The Financial Wonderland of Covid-19

According to economic experts, Ireland does not have to worry about paying back the massive borrowings that were needed to fund the endless lockdowns : 

“Government debt does not have to be paid back, particularly the kind that sits minding its own business in the vaults of the ECB” - Chris Johns, Irish Times

 The problem with that is Article 123(1) of the Treaty on the Functioning of the EU :

 

 This means that it is illegal for any Member State to use the ECB as a bank overdraft facility.  The only reason why we can afford the luxury of endless lockdowns is our access to lots of free money. The Irish government have already borrowed €20 billion interest free this year and they plan to borrow another € 20 billion next year.   This is in addition to around €35 billion borrowed at very low interest rates since 2015 from the ECB's PSPP programme, prior to the covid "pandemic". So the free money bonanza that has enveloped the EU is not a new thing as some commentators have argued. 

All this free money being created by the ECB has resulted in the ECB becoming the largest single creditor of the member states in recent years. The German Council of Economic Experts have warned that this could present a threat to monetary policy independence in the long term.

In 2008, after the banking crash, the debt laden on to the backs of the Irish was paid back through taxation. This makes the situation at present different as there is no pressure to increase taxes. 

The natural effect of all this free money is massive inflation but we have not seen any sign of that yet (it may help to reduce government debt by de-valuing the euro). What is the most likely outcome - my guess is that we will see some inflation next year but more importantly negative interest rates will skyrocket so that most of the extra cash lying around on deposit will be recouped.   

There is already a similar precedent for this in the EU banking system, when deposits were confiscated in Cyprus in 2013 in what became known as a bail in. 

So as Mr Johns maintains, the ECB may well continue to play ball by printing infinite quantities of free money but the price will be an eradication of savings, either through inflation or negative interest rates or a combination of both. It will also mean that the EU will once again bend and mold its own laws laid down in it's treaties. This further erosion of the rule of law will sow yet more discontent within the union. 

German Court Challenges the Superciliousness of Media Commentators

The recent German Court ruling highlighted the superciliousness of Journalists who have become the arbiters of what is permissible and what is not :

The fact that commentators in legal scholarship, politics or the media have argued for the permissibility of certain measures does not generally rule out that such measures can be found to constitute a manifest exceeding of competences [by the ECB]. An exceeding of competences may be regarded as ‘manifest’even where this finding derives only from a careful and meticulously reasoned interpretation [German Court ruling].

Journalists do no have any training in philosophy or logic. They only know how to present or in most cases spin a story.  Yet we have allowed them to forget their own limitations and exceed their own abilities by deciding not only what is true but what is right. 

In this case, the German Court decided that the European Central Bank had exceeded  it's mandate in relation to it's large scale bond-buying, the mandate that was conferred to it by the German Parliament (and therefore the German people) and therefore at least in relation to Germany, its decision then lacks the minimum of democratic legitimation.

Aren't the media supposed to be a pillar of our democracy ?

The Government's Spending on Covid Crisis is not Proportionate

The acting finance minister, Pascal Donohoe, said yesterday that the Covid 19 crisis has so far cost Ireland €13 billion and that Ireland will have a national deficit of €30 billion by the end of the year. The Taoiseach, Leo Varadkar, also said that Ireland cannot borrow cheap money forever. As the ECB prints more money, inflation will become even higher in Ireland and prices of goods will rise. Since natural levels of deflation have been prevented in Ireland since 2015 by the actions of the ECB, this means Ireland and the EU are starting at a higher inflationary point than would have been otherwise without the ECB bond buying, and is therefore on the road to very high rates of inflation. Negative interest rates may well be here to stay. High inflation may well suit the Government because it will make it easier to pay their previous debts, but it means savers and workers will continue to be robbed.

At the beginning of the crisis, the government generously paid out covid unemployment payments of €350 per week, almost double that of conventional jobseekers payments. It has since materialized that 40% of those on the covid payment were earning less than €300 in employment. Meanwhile, on the covid subsidy scheme, where employers are subsidized to keep employees on the payroll, employers cannot pay employees more than their average pay and still qualify for the subsidy.   So the schemes were very badly thought out. There is also some fraud occurring where payments were made to non resident people. 

425,000 people are on the employers subsidy scheme and 600,000 are in receipt of the covid unemployment benefit. Before the crisis, there was about 2.3 million people in the workforce. So about 44% of the workforce are now in receipt of government supports. In the UK, there was 28 million people in the workforce before the crisis. Now, 6.4 million people have been furloughed - the equivalent government subsidy scheme for those affected by the covid crisis and another 2 million self employed people are receiving supports from another scheme. That is a total of 30% of the workforce. 

So Ireland has one and a half times the equivalent numbers on covid unemployment schemes as the UK has. This means that the Irish government should be phasing out the support payments. However, it is only the British government which is talking about winding down their schemes to reduce the cost to the exchequer. 

This was partly a reaction to the Bank of England warnings about the UK facing the worst recession in 300 years.  Meanwhile, in Ireland, there is strong opposition to any talk of protecting the taxpayer in all this. Leprechaun economics dictates that we must go blindly into the night and not prepare for a recession. Faith in the ECB money printing machines has never been better. And anyway, sure equality measures will ensure that we will all be equally poor. Except, of course, the few at the top who benefit from high inflation.

Price of Electricity and Renewables Revisited

Previous work by Willis Eschenbach and Euan Mearns showed the relationship between Electricity costs and per capita installed renewable capacity. A new European Commission report shows the increases in electricity prices since 2010. I put this on a graph alongside the increase in share of electricity from renewable sources [Figure 1].

Figure 1 : Increase in electricity prices 2010-2015 plotted alongside increase in share 
of renewables in electricity generation 2010-2014

So the UK went from renewables providing 7% of electricity generation in 2010 to 17% in 2014 resulting in almost a 50% increase in prices over the same period. Ireland is in the top five increases in electricity prices over this period. Denmark seems to be an outlier (although they started off from very high prices) but most countries who invested heavily in renewables saw a sharp rise in electricity prices. 

Something that struck me was the proliferation of PIIGS countries at the top of the graph. So I labelled the top government indebted countries on the same graph [Figure 2] :

Figure 2: Top 7 member states with highest Government debt as % of GDP 

Greece, Italy and Portugal are the top 3 indebted countries in the EU (Debt of general government, as a percentage of GDP). Most of the countries investing heavily in renewables are also running up the biggest fiscal deficits. They have put environmental sustainability above economic sustainability. However, surely the two are linked ? If capitalism is the driver of climate change then living beyond your means must be twice as bad.

References

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1)  Monitoring progress towards the Energy Union objectives – key indicators - see Page 62

https://ec.europa.eu/priorities/sites/beta-political/files/swd-energy-union-key-indicators_en.pdf

2)  Share of electricity from renewable sources in gross electricity consumption (%) - unfortunately this only goes up to 2014, whereas the prices in 1) goes up to 2015, so if a more recent report comes out I will update this blog. Still, Figure 1 is indicative of the electricity price/ RES-E trend.

http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Share_of_electricity_from_renewable_sources_in_gross_electricity_consumption_(%25).png

3)  Risk Assessment of the EU Banking System - See Figure 1

https://www.eba.europa.eu/documents/10180/1315397/EBA+RISK+ASSESSMENT+REPORT.pdf/46d91b9a-f393-4b54-96eb-df06ca01bec5

The Big State

Eamon Ryan, the Green Party leader, thinks the State is not doing enough about climate change and not borrowing enough money from the European Investment bank :

The end game for the Greens and the Left is a bloated state, high taxes and debt enslavement for future generations. The irony is that if the Greens wanted to stop climate change the first thing they would do is call for an end to budget deficits and governments spending beyond it's means. After all, this would meet the definition of sustainability according to the Brundtland Commission :

Humanity has the ability to make development sustainable to ensure that it meets the needs of the present without compromising the needs of future generations.

The European Union - what has it ever done for us ?

"Yeah, that's all very fine, but the Romans are making us use windmills, what are we going to do on a calm night ?"

Let's take a cursory look :

Ireland has received € 4.6 billion in Farm subsidies

http://farmsubsidy.openspending.org/IE/

and € 4.4 billion in structural funds for roads :

http://eustructuralfunds.gov.ie/csf-2000-2006/

http://eustructuralfunds.gov.ie/nsrf-2007-2013/

That's a total of € 9 billion since 2000.

According to the IMF, we were forced by the ECB to pay € 8 billion to unsecured bondholders, which we shouldn't have paid. So that leaves us in net receipt of € 1 billion.

But we seem to be missing the elephant in the room. Much has been made of all the above in the Irish media.

Due to EU regulations, we have been forced to turn our electricity system upside down and make significant changes to accommodate large amounts of intermittent wind. Irish Energy Blog estimates this total cost at € 20 billion:

http://irishenergyblog.blogspot.ie/2015/02/20-billion-committed-under-irelands.html

If we include REFIT over 15-20 years, this amounts to a minimum of € 2-3 billion. Then there are other support schemes for ocean and offshore energy which will be more expensive than onshore wind. This brings us up to circa € 25 billion. There will be no discernible benefit to the electricity consumer from these changes, in fact, its a net cost, particularly in these times of low fuel prices.

No mention hardly whatsoever has been made of this in the media, despite the fact that the sums for electricity dwarf the sums for bondholders, roads and farm subsidies.

This leaves Ireland at a net loss of € 24 billion as members of the EU.