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News : Irish Economy Last Updated: Jun 17, 2011 - 4:09 AM

Dublin Review of Books: Use the Mirror; The Irish economic crisis and the lack of enthusiasm for overdue reform
By Finfacts Team
Jun 14, 2011 - 6:09 AM

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The current issue of the Dublin Review of Books includes an article on the Irish economic crisis.

Michael Hennigan, Finfacts editor, says in the article that it is rare for a people to look in the mirror and accept that they have played some part in a national calamity. Both in politics and in economic commentary it seems more convenient to narrow the focus for blame to politicians in power, bankers and regulators. Reform throughout society is a less digestible concept. Commentators with a grip on the public megaphone are generally in comfortable positions despite the recession and support the status quo.

Our society remains a conservative one where, when change occurs it is at a glacial pace and where traditional trade unions appear to have a tacit understanding with wealthier players on the right of the political spectrum to avoid advocacy of change and fundamental reforms. That few journalists in the Irish broadcast media have the knowledge of economics and command of the facts required to challenge spoof is another factor. This was the situation in Ireland during the bubble times and the change in the interval has been marginal. 

Joschka Fischer, former German foreign minister, writes on the European Union that a union of solidarity will never work if some people retire at sixty-seven and others at fifty-five or sixty; if some duly pay their taxes and others do not; if some increase their competitiveness while others do not; if some save while others amass increasing debt.

Recent events will either lead to a profound encroachment on member state sovereignty, or the actions taken will not work. In the latter case, the euro as a common currency will also cease to function.

Michael Lillis, a former head of the Anglo-Irish Relations division of the Department of Foreign Affairs, writes a tribute to the late Dr. Garret FitzGerald.

Dublin Review of Books- -  Summer Issue

Related Irish Economy Blog thread

Karl Whelan, an economist at University College Dublin, says on the Irish Economy blog that Michael Hennigan's views are 'nonsense.'

Whelan who worked at the Central Bank during the bubble period, appears to be another defender of the comfortable status quo. He says nothing on reform of broken governance systems and like others he is quick to criticise politicians but don't expect him for example to make any proposals on his own institution that would challenge conventional wisdom at a time of stretched public finances.

The Blanket State Bank Guarantee

The issue of the blanket bank guarantee where Ireland was alone among Eurozone countries to provide a sovereign guarantee covering bank creditors such as bondholders, is discussed in Michael Hennigan's article.

On September 17th, 2008, days after the collapse of Lehman Brothers, Minister for Finance Brian Lenihan met celebrity economist David McWilliams, who urged the minister to issue a blanket guarantee. McWilliams wrote in the Irish Independent in 2009:

"He was worried that this guarantee idea was too radical. And I could understand this because he was the man who had to make the decision, not me.

I told him he simply had to guarantee everything for a limited period to make sure that an illiquid dilemma didn’t lead to an insolvency catastrophe ... I walked him out to his car and he reiterated the fact that his officials would explode if they knew he was there. I said I wouldn’t tell a soul if he didn’t.

The minister called me the next day and again on Friday, the 19th, when he rang to say they were contemplating a partial guarantee. My view was that such a move would accelerate capital flight, not avert it. From then on, we spoke on a daily basis, but he still wasn’t convinced and, from what I could gather, his officials in the department were dead set against a full guarantee, although they didn’t seem to be coming up with an alternative."

Last year Brian Lenihan said that during a telephone conversation he had on Sunday, Sept 28th, 2008 ‑ a day before the state bank guarantee was agreed ‑ Jean-Claude Trichet, ECB president, urged him to “save the banks at all costs”. This has become a battering ram for opponents of the ECB and John Bruton, former taoiseach, has raised it in an Irish Times article. However, Brian Lenihan, a lawyer, knew that a consequential decision should not depend on an informal phone conversation, whether or not Trichet would confirm the claimed words. There had been no contact with the heads of the key EU institutions as the policymakers in Dublin anticipated an inconvenient response.

Europe’s competition commissioner has said Ireland’s banking blanket bank guarantee was a mistake whose sweeping scope served to concentrate losses on taxpayers.

Joaquín Almunia told The Irish Times that the intervention in September 2008 resulted in citizens having to assume responsibility for losses that would have been “better distributed” in the absence of an unlimited guarantee.

The commissioner said the guarantee curtailed the capacity of the authorities to impose losses on senior bank bondholders and undermined the Irish sovereign.

Interviewed in advance of a visit to Dublin today, the commissioner said “Yes, indeed” when asked whether the guarantee as enacted was a mistake.

Almunia said the then government’s failure to notify the EU authorities in advance of the intervention was “very unfortunate” and noted that the initiative came as a big surprise among senior Eurozone figures.

“To my knowledge, everything was explained and [discussed] ex poste. I remember some conversations with the Irish authorities that they tried to explain to us why it was not possible to establish the contact, but in any case I think everybody learned from that experience, from that bad experience,” he said.

“If I remember well, it was at the end of the September 2008 when the Irish authorities – without notification here [Brussels] – extended an unlimited guarantee to assets, also to creditors; and all those bondholders that can benefit from this unlimited guarantee, they are protected.

“This was not our decision; even this was not a decision that had been notified here ex ante. We were dealing the day after with – how do you say? – a fait accompli.”

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