Friday, 26 February 2010

Between Dublin & Brussels

A birthday celebrated.


Our youngest daughter, Mary Elizabeth had a party to celebrate her 21st birthday last week.

We all had a great time. Mary Elizabeth is studying history in Trinity College, Dublin and is focussing on the twentieth century. The attendance at her party demonstrated to us how international student life in Dublin has become. There were friends there from the United States, England, France, Sweden and Australia.



New thinking on the debt crisis

I was in Brussels during the week to attend my first meeting of the Board of Directors of the Centre for European Policy Studies, CEPS, which had been voted one of the top ten think tanks in the world.

It is doing some really topical work on how best to cope with the effect of the euro of the unsustainable gap between income and expenditure in the Greek Government. A CEPS paper by Daniel Gros and Thomas Mayer suggests that the EU is better placed to manage an orderly rebalancing of the situation than the IMF would be. This is because the EU has more levers it can use to ensure that commitments given by Greece are adhered to. It can withhold structural funds and the ECB can decline to accept Greek bonds in its monetary operations.

CEPS suggests the building up of a fund to handle the funding of any future rescues that might be needed. Rather than burden the taxpayers of those countries who have managed their finances properly with the burden of helping out those who have not done so, CEPS suggests that the fund be built up to help out euro countries who may get into funding problems by small annual proportionate contributions/levies to be paid only by countries which are exceeding the EUs debt and deficit limits.

This would be a way of minimizing the risk of future problems while also creating a fund to deal with a problem if it does arise. I think this is a worthwhile idea. I hope it can be introduced without creating the need to amend the EU Treaties, which is very difficult to do.

A situation is which no bank, or no state, can ever be allowed to fail is impossible to defend because it rewards irresponsible behaviour.

The goal must therefore be to create a situation in which banks, and even states, can be allowed to fail, but to do so in a managed and orderly way that does not lead to a sudden panic and the undermining of other banks, and states, that can manage their finances if given some breathing space. The absence of such arrangements contributed to the present crisis.

Competition does more than just keep prices down

Another contributor to our present crisis was the fact that some banks had simply become too big. If banks were all small and local, some of them could have gone out of business without creating a panic or bringing others down with them.

This brings up the argument as to whether the EU and the US anti trust/competition authorities should have or use more power to force overlarge banks or analogous institutions to sell off parts of their business to new competitors.

I believe this question of ” bigness” and how to control it will become one of the major economic policy questions of the next ten years, because the problems of “too big to fail are not confined to banking. It will be controversial too because the shareholders in the companies that are too big will not want to be forced to sell off assets and many of those shareholders are pension fund representing ordinary saver and employees.

The EU Competition rules are there to deal with this. Their goal is of course to keep prices low by guaranteeing completion. But they do more than that. They prevent too much concentration of power, power that could be used to stifle innovation, or to exercise undue influence over the political process

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