Conference warned on economic 'trilemma'

 

THE ECONOMY faces a “domestic trilemma” as a simultaneous deleveraging by households, banks and the Government could intensify the risk of default, the Kenmare economic conference has heard.

A paper by Goodbody Stockbrokers economist Dermot O’Leary and UCC economist Don Walshe presented yesterday to the Dublin Economic Workshop, traditionally held in the Co Cork town, says the current mix of policies is “unlikely to be successful”.

The authors say “a change of emphasis in the policy mix is urgently required” to avoid a “particularly severe” drag on the economy whereby it becomes mired in low growth and the real value of the debt burden rises.

A paydown of debt by households and the banking sector, as well as the fiscal consolidation measures set out by the EU-ECB-IMF troika, all “make sense” on an individual basis, they write. But when these policies combine with the need for private-sector deleveraging “an internal policy trilemma emerges”.

A “trilemma”, or a difficult choice between three options, is most often used in economics in the context of an “international” or “external” trilemma, whereby governments desire autonomy over their own economic policies, capital mobility and a fixed exchange rate, but are only able to achieve two of these three goals at any one time.

The paper says Ireland’s membership of the Economic and Monetary Union means it faces a “dual trilemma”, both domestic and external.

“Ireland wants to reach a destination whereby it will have a smaller private debt level, a smaller banking system and stable public finances,” the authors write.

“The current policy course is inconsistent with the achievement of all three goals in a reasonable timeframe and sustainable way.”

Mr O’Leary and Mr Walshe suggest that the pace of bank deleveraging should be slowed. However, to do so, the banks would need further liquidity assistance from the European Central Bank over a longer period of time.

“Although Ireland’s banking crisis is well-advanced, a euro-wide agency that deals with systemically important banks in difficulty may come in particularly useful as the wider problems in the euro zone rumble on.”

Also addressing the conference, Cathal Hanley and Andrew Rae from the Competition Authority outlined the risks posed by the creation of a banking duopoly, whereby the Irish banking system is dominated by Bank of Ireland on the one hand, and the merged AIB and EBS Building Society on the other.

This may reduce competition in the medium term, while also exacerbating the risk that the banks are “too big to fail” but then become “too big to save”.

Mr Hanley and Mr Rae described a situation where the State was unable to bail out the banks as “even more serious” than the situation where they were obliged to do so.

KENMARE CONFERENCE: WHAT IT'S ALL ABOUT

Policymakers, economists and business figures descend on Kenmare, Co Kerry, every October for the Dublin Economic Workshop’s annual Economic Policy Conference – a weekend of debate, research presentations and speeches on the state of Irish economic policy.

After last night’s opening session on the banking crisis, the highlight of today’s programme is the appearance of International Monetary Fund official Ajai Chopra, who will give an address on strengthening the financial stability framework of the euro area.

Competition policy is also on the agenda for discussion, while tomorrow it is the turn of pensions reform, site value taxes and behavioural economics.

Coverage of the conference continues in Monday’s Irish Times.