Budget 2011

March 24, 2011

Spring 2011

The British economy has to contend with two major problems at the moment: a quickening rate of inflation and a deteriorating fiscal deficit. The cause of each seems to have been public sector indulgence. The remedy for each will be public sector austerity.
In 2010, the Chancellor made a start, but only a start. He appeared to be tougher than he was. In last year’s budget, he spelled out spending cuts that would become effective only after months of delay. Unsurprisingly, having been left unattended, deficit and inflation both got worse.
Will things come right this year? Has the Chancellor done enough? Probably not. Even on his (optimistic) forecasts, the deficit will still be huge in four years time. On alternative (realistic) forecasts, it’ll be a lot worse.

Might he come back for a second bite of the cherry, therefore? Unlikely. Tough decisions have to be made in the first year of a term. Political resolve weakens as time goes. As attention shifts to the re-election campaign, the capacity for backtracking rises sharply.
What the Chancellor will want in the next couple of years is an economics revival. He’ll want to see living standards improving and the popularity of his party therefore rising. Is that what he’ll get? Probably not.

The economics cycle is not going to be helpful. Its periodicity is about 5½ years. Its last trough occurred in December 2008, and its next peak is consequently due in autumn 2011. Currently, we are still achieving growth, but at progressively slower rates. The moderation will continue for some time. Next year, there may be negatives, possible severe ones.

In any event, the growth will be insufficient to generate the tax revenues needed to fulfil official deficit improvement expectations. In his current budget statement, the Chancellor reduced the estimate for GDP growth in 2011. He may well have to do so for 2012 and 2013 as well!
And the electorate won’t relish protracted austerity. People don’t yet appreciate the extent of the mess into which the economy has been plunged. They might be prepared for a couple of years of difficult times, but not for five or even ten!

Who’ll be blamed? Incumbents rather than instigators! Memories of the awfulness of New Labour will fade. Appreciation of the awfulness of New Conservative will rise! There’s a better-than-evens chance that the next election will bring a return of the status quo ante.

Could the Chancellor have done a better job? No question. If he’d recognised the tendency for politicians to lose fiscal resolve in difficult circumstances, he’d probably have been a little bolder in his original proposals. Most importantly, he’d have recast the public sector’s pensions plans. He’d have opted for DC rather than DB (defined contributions over defined benefits). In any event, he’d have raised the retirement age for public sector workers—to the same as that in the private sector or, better, to something significantly higher (70 versus 68).
Doing so would have returned the country’s fiscal affairs, almost at a stroke, to balance. And, a little later, inflation might also retreat. Why? Because the addition to the labour force would depress wage settlements (particularly in the public sector).
Additionally, the Chancellor might have made a public example of his senior civil servants. It would have been salutary to have announced, immediately on taking office, a 15% pay cut for Whitehall’s top Mandarins (lower grades taking proportionately smaller cuts).

And, in the case of the worst offenders—the Home Office, Treasury and MOD—(in recognition of their chronically poor performance), cuts of 25%, say. For the Bank of England (for a similar logic), 40%. For the FSA (a fortiori), closure without compensation. For most quangos, likewise (not a publicity stunt, but actual closure).
That would have got the message across. That would have rammed home the seriousness of the problem. There’d have been strikes, of course. But would they be noticed? In any event, better to have them early in the term than late.

Instead, in his 2011 budget, the Chancellor was far from bold. His decision to cut corporation tax was sensible enough. But he oughtn’t to have reduced the rate by a footling 1%. He should have opted for a scenario-changing 10%. If he’d wanted to stop companies relocating elsewhere (and to start them doing so here again), he’d have needed to make a perceptible difference.

His changes to the personal allowance and to the fuel duty were politically inspired. He hoped to ingratiate himself with the electorate. He’ll probably be disappointed by the results.

Instead, voters may be irritated at his continued featherbedding of commercial bankers. And they are almost bound to blame him and his (Blair-lookalike) PM for having to stump up the costs of a third war; each as pointless as the others.

It’s no surprise that securities markets have been dull in recent weeks. The economy is bad and getting worse! The politicians out-of-touch, and getting out-of-toucher. The issues are being played with, not addressed.

Economics News

March 18, 2011

Tweddledee and Tweddledum agreed to have a quarrel,
For Tweddledee said Tweddledum had spoiled his nice new rattle.

Their differences of opinion are fabricated, not principled; to choose one is to get the other; electorates deserve something better!

Peak rates of growth occurred last summer; peak levels of activity are due this autumn.
In recent weeks, higher unemployment rates (lagging indicators) have been reported in a number of countries. There’s an implication, therefore, that the pace of economics growth in these parts of the world was running below-par as early as last autumn. And what’s happen¬ed since then? Is it more likely that there’s been a new quickening or a further slowing?

Recession in 2012?
No contest. The chronology of the business cycle suggests there’ll have been a moderation, and the fact that so many central banks were raising interest rates concurrently makes it likely that the deceleration will have been steep. Indeed, the risk is that 2012 will bring another recession.

Europe won’t fare well.
European countries are more precariously placed than most. In the EZ, there’s been deterioration for a generation, and the authorities don’t know what to do for the best. They can’t decide whether to tighten money to discourage exuberance in Germany, or to loosen it to discourage depression elsewhere. Catch 22. Whatever he does, Trichet’ll offend part of his constituency and undermine part of the region’s economy. No problem for him, though. He’s off to pastures new. He intends to deploy his insights in other areas!

Nor will Britain.
Britain doesn’t have those problems. But it does have others of its own; many just as intractable. The Coalition may be largely to blame. Pandering to their own supporters, the LibDems have dragged policy sharply to the left. New Conservative today is much the same as New Labour ten years ago.

In the former, the worry is the ECB; in the latter, the Coalition.
Cameron’s foreign policy, for instance, has become indistinguishable from Blair’s. Each leader allowing personal vanity to supersede national interest. Each enthusiastically engaging in dubious conflicts in the Middle East. Each spinelessly transferring sovereignty from elected representatives in the UK to unelected ones in the EU.

Politicians display too much vanity, too little logic.
And Osborne, pursuing taxation rather than efficiency, has become Brown-reborn. He’s spoken of the need for growth, but his actions have belied his words. Were it otherwise, taxes would have been cut, not raised; regulations scrapped not multiplied; quangos eliminated not reclassified. A higher retirement age would have been implemented immediately, not deferred indefinitely (it’d be higher in the public sector than the private one!).

The outlook for Britain’s budget isn’t good.
Will Osborne do any of these things in the forthcoming budget? Of course not. Nor would Balls have done so if he’d been Chancellor. They are as much the same creature as Cameron and Blair.

It’s better in the States.
Things are a little better in the States. The country’s foreign policy may be as daft as the UK’s, but its economics strategy seems more sensible. Efficiency and competitiveness have consequently been rising. GDP has responded. Shortly, the fiscal deficit may also start to contract.

And in Japan.
In Japan, earthquake and tsunami have done their worst. But the economy will come through it strongly. Indeed, activity in the next couple of years, from an admittedly reduced base, will grow fairly briskly.

Growth in the latter will quicken.
The country’s problem in the past has been its excess supply. That problem, at least temporarily, has been reduced. Spending on infrastructure and housing will rise strongly. Japan’s progress will quicken relative to that of the rest of the world.

And its deficit fall.
Some pundits are said to worry that the fiscal deficit will inhibit the economics recovery. Vice versa. It’s the recovery that will neutralise the deficit.

Equity indices will bounce temporarily.
In the near term, the securities markets will probably recover quite briskly. It was poor sentiment that depressed valuations. It’s a revival in the one that’ll lift the other. In the short term, monetary accommodation from the world’s central banks will work most of the magic. Later on, evidence of a robust revival in Japan’s economy will reinforce the better psychology.

Sentiment, de profundis, improve.
The paranoia about nuclear power will probably also wane. It’ll be appreciated that the sectors of the economy that generate most human suffering are tobacco and alcohol on the one hand, cars and mineral extraction on the other. Worst of the lot, of course, commercial banking! Electricity generation, the nuclear variety in particular, doesn’t figure on the list!

But there’ll be no sustainable rally for a while.
Will the rally be sustained? No. The world as a whole will grow unsatisfactorily. Rates of unemployment will continue to rise, living standards to fall. It’s not until inflation is back down to acceptable levels that central banks will turn on the money taps again; not perhaps until 2012 that the indices will begin sustainable advances.

Economics Views

March 16, 2011

One man sees advance where another sees retreat,
sunshine rather than shadow, hope not despair.

O. S. Marden—but which sees the more clearly; which forecasts the more accurately?

The news from Japan has been devastating.
For several days, global headlines have focused on events in Japan. Understandably, sentiment has tumbled. Less understandably, investors have downgraded equity valuations, and economists have cut GDP forecasts.

It’s coloured the analysis of investors and economists alike.
The standard analysis is that activity in Japan will fall as a consequence of the constraints imposed by the earthquake and tsunami. Private sector demand will be inhibited by rising unemployment; public sector demand by straitened finances. Recession is highly likely. And, via curtailed imports, the weakness might spread to the rest of the world!

They’ve let sentiment overwhelm logic.
Unlikely. Economics softness tends to occur when supply is excessive, not deficient. In the former, characterised by surpluses, companies reduce their capital spending and lay off their workers. In the latter, characterised by shortages, the reverse happens.

The reality is that Japan’s excess supply has been lessened.
Japan was suffering from excess supply. But recent events have reduced the surplus, possibly eliminated it. In many parts of the economy, there are shortages. Houses must be rebuilt, factories and roads repaired. Output may fall for a week or two, but it’ll revive strongly thereafter. Growth, from an admittedly lower base, will be stronger in the rest of the year.

Activity will quicken in consequence.
A good deal of the extra spending will be undertaken by the public sector. Initially, that’ll cause the fiscal deficit to hit new highs. Later on, as tax revenues respond to quickening output, the problem will go away.

Possibly inflation as well.
It’s possible that the economy’s shortages, intense in many sectors, will have an effect on consumer prices. Falling for much of the last twenty years, they might rise again in the next couple. Perhaps interest rates will be raised in consequence.

But trade surpluses will shrink, perhaps become deficits.
Will that cause the yen to appreciate? Probably not. The trade accounts won’t be strong. Imports’ll surge and exports stagnate. It’s not until the balance between supply and demand has been restored, 2013 at the earliest, that there’ll be a return to foreign trade virtuosity, not till then perhaps that the currency reverts to strength.

Good news for competitors; bad for suppliers.
For the rest of the world, the changes will be relatively modest, but not insignificant. The supply of manufactured goods will be curtailed, the demand for raw materials moderated. Temporarily, those parts of the developed world that compete with Japan in the provision of finished goods will benefit; those that specialise in the supply of commodities will take a small hit. Countries like Germany, Korea and China might as a result be more inclined to raise interest rates; Australia and Brazil more inclined to cut them.

Britain isn’t significantly either.
Britain’s economy will not be greatly affected. It’ll focus on domestic considerations. Near term, the budget will figure prominently. Later on, the outlook for the country’s financial services sector will be central. Neither offers much room for optimism.

It has to contend instead with domestic politicians.
Public spending hasn’t been cut enough; taxation raised too much. Companies are not relocating to Britain, but away from it! Those in finance, more than most. It’s a tragedy. And those in Government are largely responsible.

Little wonder that Britain’s asset valuations are under pressure. And there’s not much chance of near term amelioration. Tweddledum is no better, possibly worse than, Tweddledee.

Still Time to Dump Bailed-Out Banks

March 12, 2011

Governments bailing out failing banks was “an obvious mistake,” while global economic growth will “peak” in Autumn and another recession could follow, according to Roger Nightingale.

“You mustn’t buy out failing companies, whether they are banks or not,” Nightingale told CNBC Wednesday said. “Everybody looking at it now regrets that they bailed out those banks.”

It’s not too late to “pull the plug” and dump the banks, he added.

His comments came as bailed-out British lender Lloyds Banking Group unveiled management changes. The company said that its insurance and retail heads are stepping down. Lloyds is 41 percent owned by the UK government.

“When the bonuses come out, the general public feels slightly irritated,”  Nightingale said with a hint of understatement, on news that Royal Bank of Scotland, another state-backed bank, unveiled that its chief executive Stephen Hester will receive a 2010 pay package of £7.75 million ($12.5 million). The package will include £4.45 million in shares.

Growth Peaking

If a recession materializes, it could be especially severe on the back of rate hikes from central banks in emerging markets, as well as the European Central Bank expected hike in April, Nightingale said.

“Secularly high levels of personal debt and secularly low levels of personal sentiment” will also continue to weigh on growth prospects, he added.

Nightingale went on to say that governments’ “whistling” about a broadening and deepening recovery is just “to keep up their spirits,” and that they “know they’ve got it wrong. But they’re unwilling to admit it.”

Countries that are looking the least troubled include the US, Germany and Japan, in Nightingale’s opinion. But he singled out Britain as the country that has made more mistakes than others.



Banks Bailout was a Mistake

March 12, 2011

CNBC Television

9 March 2011

“We should never have let them go,” Roger Nightingale, strategist  told CNBC on the state rescue of Lloyds and RBS. “We should not buy up failing banks, it’s obvious it was a mistake.”

Economics Views

March 12, 2011

Natural disasters are easier to bear
than man-made ones.

They may be just as painful, but there’s nobody to blame.

Things seem to be getting progressively worse.
Floods in Australia and Latin America have been followed by earthquakes in New Zealand and, most recently, Japan. The outlook is quite grim: natural disasters reinforcing man-made ones! There’ve certainly been lots of examples of the latter: political misjudgment has been rife and economics mismanagement commonplace. Little wonder that investors are nervous, consumers pessimistic and voters disenchanted.

Is China’s economy stalling?
China, as always, is difficult to interpret. What was to be made, for instance, of reports of a much reduced trade surplus in February? Was the lowish export number a reflection of global qualms? Or the highish import one a consequence of domestic confidence? How much were the surprises in each the result of surging raw material prices and heightened political uncertainty? Opinions were not in short supply, but insight was.

Is America’s? Employment trends there . . .
It was much the same in the US. There too, the trade returns could be interpreted in a variety of ways. The balance had deteriorated despite record exports. But it wasn’t clear how much of the latter’s strength was due to rising volume and how much to softening currency. Nor was the split between commodities and manufactures immediately apparent. Some analysts thought the data encouraging, but most didn’t.

. . . may be softening.
America’s jobless claims, on the other hand, were unambiguous. Demand for labour had risen in the last six months or so, but was still modest relative to similar periods in earlier cycles. And the most recent data hinted at retrenchment; the implication was that the best of the recruitment phase might already be over.

The EU can’t do anything right.
Europe was in turmoil, meanwhile, politically and economically. Germany was competitive and faring well, but the rest weren’t. It was the “common currency” (the best irony is nearly always unintentional) that was the principal problem. It was dividing the Union, not bringing it together.

Greece is a disaster; Ireland’s similar.
Greece had already suspended both democratic principles and economics initiatives. Ireland was going the same way. It’d been instructed to ignore the wishes of the electorate and fulfil those of the Commission. Fine Gael might have replaced Fianna Fáil; Enda Kenny, Brian Cowen. But nothing else had changed. Nor would it so long as Ireland remained part of the Union.

Can Portugal and Spain resist the undertow?
Will Portugal also succumb? Will Spain? Both are teetering on the edge of the abyss and both seem to be losing their footing. It’s a vicious circle. As investors fret about defaults, bond yields rise. But that causes economics activity to slide, and investors to become even more anxious.

Probably not.
The Rating Agencies don’t cause the problem, but they do monitor it. They’re always behind the curve. They report what the market already knows, but the politicians often don’t.

They prefer to blame the messenger!
A couple of days ago, belatedly, the Agencies’ assessment of the safety of the bonds of Spain’s Government was lowered. The authorities in Madrid were upset. Likewise those in Brussels. Both thought they spotted an anglo-saxon conspiracy. Financial terrorists, they opined, oughtn’t to be allowed the freedom to express their opinions. In future, they’d have to be regulated!

Their societies are vulnerable.
For the moment, though, the outlook for a number of Europe’s economies is rather grim. Once the downwards spiral has begun, things get worse not better. That means there’s unlikely to be any way back for “the four” already under suspicion. And it’s not impossible that their number will be expanded in the months that lie ahead.

Britain hasn’t yet been suffocated, but Cameron’s worryingly complacent.
More by luck than judgment, Britain has thus far escaped the dangers. But the risks remain. The Coalition Government is a weak reed. It’ll not protect Britain’s Parliamentary system nor the City’s commercial interests. The election here, as in Ireland, changed the actors but not the drama!

Security markets are set to be dull.
And how are the securities markets going to fare? Not well. In the immediate future, there’s the prospect of instability in the oil-producing world and, to make matters worse, the risk of military intervention by those who misjudged the situation in the past in Iraq and Afghanistan!

Indices’ll drift.
Later on, slowing economies and higher interest rates will figure on the agenda. If retrenchment should turn to recession, there’ll be bankruptcies. The fundamental environment’ll not become favourable again until 2014. Time perhaps for a defensive strategy.

Economics Views

March 12, 2011

There’s no problem so trivial that an official inquiry,

assisted by expert evidence,  can’t make insoluble.

Public Pensions Provision illustrates the phenomenon:  a half-wit could have resolved the issue; a string of Government Ministers can’t.

The public sector is slow-moving and dull-witted.
In terms of palaeontology, the private sector seems to be the adaptable mammal; the public sector the sclerotic dinosaur.  The one adapts fairly quickly to changing circumstances; the other, glacially slowly.  Pensions provision illustrates the point.
The private sector, nimbler on its feet and in its thinking.
When, in the closing quarter of the last century, the defined-benefits model became untenable, the private sector responded flexibly and remained viable, but the public sector refused to acknowledge the changed environment and consequently became unviable.  Politicians, part of the public sector, reacted characteristically slowly.  Blair and Brown turned a blind eye to the problems, and it’s not yet clear whether Cameron will do anything different.
Their reactions to pensions issues illustrate the difference.
The Hutton Report is hardly encouraging.  It recognises the problem, but is reluctant to deal with it.  Instead of grasping the nettle by abandoning DB in favour of DC, it recommends compromise:  one that’ll satisfy neither the public sector worker nor the private sector taxpayer.  It’s a little spineless also on the question of the retirement age.  Instead of urging something that’s actuarially sustainable, it opts for more compromise:  ensuring that the issue will have to be revisited in years to come!

Lord Hutton is a dinosaur, reporting on dinosaurs.
It’s not only pensions that are going wrong for the Coalition Government.  Just about everything else is as well.  World activity is continuing to lose momentum.  Almost two-thirds of data releases these days are “disappointing.” The numbers, for instance, from China and India have slowed a good deal in recent months.  And those from the US are uninspiring.  Europe, of course, Germany excepted, is a mess.

The Coalition has other handicaps besides him.
But what’s especially worrying is the prospect of an economics slowdown coinciding with monetary restraint.  In much of the developing world, Central Banks have been lifting interest rates for some time already.  In many commodity producing countries, they’ve done likewise.  And, in the EZ, the ECB, despite its manifest problems, is talking hawkishly.

The world economy, for instance.
The implications are obvious.  The slowdown will be intensified.  Retrenchment is likely to become recession.

Living standards are being squeezed.
That’ll make life very difficult for the Coalition in Britain.  The electorate’s living standards will be hit and it’ll be incumbent politicians, rather than their predecessors who caused the problem, that’ll be blamed.  An early return to the status quo antecan’t be ruled out!

Is Cameron serious about another invasion?
The PM’s response to the troubles in North Africa is another source of anxiety.  He seems to think that military intervention (by Britain and others) would be helpful!   Really?   As helpful as that in Iraq or Afghanistan?

Let’s hope not.
Given the news-flow in recent sessions, it’s no surprise that markets have declined.  The chances are they’ll continue to be heavily influenced by the headlines.  That makes a short-term recovery quite likely!  It’s not necessary that the news become “good,” just less bad than it has been recently!

The markets have enough to worry about.
That said, it’s difficult to be very optimistic on a medium-term basis.  Economics and politics and finance are going to be difficult.  Corporate profits may hold up well, and inflation soften, but the indices are more likely to be lower by year-end than higher.

Economics News

March 4, 2011

Perceptions of the strength of the one may be false;
reflecting no more than the weakness of the other.

Joseph Conrad, Heart of Darkness—the author was talking of psychology and politics, but the proposition applies to economics also.

Britain’s recovery has come and gone.
Britain’s economy has been faltering for some time. And the latest data imply no near-term revival. On the contrary, they indicate that conditions are more likely to deteriorate than improve. The PMI index of services activity in January, for instance, was worryingly weak. It added to anxieties posed by reports of accelerating shop closures and quickening house price declines. A fairly grim outlook!

What lies ahead is retrenchment.
What’ll happen, it’s being asked, when interest rates are raised?
Trends elsewhere in the world are upwards, and Britain will have to follow suit or risk being treated as another financial pariah. But more expensive credit is bound to mean higher unemployment! And it’s that which will deal the economy a knock-out blow: house prices unsupported and retail spending squeezed.

The Coalition is being blamed.
Unsurprisingly, the Coalition’s popularity isn’t high.
In the Barnsley Central by-election, Labour won the seat with a substantially improved majority. The Conservatives, ranked third, surrendered a good deal of ground; the LibDems, ranked sixth, were slaughtered. Significantly, it was UKIP that took second place!

And will continue to be!
Cameron’s advisers are fretting about the chronology of the business cycle: activity isn’t likely to peak until autumn 2011, nor to trough until mid 2014. But the next election will be held in May 2015. That means there’ll only be twelve months of quickening activity before the Government has to go to the country. Is that enough to regenerate a feel-good factor? Almost certainly not!
Cameron has tried to divert attention elsewhere.

Can anything be done in the meantime?
Unlikely. But that’ll not stop the back-room researchers from trying. They’ve already persuaded the PM to propose a “big society” debate. To no great effect, though. It’s not caught the imagination of the public. Politicians are seen as wasteful and incompetent: they fail to deal appropriately with simple issues; they’re not to be trusted therefore with complex ones.

Cable will do likewise. But probably as unsuccessfully.
Undeterred, the Business Secretary is toying with the idea (not a novel one) of cutting red tape. In a recent speech, he acknowledged that regulation had got out of hand; it was strangling businesses and inhibiting job creation. That’s the conclusion that most of his predecessors had come to. But what had they done about it? They’d employed new sets of bureaucrats to control old ones! As usual, they’d made the situation worse, not better!!!
US, Japan and Germany look better placed.

Elsewhere in the world, most economies are losing traction.
But they’re doing so less dangerously than the UK’s. In the States, for instance, employment is rising and spending is reasonably strong. Growth is slower than “normal” for the current stage in the cycle, but it’s satisfactory nevertheless. In Japan and Germany, it’s much the same story; in the commodity producing world, likewise.

China and India are applying the brakes, though.
Not so, China and India.
Each is overheating (the latter much more than the former) and each is tightening credit therefore. The hope is that growth will slow by just enough to restore equilibrium. The risk is that the brakes will be applied too severely, and that growth will come to a complete halt.

Partly, that because the PRC fears popular protest.
China has an additional problem. It’s worried that it might have to contend with the sort of protests currently affecting North Africa. The authorities in Beijing recognise that the gap between haves and have-nots is enormous; of the same order as that which occurred in the closing decades of the nineteenth century in the US and Russia. China is bound to have noticed that, in the one, there was subsequently revolution; in the other, significant destabilisation.

Later, it’ll adjust taxation and introduce welfare.
What will China do to avoid a negative outcome? As far as possible, it’ll act pre-emptively, but equitably. On the financial front, it’ll try to keep the economy running smoothly; growing in line with potential, not in excess of it. On the social front, it’ll introduce (in the longer term) progressive taxation and social security.

Markets to drift; to fall moderately in second half.
And the securities markets? They’ve held up very well in recent weeks. Slower growth, higher raw material prices and fraughter politics have had little impact. Why not? Because corporate profits have been strong and liquidity, though beginning to be curtailed, is still plentiful. That’s the pattern that may persist for a while longer. In the next few weeks, the indices won’t soar, but neither will they sink. It’s not until the summer that the negatives will significantly outweigh the positives.

Economics Views

March 3, 2011

Democracy substitutes election by the incompetent many
for appointment by the corrupt few.

George Bernard Shaw, Man and Superman, but the misjudgments of the one are easily reversed, those of the other aren’t!

Voters are no worse at assessing the future than experts.
Elections look backwards, not forwards. They provide voters with an opportunity to signal their disapproval of politicians and policies deemed to have been unsuccessful in the past, rather than their approval of those likely to be successful in the future. As such, they are heavily influenced by economics conditions.

And just as good at judging the past!
Recent polls in Ireland illustrate the phenomenon; faithfully reflecting the public’s assessment of the general environment. So long as it was deemed favourable, incumbents tended to be returned to office. But, as soon as it was thought to be unsatisfactory, they weren’t.

Ireland, for instance.
Ireland’s economy has been volatile: outperforming others in the period of credit indulgence in the twenty years up to 2007, but underperforming them subsequently. Voters acted accordingly. As soon as they had the chance to do so, they threw out the rascals presumed to have caused the problem, replacing them with those presumed not to have. Fianna Fáil out; Fine Gael in.

But will the country’s voters expect . . .
But there’s a problem: elected politicians in Europe no longer have the power to influence their economies. They can’t set a successful agenda, nor amend an unsuccessful one. The authority to do so has been surrendered to unelected bureaucrats in Brussels and Frankfurt.

. . . the newly elected politicians to do anything different?
That point was ignored in Ireland in the halcyon days prior to the financial crisis, but, in the period ahead, it may become significant. The man who’s set to become the country’s new Prime Minister, Fine Gael’s Enda Kenny, has suggested that the country’s “rescue package” be renegotiated. The one agreed between Fianna Fáil and the Commission (after the crisis but before the election) doesn’t have the backing of the Irish people—as illustrated by the recent election outcome.

Will power be returned to Dublin?
A constitutional crisis looms. The Commission is frantic; the ECB likewise. Each must know it lacks a democratic mandate. Each knows its power base could evaporate in the face of popular revolt.

Or will another tacky deal be done?
How will things pan out? There are a number of possibilities. But, most probably, a deal will be done. As in the past, Ireland will negotiate somewhat better terms for itself. And other members of the Union will, unconsulted, pick up the tab. Power will continue to be exercised by unelected bureaucrats; the revolution delayed for a while longer.

In any event, the euro will be spurned.
In the meantime, though, the euro will be troubled. Traders will have to build in the possibility, admittedly fairly low, that Ireland will seek to re-establish democratic accountability. The value of the currency will be kept low; the level of interest rates associated with it kept high.

The parallel with North Africa is obvious.
In North Africa, the issues are not wholly dissimilar. Governments there, as in Europe, have been persistently despotic. The difference is that, in the latter, they’ve been mostly benevolent; in the former, mostly malevolent. But in neither has there been any accountability; in neither any legitimacy.

Economies will stall; markets falter.
Markets and economies are worried less about theory than practice. They fret, justifiably, that turmoil in North Africa and the Middle East will raise the oil price; causing economies to stall and valuations to slide. They fret that intransigence in Ireland will exacerbate the trends: not good before; worse now.

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