent ]
Would it be worth sketching out what a progressive alternative would look like in a Diary?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 01:23:53 PM EST
[ Parent ]
  1. The European Union should develop a true, discretionary federal budget, as opposed to the ad-hoc and largely non-discretionary CAP and structure transfers. This policy should serve three objectives:

    • First to design and implement industrial policy in those member states which are under-industrialised or which run structural trade deficits against the rest of the €-zone.

    • Second, to fund harmonisation efforts in workplace safety rules, health care and other areas where harmonisation to a civilised level would be so expensive for poorer member states that they would insist on harmonising to third-world levels.

    • Third, to ensure full employment by spending into depressed economies, in accordance with the first two objectives (occasionally depressed economies always have some infrastructure project or another that would be worthwhile to do, while chronically depressed economies usually need systematic industrial policy).
  2. Scrap the current mandate of the ECB. Replace it with a three-pronged financial stability mandate:

    • Ensure financial stability by moving to a full-reserve banking system and conducting monetary policy through the discount window.

    • Ensure financial stability by using differential rediscount rates to kill speculative bubbles.

    • Ensure financial stability by purchasing, on the open market and with Euros created ex nihilo, sufficient foreign currency to match the gross foreign currency exposure of the private European banking system (this kills carry trades stone dead). Further, do not permit the real exchange rate to rise by more than one percent per month against a trade-weighted basket of currencies (if the markets really believe that the € is worth much more than it's traded for, the ECB should use the opportunity to add a little seigniorage income to its war chest).
  3. On the income side, the federal EU level should:

    • Levy taxes on real estate, because this is a persistent cause of financial and macroeconomic instability.

    • Auctioning pollution rights, fishing quotas, etc., where the aggregate quota should be set at the federal level, and where there is no sound economic argument for giving quotas away for free.

    • Levy Tobin taxes on financial transactions.

    • Levy import duties on countries that practise subsidy-by-environmental-despoliation and subsidy-by-dead-workers.

    These are the taxes that it makes more economic sense to collect at the federal than at the state level. Obviously, the federal level can harmonise other taxes (or tax indirectly through the states for that matter) if it finds its revenues insufficient for the macroeconomic policy it wishes to pursue.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 25th, 2011 at 02:10:43 PM EST
[ Parent ]
That's a good one.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Fri Mar 25th, 2011 at 02:21:27 PM EST
[ Parent ]
This definately does deserve a diary of of its own.

Some Observations:

  1. No mention of inflation targets for the ECB!

  2. How to you assess real estate on a pan European level for the purposes of taxation?

  3. You are proposing a Federal Government for the EU (or is it just the Eurozone?).  How will that fit in with existing institutions and how will it enhance its democratic legitimacy in line with it's increased powers? - Head of Commission becomes Prime Minister hired/fired by Parliament? President of the Council becomes directly elected Federal President

  4. Why would Germany vote for a "Transfer Union"

  5. Why would smaller member states vote for a Federal Government likely to be dominated by the major powers?

  6. How will the above structures accommodate Sarkozy's ego?

  7. How big must the Euro crisis become before your proposals become "serious"?


Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 02:34:14 PM EST
[ Parent ]
  1. The central bank does not have any appropriate tools for inflation control. And after policing currency policy and financial stability it wouldn't be able to police inflation even if it had the tools to do so in the first place (because an inflation mandate would often conflict with the stability mandate). Inflation control is a fiscal and industrial policy objective, and not a terribly important one at that.

  2. Initially, I rely on member states' own auditors, but using a common set of definitions. Ultimately, of course, it would be better to have a corps of auditors directly employed by the federal bureaucracy. My idea would be that you would pay tax on the higher of the auditors' assessment or the sale price, but the ECB would only rediscount real estate loans up to 80 % of the lower of the two. That should kill speculative bubbles dead real fast.

  3. Yes, I am. My preference would be to make the ECB answer to the Commission, make the Commission serve at the pleasure of Parliament and reduce the Council to an advisory position.

  4. Because otherwise they'll get a messy series of defaults, that will make their banks insolvent. Repeatedly.

  5. Because it would answer to Parliament, which is the only European institution that actually divides itself along ideological rather than national lines.

  6. They won't. Fortunately, Sarko is a temporary problem.

  7. Don't think "how big." Think "how frequent." I never believed for a moment that sane policy would result from the current crisis. But since the insane policy currently on offer would recapitulate the crisis at most ten years down the road, we will have another opportunity within a foreseeable time frame. And, as I said above, I am cautiously optimistic, since the peripherals seem to have gotten their act together a lot faster than I expected.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 25th, 2011 at 02:49:02 PM EST
[ Parent ]
Make this a diary on the Euro summit...

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11
by Migeru (migeru at eurotrib dot com) on Fri Mar 25th, 2011 at 05:43:34 AM EST
[ Parent ]
Irish commentators are calling the Summit a success because Ireland managed to avoid all discussion on the Irish situation on the grounds that properly informed discussion must await the bank "stress tests" - despite the fact that they probably have a very good idea of the results.  According to sources, the Irish Govt. wants the Irish situation to be discussed by Finance ministers, not Heads of Govt/State, chiefly because they regard Sarkozy as batshit crazy, and Merkel as being under too much domestic pressure at the moment..

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 01:28:44 PM EST
[ Parent ]
What has you watching Irish TV programmes over the net in Copenhagen?  Is Danish TV that bad?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 10:05:15 AM EST
[ Parent ]
I watched this because another Irish I've been in touch with earlier mailed me a link.

But yes, Danish TV is that bad. If this is typical of the quality of Irish TV, maybe I should start watching it on a more regular basis.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 25th, 2011 at 12:06:03 PM EST
[ Parent ]
Current affairs programming - on RTE1 and Radio 1 is generally quite good.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 01:22:19 PM EST
[ Parent ]
"the advantage of being English speaking is being eroded every year that English becomes the more universal lingua franca."

While I agree with the rest, I am more sceptical of that.

Yes, more people will speak English as it becomes more universal (can it become MORE so? Oh my, the horror...).

But then the value of the advantage also increases as the use of English rises. And the fact that even top academies keep churning out people who speak awful English was again on display two days ago, when I had to completely retranslate a commercial proposal that had to be posted before midnight -I completed it at 10pm so it was in time but...

Being a native speaker is bound to remain an advantage. I can probably speak and write better English than many natives, but it tires me much faster to do so and I will find it harder than them to understand what is being said in a noisy environment. And that is despite having come top in English in the top French Grande Ecole (amongst 450 students).

Now, I know that some people will argue that English with an Irish accent IS a foreign language...

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Fri Mar 25th, 2011 at 04:27:48 AM EST
Can you speak Kerry, sing Cork, or deal with that awful accent from Norn Ireland?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 05:13:10 AM EST
[ Parent ]
Isn't the initial goal to harmonize the corporate tax base, rather than the tax rate? That would do away with the problem in short order, if countries defines things the same way for taxation purposes.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 25th, 2011 at 06:23:27 AM EST
That is the purpose of the CCCTB - Common Consolidated Corporate Tax Base proposals from the Commission - which seem to be running into opposition from a number of quarters - not just Ireland. However that is also not how Sarkozy/Merkel are framing their opposition to Irish tax rates, which is based on populist perceptions of headline rates. But yes - the CCCTB would be the obvious compromise for all to pursue once we get the populist guff out of the way.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Mar 25th, 2011 at 08:30:31 AM EST
[ Parent ]


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