Ireland to opt out of EU recovery plan

Daithio

http://www.irishtimes.com/newspaper/breaking/2008/1126/breaking46.htm

State unlikely to join Commission recovery plan

Ireland is unlikely to join a €200 billion economic recovery plan unveiled by the European Commission, the Department of Finance indicated this afternoon.

The commission plan aims to stimulate spending and boost consumer confidence by injecting purchasing power. The commission president José Manuel Barroso said the plan was "timely, temporary and targeted".

Member states are expected to contribute €170 billion while the European Union will give €30 billion. While welcoming the Commission’s move - saying it will boost demand - the Department said the State has “no room for manoeuvre in terms of a further fiscal stimulus”.

This is because next year's general Government deficit is budgeted to be 6 per cent. Under existing spending plans the State’s capital investment will increase to 5 per cent of GNP, which the Department says is almost twice the EU average.

This coupled with “relatively low tax rates for the employed” are broadly consistent with the commission recovery plan, the Department suggested.

The priority for countries like Ireland, with relatively high general government deficits, is to get the public finances back in order, it indicated.

A spokesman said not all member states have a similar capacity to provide their economies with a further financial boost by relaxing their finances.

He said the Government would be given time to reduce its deficit below 3 per cent and said this must be achieved or face having the State’s commitment to maintaining credible public finances called into question.

The commission plan will need to be approved at the next EU summit on December 11th and 12th. The majority of the package will be implemented in 2009, while some measures would continue into 2010.

What are peoples' opinions on this? Is the EU's 3% deficit cap completely unrealistic in times like these?

Économiste Monétaire

There will be no, all inclusive, coordinated European fiscal stimulus programme, in my view, especially to that magnitude. Germany has already indicated that it will keep its current plan, Britain is blowing the dust of JMK, and some other members are simply too poor to find the cash.

The SGP rules won't be enforced--these are extraordinary circumstances. The real purpose of the SGP is to limit the effects of large countries' GGDs on smaller countries vis-a-vis the European economy.

Edit: Remember there are also countries trying to meet the criteria for entry to the Euro, large deficits are a big no-no for them.

BenjAii

According to The Economist if Ireland goes along with its current budget plans unchanged, it will have the largest budget deficit as a percentage of GNP that any eurozone country has ever had by the end of next year at 9%.

I'm not against the government borrowing money on our behalf to boost the economy, I just wish we could be a little more productive and imaginitive with how we use it.

Rather than giving it to people to blow on extra shopping (with VAT cuts), why can't we use it for investment in new small businesses and R&D. Far better in the long term.

admiralofthefleet

BenjAii wrote: »

Rather than giving it to people to blow on extra shopping (with VAT cuts), why can't we use it for investment in new small businesses and R&D. Far better in the long term.

VAT is being increased by a half of 1%

BenjAii

admiralofthefleet wrote: »

VAT is being increased by a half of 1%

I know, I was replying to the OP's proposition that our government should reverse its attempts to rein in public spending and increase borrowing, by for example following Britain's lead and forgoing some VAT revenue.

Économiste Monétaire

Seeing as there was an EU meeting yesterday about this issue: The governments agreed a 'watered down version' of the original plan.

Bloomberg.
WSJ.

Also, as Europerson pointed out here, there is a new blog with some of your favourite (crusty, and not so crusty) Irish economists, which is something worth bookmarking. Well, Colm McCarthy (Chairman of 'an Bord snip') wrote a piece this morning about whether Ireland should engage in a fiscal stimulus:

(Edit: Acronym buster for non-economic nerds: GGB = General Government Budget; NPRF = National Pension Reserve Fund; GDP = Gross domestic product; FT = Financial Times; Ricardian Equivalence.)

Colm Mc wrote:

Responding to Labour leader Eamon Gilmore’s suggestion of a fiscal stimulus at his party’s recent conference in Kilkenny, Jim O’Leary argued in yesterday’s Irish Times that the option is unattractive. I would like to expand on some of Jim’s points and offer a few more.

The first is that the Government’s fiscal targets for 2008-2011 will in all likelihood be over-shot significantly in 2008 and 2009, and will be hard to hit in the terminal year of 2011. The targets are (as per the Budget Stability Update), GGB deficits for the years 2008 to 2011 at 5.5%, 6.5%, 4.7% and 2.9%. The gross debt grows from 36% through 43.4%, 47.5% to 47.8%, while net debt starts at 25% and grows through 31% to stabilise at 34% for both 2010 and 2011.

To begin with, the out-turn for 2008 will be a GGB deficit of maybe 6.5%: the NPRF vauation was 10% of GDP at end-June, but can only be 9% at best now; and GDP for 2008 will probably come in under the figure assumed in this table. At end 2008, gross and net debt ratios will likely be 2 to 3 points higher for these reasons. But borrowing in 2009 could be in the 8 to 9% zone, rather than the 6.5% target, and the assumed growth in NPRF value in 2009 may not happen. There could be bank bail-out costs not included in the budgetary arithmetic. At end 2009, gross debt will likely breach 50% (of nominal GDP below the 2008 outcome), and the net debt ratio could approach 40%. These would be the numbers before the fiscal consolidation begins!

There is a casual assumption being made by some commentators, and possibly some Governments, that the sovereign debt markets will pony up whatever is required, at least for developed countries and certainly for Eurozone members. But Germany struggled with a bond issue during the week, secondary markets are illiquid, spreads have widened and the weakest Eurozone member (Greece) trades 1.65% above bunds at ten years. The second-weakest is Ireland at 1.35%, and some Eurozone countries with worse debt ratios are trading on narrower spreads than us.
Martin Wolf argued in the FT during the week that a weaker Eurozone member could, in principle, default. There cannot be a currency crisis, but there can be a credit crisis instead. Greece is the current bookie’s favourite, but Wolf described Ireland as ‘…a dramatic case’, noting the speed of the fiscal deterioration and the over-leveraged private sector.

The system as a whole needs to de-leverage, and there is no point offsetting a necessary balance-sheet improvement in the private sector with a public borrowing explosion. Indeed, de-leveraging the public sector through liquidation of the NPRF at some stage, and crystalising the painful losses, will need to be addressed. If you can’t easily sell debt, you may have to sell equities, as many hedge fund managers have discovered.
Any attempt by Government to stimulate will run up against Ricardian Equivalence anyway, even more so in the UK version, where the tax reductions are accompanied by specific commitments to increase taxes later. If the private sector is determined to improve its balance sheet through cutting consumption and investment spending, fiscal easing will either fail, in which case it is pointless, or ’succeed’ at the cost of frustrating the unavoidable private sector adjustment.

Finally, Mr. Gilmore proposed specific capital spending initiatives, such as school building. These may be better projects than some other components of the capital programme, but it is notoriously difficult to fine-tune with capital spending.

Link.

silverharp

Économiste Monétaire wrote: »

There is a casual assumption being made by some commentators, and possibly some Governments, that the sovereign debt markets will pony up whatever is required, at least for developed countries and certainly for Eurozone members. But Germany struggled with a bond issue during the week, secondary markets are illiquid, spreads have widened and the weakest Eurozone member (Greece) trades 1.65% above bunds at ten years. The second-weakest is Ireland at 1.35%, and some Eurozone countries with worse debt ratios are trading on narrower spreads than us.
Martin Wolf argued in the FT during the week that a weaker Eurozone member could, in principle, default. There cannot be a currency crisis, but there can be a credit crisis instead. Greece is the current bookie’s favourite, but Wolf described Ireland as ‘…a dramatic case’, noting the speed of the fiscal deterioration and the over-leveraged private sector.

That is spot on, what is going to happen sooner or later is that interest rates on long bonds (10 / 30 year) are going to go up. Finance will be hard to come by. It will be fun to watch the gov. come face to face with market realities

Économiste Monétaire

silverharp wrote: »

That is spot on, what is going to happen sooner or later is that interest rates on long bonds (10 / 30 year) are going to go up. Finance will be hard to come by. It will be fun to watch the gov. come face to face with market realities

Next year will be an interesting year for Ireland Inc. and the credit markets. The NTMA only published yesterday a revised plan for debt issuance in the coming years. (It's here.) I would wonder what the yield on those issuance will have to be if/when budgets of other European Governments take a greater turn to the negative.

silverharp

Économiste Monétaire wrote: »

Next year will be an interesting year for Ireland Inc. and the credit markets. The NTMA only published yesterday a revised plan for debt issuance in the coming years. (It's here.) I would wonder what the yield on those issuance will have to be if/when budgets of other European Governments take a greater turn to the negative.

A market Historian Bob Hoye whos work I follow see link, writes alot on what will happen to long dated yields in a credit contraction If history is a guide? there are some nice graphs at the bottom of the piece

http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10141


Mechanism

Reflecting very "easy" credit that is integral to every great bubble, real long interest rates have declined until speculation fails. As shown on the following page of charts, some of the declines have been huge.

Soaring real rates is one of the features of a post-bubble contraction, and is accomplished by falling prices and earnings power that impairs the ability to service debt.

A revulsion for most corporate debt soon encompasses long-dated treasuries such that nominal yields increase as the rate of CPI inflation declines.

In each case, the shock to the markets and policy makers was sufficient to end a generation's abuse of credit.

johnnyskeleton

BenjAii wrote: »

According to The Economist if Ireland goes along with its current budget plans unchanged, it will have the largest budget deficit as a percentage of GNP that any eurozone country has ever had by the end of next year at 9%.

If we manage to keep to 9% we'll be doing well.

http://www.thepropertypin.com/viewtopic.php?f=19&t=16339