Britain doesn't have any accountability to this Irish failure 'cos Britain is not a part of the EMU!
Unless either Ireland leaves the EMU or the Eurozone decided to Federalise itself (i.e. replace the national debts with the ECB bond, and replace the unstable fragmented fiscal policies with a stable common treasury) , investing Ireland contains a high risk premium!
Lending money to individuals with a high risk premium requires charging a high interest rate enough to cover the risk premium because the lender should not make a fatal loss on a budget, which causes the lending country to fall in to another recession.
A relatively well-off country shouldn't be penalised save a country with an insoluble trouble! The current policy will knockdown both the relatively well-off countries, such as Germany and Britain, and the countries under the crisis!
It's highly dangerous to lend money to those which have a high risk premium!
I would have agreed with you if Ireland weren't in the Eurozone.
Under her crisis, the common currency system is a fundamental cause, so the Eurozone countries are much more responsible on her crisis than Great Britain.
The reason why Germany could lend money to Ireland was that the stimulus to Ireland, the same organ of the common currency system, also stimulate the value of Euro, so it is beneficial to Germany in a long term. The value of Euro is influenced by the value of all a whole set of Eurozone countries.
However, the stimulus by Britain, who is in outside the Eurozone, won't encourage Irish economy, the tiny part of the Eurozone. If Ireland had kept her own monetary policy, British stimulus to Ireland causes to the appreciation of Irish economy, therefore it would have induced the healthy inflation which reduces the net present value of the money borrowed at the time Ireland borrowed. Therefore, the motivation to invest into capital in Ireland will be encouraged 'cos of the expected inflation.
On the contrary to this function, the current system doesn't enable Ireland to reduce the net present value of the money borrowed unless the entire Eurozone economy is stimulated. Although the British stimulus to Ireland may boost her economy in a very short run, because the velocity of money invested will be very low or even zero, Irish economy won't be stimulated enough to recover from the recession due to the low inflation expectation.
All in all, the responsibility of Irish economy is based on the accountability of the entire Eurozone. British investment to Irish economy will simply be a waste of money unless Britain charges a high interest rate.
... Politicians tend to lose the perspectives from a financial and economic analyst. If we lend money, all the factors have to be put into a calculus! We must not forget about the dynamic impacts of Financial Engineering on an international public sector economy! The simulation taking the inflation expectation, impact of the monetary union, and risk premium into consideration must be run! It's dangerous to rely on the Pro-Europeanist transcendentalism any more! Realistic financial aspects based on the cost and benefit analysis should be taken into the consideration well!
Friday, November 19, 2010
Tuesday, November 02, 2010
Eurozone fiscal integration is required soon as possible!!
A country in the Eurozone is required to pay a high interest rate to borrow money from another country in the Eurozone. This is the first attempt to make all the Eurozone countries to be responsible for helping each other without claiming any help from the outside European Union (EU). As long as Maastricht treaty restrict the rate of national debt balance to GDP, Eurozone countries are not able to incur their national debt enough to stimulate their economy. Therefore, the relatively well-off countries joining the European Monetary Union (EMU) are expected to subsidise the stagnating countries.
However, lending money to individuals with a high risk premium requires charging a high interest rate enough to cover the risk premium because the lender should not make a fatal loss on a budget, which causes the lending country to fall in to another recession.
This Eurozone macroeconomic policy is very unstable!
Mr. Jean Claude Trichet(Read about his articule in this blog!) also highly criticised this unstable fiscal rule, charging high interest rate for countries borrowing from another country inside the Eurozone.
Mr. Trichet is remarkably intelligent enough to realise the current Eurozone economic system is notoriously unstable.
The Eurozone should install the European federalism with the ECB bond by relinquishing the right to incur national debt in all the Eurozone nations! Otherwise, the EMU should be dissolved (i.e. abolish Euro, the common currency), and remove the restriction on incurring national debt stated by Maastrict treatyin order to enable them to set their own interest rate for their own monetary policy to adjust their own money supply and their liquidity to their economic stimulus.
If the ECB bond is incurred, the value of national debt traded in the international market is determined by the economic performance of the Eurozone economy. Instead of penalising a relatively well-off Eurozone country, the Eurozone economy should incur the bond with their collective responsiblity. If the debt is incurred by the collective responsibility, the risk and the interest rate is spread out to all the Eurozone nation. Therefore, one country doesn't have to pay an excessively high interest rate meanwhile a relatively well-off country does not need to be penalised (Although they might need to contribute to pay the interest rate of the ECB bond, but the cost and the risk are still obviously lower than the cost and the risk of lending money to a country in a terminal recession).
In addition, if the entire Eurozone economy is expected to recover by the fiscal stimulus financed by the debt, the value of the ECB bond will continue increasing so that more traders will purchase it. A high volume of finance flow from both private companise, individual citizens, and the government outside the Eurozone will be expected as the ECB bond is introduced. This is the golden rule of the national debt. As the credit rating of the ECB increases, the limitation of incurring the debt will be less restricted unlike the current Eurozone system.
The current Eurozone system will stagnate the Eurozone economy further. In order to avoid this situation, the Eurozone economy "has to" either dissolve the EMU or establish the common treasury under the Euro-Federalism. Nevertheless, in order to establish the more stable system than now by keeping the common currency, a furthermore efficient fiscal policy (spending on the government expenditure with a lower cost of taking tax) needs to be put into practice. On the top of it, the fiscal policy in all the Eurozone country has to be strictly counter-cyclical to their own business cycle relative to the one of the entire Eurozone in order to adjust their economy to be harmonised with the entire Eurozone economic environment. One country will no longer be able to diviate their fiscal policy rule from the other Eurozone countries.
However, lending money to individuals with a high risk premium requires charging a high interest rate enough to cover the risk premium because the lender should not make a fatal loss on a budget, which causes the lending country to fall in to another recession.
This Eurozone macroeconomic policy is very unstable!
Mr. Jean Claude Trichet(Read about his articule in this blog!) also highly criticised this unstable fiscal rule, charging high interest rate for countries borrowing from another country inside the Eurozone.
Mr. Trichet is remarkably intelligent enough to realise the current Eurozone economic system is notoriously unstable.
The Eurozone should install the European federalism with the ECB bond by relinquishing the right to incur national debt in all the Eurozone nations! Otherwise, the EMU should be dissolved (i.e. abolish Euro, the common currency), and remove the restriction on incurring national debt stated by Maastrict treatyin order to enable them to set their own interest rate for their own monetary policy to adjust their own money supply and their liquidity to their economic stimulus.
If the ECB bond is incurred, the value of national debt traded in the international market is determined by the economic performance of the Eurozone economy. Instead of penalising a relatively well-off Eurozone country, the Eurozone economy should incur the bond with their collective responsiblity. If the debt is incurred by the collective responsibility, the risk and the interest rate is spread out to all the Eurozone nation. Therefore, one country doesn't have to pay an excessively high interest rate meanwhile a relatively well-off country does not need to be penalised (Although they might need to contribute to pay the interest rate of the ECB bond, but the cost and the risk are still obviously lower than the cost and the risk of lending money to a country in a terminal recession).
In addition, if the entire Eurozone economy is expected to recover by the fiscal stimulus financed by the debt, the value of the ECB bond will continue increasing so that more traders will purchase it. A high volume of finance flow from both private companise, individual citizens, and the government outside the Eurozone will be expected as the ECB bond is introduced. This is the golden rule of the national debt. As the credit rating of the ECB increases, the limitation of incurring the debt will be less restricted unlike the current Eurozone system.
The current Eurozone system will stagnate the Eurozone economy further. In order to avoid this situation, the Eurozone economy "has to" either dissolve the EMU or establish the common treasury under the Euro-Federalism. Nevertheless, in order to establish the more stable system than now by keeping the common currency, a furthermore efficient fiscal policy (spending on the government expenditure with a lower cost of taking tax) needs to be put into practice. On the top of it, the fiscal policy in all the Eurozone country has to be strictly counter-cyclical to their own business cycle relative to the one of the entire Eurozone in order to adjust their economy to be harmonised with the entire Eurozone economic environment. One country will no longer be able to diviate their fiscal policy rule from the other Eurozone countries.