What if ?

mediator1964

What if we had played by the rules which are laid out in 2012 treaty for the last decade, can anyone run those numbers, I think it would give an insight into their effectiveness or otherwise.

PopeBuckfastXVI

mediator1964 wrote: »

What if we had played by the rules which are laid out in 2012 treaty for the last decade, can anyone run those numbers, I think it would give an insight into their effectiveness or otherwise.

Didn't we run surpluses all through the '00s?

Running a surplus certainly didn't create any austerity that I could see, also didn't prevent the private debt bubble, but then the rules aren't designed to prevent private debt, only unsustainable public debt, like Greeces.

A more interesting question is where would Greece be now if *they* had played by these rules?

Triangla

True on the surplus fact.

The austerity measures would not have prevented the boom - bust as it only kicks in when your budget has a deficit.

PopeBuckfastXVI

Triangla wrote: »

True on the surplus fact.

The austerity measures would not have prevented the boom - bust as it only kicks in when your budget has a deficit.

I think the very fact that you can have year after year of bountiful giveaway budgets coupled with overall debt reduction, while still being well within the limits shows that it isn't about austerity at all.

later12

mediator1964 wrote: »

What if we had played by the rules which are laid out in 2012 treaty for the last decade, can anyone run those numbers, I think it would give an insight into their effectiveness or otherwise.

You can quite easily run a structural deficit of <0.5% and a debt to GDP ratio of below 60% and still end up with a property bubble and a banking collapse if that's what you mean.

In fact, the receipts from capital assets would be quite an attractive way of maintaining those sorts of parameters so long as the boom lasted. One might argue that stringent fiscal rules combined with an electorate demanding lots of nice goodies would be very conducive to boom-stoking economic policies.

Triangla

PopeBuckfastXVI wrote: »

A more interesting question is where would Greece be now if *they* had played by these rules?

I think if Greece played by the rules they wouldn't have even been allowed into the Euro.

http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010

Nice article here from 2 years ago.

PopeBuckfastXVI

later12 wrote: »

You can quite easily run a structural deficit of <0.5% and a debt to GDP ratio of below 60% and still end up with a property bubble and a banking collapse if that's what you mean.

In fact, the receipts from capital assets would be quite an attractive way of maintaining those sorts of parameters so long as the boom lasted. One might argue that stringent fiscal rules combined with an electorate demanding lots of nice goodies would be very conducive to boom-stoking economic policies.

Democracy is very conducive to boom-stoking economic policies.

The fact that the biggest boom in our economic history happened prior to the obligations of this treaty becoming law makes your hypothetical causation appear specious.

later12

No... it would make any link between the last bust and austerity completely specious. Of course, nobody is making that connection.

Hypothetically, a pressed Government with a reasonably free economic rein could well be tempted to arrive at some revenue raising measures which are undesirable in the long term. If anything, that's an argument for greater co-ordination of Euro Area economic policy, which despite its name the TSCG does not deliver.

In its absence, I think it's reasonable to at least remark on all sorts of hypotheses; so long as we don't do a Danny McCoy on it and pretend there is some sort of inevitability attached.

mediator1964

later12 wrote: »

You can quite easily run a structural deficit of <0.5% and a debt to GDP ratio of below 60% and still end up with a property bubble and a banking collapse if that's what you mean.

Scorn not my simplicity
I was looking for a reason to vote yes or no

RandomName2

mediator1964 wrote: »

What if we had played by the rules which are laid out in 2012 treaty for the last decade, can anyone run those numbers, I think it would give an insight into their effectiveness or otherwise.

No difference. At all.

PopeBuckfastXVI

mediator1964 wrote: »

Scorn not my simplicity
I was looking for a reason to vote yes or no

The treaty doesn't address the reasons for our economic collapse, it's not designed to. Our collapse was due to a self inflicted private debt bubble, followed by Fianna Fail's disastrous decision to provide a blanket guarantee of all Irish banks.

This treaty is about ensuring that no government in the eurozone (which has signed up to the treaty), will run large structural deficits as a policy, without worrying about racking up debt. This is because if those debts become unsustainable and that government defaults we are all in trouble because we use the same currency, their actions affect us, not just them. This does not preclude giveaway budgets and excellent public services, so long as they are not provided on unsustainable borrowing.

Alongside that signing this treaty gives access to a fund which can be used by distressed countries (such as ours) who cannot access the private bond markets without incurring serious financial penalties in the form of increased rates. The reason this so called 'blackmail' clause is built into this treaty is that the fund should be only accessible to countries who have signed up to being financially responsible, and indeed why should countries who wish to borrow recklessly have access to the insurance policy of those who are showing more restraint, and funding the thing?

I can't tell you how to vote though, you'll have to decide that for yourself

meglome

RandomName2 wrote: »

No difference. At all.

Does that stop it being a good idea for the future?

seamus

No, it would have made no difference during the boom years because we ran surpluses for so long.

However, if these kinds of budgetary rules had been in place during the last bust - from the 80s - then there's a fair argument that the measures which would have been implemented at that stage with our budgets subject to peer review, would mean that we'd have entered the boom years on a sustainable tax base with measured fiscal policies.

Chances are we would have experienced slightly more stifled growth (less runaway spending), but at the far end we wouldn't have found ourselves €18bn in the hole and having to invent new revenue streams to replace the highly volatile ones we had come to rely on.

That's really the timescales you're looking at here. The stability treaty is a preventative measure, not a curative one. It's purpose is not to help us now, but to stop us from getting here again.

later12

seamus wrote: »

However, if these kinds of budgetary rules had been in place during the last bust - from the 80s - then there's a fair argument that the measures which would have been implemented at that stage with our budgets subject to peer review, would mean that we'd have entered the boom years on a sustainable tax base with measured fiscal policies.

We did enter the boom years on a sustainable fiscal policy. The measures implemented in the late 1980s were perfectly sustainable; indeed they are occasionally held up as a global model for 'expansionary austerity'. But economic policy is not adequately dealt with in this treaty, it's mainly about the bare indicators.

K-9

RandomName2 wrote: »

No difference. At all.

Would it not have kicked in in 08/09 when we started running huge deficits and gave banks huge bailouts increasing our debt above 60%?

itzme

later12 wrote: »

But economic policy is not adequately dealt with in this treaty, it's mainly about the bare indicators.

A question for you on this later12, I was considering responding to the OP on this particular issue.
To me, I think strong tight economic policy in the treaty has been intentionally (and correctly) left out. This is to allow for a country to have political autonomy to make decisions on its economy that suit it at that time. To put it very simply, policies that would work for a German recession are not guaranteed to work for an Irish recession, French, Belgian....
Can you think(/be kind enough to tell me) of many policies that have been left out that are applicable in a full European context?

later12

K-9 wrote: »

Would it not have kicked in in 08/09 when we started running huge deficits and gave banks huge bailouts increasing our debt above 60%?

Presumably they could get away with it under Article 3 of the Treaty:

1. (c) the Contracting Parties may temporarily deviate from their respective medium-term objective or the adjustment path towards it only in exceptional circumstances, as defined in point (b) of paragraph 3;

3. (b) "exceptional circumstances" refers to the case of an unusual event outside the control of the Contracting Party concerned which has a major impact on the financial position of the general government or to periods of severe economic downturn as set out in the revised Stability and Growth Pact, provided that the temporary deviation of the Contracting Party concerned does not endanger fiscal sustainability in the medium-term.

PopeBuckfastXVI

itzme wrote: »

A question for you on this later12, I was considering responding to the OP on this particular issue.
To me, I think strong tight economic policy in the treaty has been intentionally (and correctly) left out. This is to allow for a country to have political autonomy to make decisions on its economy that suit it at that time. To put it very simply, policies that would work for a German recession are not guaranteed to work for an Irish recession, French, Belgian....
Can you think(/be kind enough to tell me) of many policies that have been left out that are applicable in a full European context?

Indeed, it leaves the individual Government the freedom to come up with an action plan which is based on either growth, cuts, or some combination of the two.

Highly sensible, in my own opinion.

later12

itzme wrote: »

A question for you on this later12, I was considering responding to the OP on this particular issue.
To me, I think strong tight economic policy in the treaty has been intentionally (and correctly) left out. This is to allow for a country to have political autonomy to make decisions on its economy that suit it at that time. To put it very simply, policies that would work for a German recession are not guaranteed to work for an Irish recession, French, Belgian....

Of course, but having said that, it is architecture supporting the economic governance of the Euro Area which is lacking. We cannot have a situation where an economic and monetary union only vaguely requests that its members consult one another on major economic policy changes. Nobody has addressed the issue of why Ireland and Spain were allowed to pursue particularly disastrous domestic policies; there is nothing in the Treaties which makes us confident that the situation has been addressed so that major sovereign crises of similar geneses could not happen again down the line.

RandomName2

meglome wrote: »

Does that stop it being a good idea for the future?

In isolation, it probably does, although from a Eurozone POV, it doesn't.

RandomName2

K-9 wrote: »

Would it not have kicked in in 08/09 when we started running huge deficits and gave banks huge bailouts increasing our debt above 60%?

In such a case it would have made our recession even nastier. Woop.

Vita nova

mediator1964 wrote: »

later12 wrote: »

You can quite easily run a structural deficit of <0.5% and a debt to GDP ratio of below 60% and still end up with a property bubble and a banking collapse if that's what you mean.

Scorn not my simplicity
I was looking for a reason to vote yes or no

In the context of a referendum, we need to examine the relative merits of both options as looking at one option in isolation is not very useful when it comes to making a choice.

There are things which we can say for certain. The status quo does not work; it did not prevent the extreme boom-bust of the last 10 years, and that is a matter of historical record. Given it didn't work in the past, it's unlikely to work in the future - see Albert Einstein's definition of stupidity.

Nobody can say for certain if the new system would work, so the question is: is it more likely to prevent the economic conditions we experienced than the existing system and why? During our boom we ran surplus, and the new system would not be triggered by such surpluses. However, the new system commits us to more oversight of our economy at a national, and more importantly, international level. I would imagine that rogue economic behaviour would get a lot more attention than heretofore especially from those reviewers from outside of Ireland, and that might be enough to cause our government to reconsider. So although the proposed system is far from perfect, it's certainly seems better than the totally dysfunctional system we have now, furthermore, it's the only new system on offer.

.

K-9

later12 wrote: »

Presumably they could get away with it under Article 3 of the Treaty:

25% debt to GDP to over 100%, that would effect fiscal sustainability in the long term, I would have thought.

RandomName2 wrote: »

In such a case it would have made our recession even nastier. Woop.

How so?

swampgas

My (somewhat limited) understanding of the rules is that the structural deficit has to be kept at less than 0.5% - so when we were running a big net surplus during the construction bubble, would the construction related component of that surplus have been counted as structural or not?

If not, presumably the underlying weakness of the economy (eroded tax base for example) would have been noted and action would have been required?

later12

K-9 wrote: »

25% debt to GDP to over 100%, that would effect fiscal sustainability in the long term, I would have thought.

But sure that was done with repeated, ongoing assurances that not only was it fiscally sound, anything less would be fiscally and economically irresponsible. Even today we are told it is sustainable.

You don't always start out on a path like that knowing it will become unsustainable, you often discover it is unsustainable over time.

later12

swampgas wrote: »

My (somewhat limited) understanding of the rules is that the structural deficit has to be kept at less than 0.5% - so when we were running a big net surplus during the construction bubble, would the construction related component of that surplus have been counted as structural or not?

Part of it probably would have been; there are things called cyclical sensitivity measurements which are an econometric exercise designed to catch this sort of thing. But there are any number of methods of calculating the structural deficit, with widely vacillating results depending on the methodology and the benefit of hindishgt. For example, in 2006 the EU Commission said Ireland enjoyed a structural deficit of just 2.2% while the IMF said it was well more than twice that, at 5.6%. In hindsight, both would say something different.

K-9

later12 wrote: »

But sure that was done with repeated, ongoing assurances that not only was it fiscally sound, anything less would be fiscally and economically irresponsible. Even today we are told it is sustainable.

You don't always start out on a path like that knowing it will become unsustainable, you often discover it is unsustainable over time.

True, the blanket guarantee would have raised a few eyebrows with the budget oversight panel though!

meglome

K-9 wrote: »

True, the blanket guarantee would have raised a few eyebrows with the budget oversight panel though!

Perhaps it's my positive nature but I'd like to believe this too. And it's one of the main reasons I'd like a Yes vote in this treaty so future Irish governments will find it much more difficult to wreck the place with poor fiscal policies.

later12

K-9 wrote: »

True, the blanket guarantee would have raised a few eyebrows with the budget oversight panel though!

That depends whether you they thought the 30th September guarantee was a bad idea or not. I know it's the popular thing to deride it, but with the possible exception of covering dated sub debt, I don't feel we can say with confidence that the EU leaders or the FAC would have opposed the Guarantee - aka "the cheapest bailout in history".

meglome wrote: »

Perhaps it's my positive nature but I'd like to believe this too. And it's one of the main reasons I'd like a Yes vote in this treaty so future Irish governments will find it much more difficult to wreck the place with poor fiscal policies.

Policies? As long as they stick within the fiscal indicators, they are essentially free to pursue whatever fiscal policies they choose; that includes stoking a property bubble or blowing it all on fizzy drinks.

K-9

later12 wrote: »

That depends whether you they thought the 30th September guarantee was a bad idea or not. I know it's the popular thing to deride it, but with the possible exception of covering dated sub debt, I don't feel we can say with confidence that the EU leaders or the FAC would have opposed the Guarantee - aka "the cheapest bailout in history".

The problem from the Brussels end seemed to be going of and doing things unilaterally, an overnight decision without informing them. Maybe they would have thought it was a eureka moment.

What makes you think they would have gone along with "the cheapest bailout in history" line?

later12

K-9 wrote: »

What makes you think they would have gone along with "the cheapest bailout in history" line?

Nothing at all, I'm not suggesting they would have had done so. But when Lenihan used that term, we did not at that time understand the extent of the problem that was emerging. That's the only point I'm making. In some alternate universe, the Guarantee might have had turned out to be the cheapest bailout in history. People love to say "ah I always knew things were going to get this bad" but I'm not quite sure that's true.

It's very easy to look back on fiscal policy and say "that was a decision which led to an unsustainable fiscal and economic situation for the sovereign", but when you're going through it, that clarity does not exist. Sustainability is a bit like a structural deficit: you only ever really understand it in hindsight, the further you are from the time series in question, and even then there are a myriad of interpretations of what sustainability actually means or how its can be arrived at in empirical terms.

Don't forget that despite what you or I may think today at 10am on the 26th of May 2012, we are being told that Ireland's debt level, which is expected to peak at 119% of GDP is still sustainable. We may not be told the same in one or two years time.

mediator1964

PopeBuckfastXVI wrote: »

The treaty doesn't address the reasons for our economic collapse, it's not designed to. Our collapse was due to a self inflicted private debt bubble, followed by Fianna Fail's disastrous decision to provide a blanket guarantee of all Irish banks.

This treaty is about ensuring that no government in the eurozone (which has signed up to the treaty), will run large structural deficits as a policy, without worrying about racking up debt. This is because if those debts become unsustainable and that government defaults we are all in trouble because we use the same currency, their actions affect us, not just them. This does not preclude giveaway budgets and excellent public services, so long as they are not provided on unsustainable borrowing.

Alongside that signing this treaty gives access to a fund which can be used by distressed countries (such as ours) who cannot access the private bond markets without incurring serious financial penalties in the form of increased rates. The reason this so called 'blackmail' clause is built into this treaty is that the fund should be only accessible to countries who have signed up to being financially responsible, and indeed why should countries who wish to borrow recklessly have access to the insurance policy of those who are showing more restraint, and funding the thing?

I can't tell you how to vote though, you'll have to decide that for yourself

Thank you for that concise explanation.

It seems like while our house is burning down the politicians have got together and said "Look over here there is a pretty kite in the sky"

meglome

mediator1964 wrote: »

Thank you for that concise explanation.

It seems like while our house is burning down the politicians have got together and said "Look over here there is a pretty kite in the sky"

Hmm that's not what I got from that at all.

K-9

later12 wrote: »

Nothing at all, I'm not suggesting they would have had done so. But when Lenihan used that term, we did not at that time understand the extent of the problem that was emerging. That's the only point I'm making. In some alternate universe, the Guarantee might have had turned out to be the cheapest bailout in history. People love to say "ah I always knew things were going to get this bad" but I'm not quite sure that's true.

It's very easy to look back on fiscal policy and say "that was a decision which led to an unsustainable fiscal and economic situation for the sovereign", but when you're going through it, that clarity does not exist. Sustainability is a bit like a structural deficit: you only ever really understand it in hindsight, the further you are from the time series in question, and even then there are a myriad of interpretations of what sustainability actually means or how its can be arrived at in empirical terms.

Don't forget that despite what you or I may think today at 10am on the 26th of May 2012, we are being told that Ireland's debt level, which is expected to peak at 119% of GDP is still sustainable. We may not be told the same in one or two years time.

Plenty questioned blanket guaranteeing the banks and Europe definitely seemed pissed off about it. Ireland was the only country that did it. Do you think they would have ok'd it, seriously?

later12

K-9 wrote: »

Plenty questioned blanket guaranteeing the banks and Europe definitely seemed pissed off about it. Ireland was the only country that did it. Do you think they would have ok'd it, seriously?

In the last post where you asked that, I did reply "I'm not suggesting they would have had done so."

I'm afraid anyone who says they would or wouldn't is saying something that is impossible to confirm.

What we do know is that these EU leaders and authorities have repeatedly said that Ireland's government debt is sustainable ex post, and anyway the Guarantee would not actually have affected the structural or proportional deficit/debt metrics since 350bn guarantee was merely contingent and notional. It's not quite clear what input this Treaty would even give them beyond the very vague co-ordination provisions.

hatrickpatrick

PopeBuckfastXVI wrote: »

Running a surplus certainly didn't create any austerity that I could see, also didn't prevent the private debt bubble, but then the rules aren't designed to prevent private debt, only unsustainable public debt, like Greeces.

This is my main argument against. It addresses the wrong problem. Government spending was indeed out of control, but the deeper issue of the entire financial and monetary system being poorly designed for the 21st century are not being addressed, and until they are, IMO anyone who claims that this entire problem can be solved by controls and limits purely on government spending is sorely mistaken.

This treaty wouldn't have prevented Anglo's misdeeds for instance, nor would it have solved the fundamental problem which is that banks are too big to fail, and customer savings are put at risk by bad lending policies. This is what needs to change, not government fiscal policy alone.

Scofflaw

hatrickpatrick wrote: »

This is my main argument against. It addresses the wrong problem. Government spending was indeed out of control, but the deeper issue of the entire financial and monetary system being poorly designed for the 21st century are not being addressed, and until they are, IMO anyone who claims that this entire problem can be solved by controls and limits purely on government spending is sorely mistaken.

This treaty wouldn't have prevented Anglo's misdeeds for instance, nor would it have solved the fundamental problem which is that banks are too big to fail, and customer savings are put at risk by bad lending policies. This is what needs to change, not government fiscal policy alone.

Those sorts of issues are being addressed by things like the establishment of the European Banking Authority: http://www.eba.europa.eu/cebs/media/aboutus/Speeches/Andrea-Enria-s--Speech----China-Financial-Summit.pdf

The difference is that we're not voting on those parts, whereas we are voting on the fiscal limits - but that doesn't mean the fiscal limits are the full extent of what is being done.

cordially,
Scofflaw

ixtlan

It's worth noting that the treaty does not just affect Ireland, and so the question of how it would have affected us pre-bust can't be taken in isolation.

Enforcement of the 60% debt rule would have forced Italy to address their competitiveness problems much sooner. Also more supervision of budgets might have brought the Greek issue to the foreground much sooner. And of course even Germany and France were breaching the rules, and stopping that might have restricted credit flows in Europe to some extent.

So, even if the property bubbles still happened here and in Spain, the EU might have been better able to handle it. Anyhow, regardless of how structural deficits might have been viewed in the past, you can be darn sure that such bubbles will be noticed in the future and action will be taken to make corrections. In the past states preferred to look the other way as regards how other states managed their finances. Now it's understood that a common currency does require supervision.

Ix.

swampgas

later12 wrote: »

swampgas wrote: »

My (somewhat limited) understanding of the rules is that the structural deficit has to be kept at less than 0.5% - so when we were running a big net surplus during the construction bubble, would the construction related component of that surplus have been counted as structural or not?

If not, presumably the underlying weakness of the economy (eroded tax base for example) would have been noted and action would have been required?

Part of it probably would have been; there are things called cyclical sensitivity measurements which are an econometric exercise designed to catch this sort of thing. But there are any number of methods of calculating the structural deficit, with widely vacillating results depending on the methodology and the benefit of hindishgt. For example, in 2006 the EU Commission said Ireland enjoyed a structural deficit of just 2.2% while the IMF said it was well more than twice that, at 5.6%. In hindsight, both would say something different.

Given that the range of figures in 2006 for structural deficit (2.2% - 5.6%) is well above the 0.5% proposed in the treaty, surely if the 0.5% limit had been in place, the government may have been forced to address the over-reliance on the property sector sooner?

Although I suspect that the real driver of change in future will not be the (new) rules by themselves, but the experience of having passed through the current crisis.