Joint Committee on Finance, Public Expenditure and Reform debate -
Wednesday, 8 Jul 2015

Quantitative Easing: Discussion

Acting Chairman (Deputy Arthur Spring)

I ask members to ensure their mobile phones are switched off. This is important as they cause serious problems for broadcasting, editorial and sound staff.

We will have two sessions today. In the second which will begin at 5 p.m. we will focus on scrutiny of the draft scheme of the public sector standards Bill. In our first session we will consider the issue of quantitative easing. I welcome Dr. Stephen Kinsella, senior lecturer in the Department of Economics at the University of Limerick; Mr. Dan O'Brien, chief economist at the Institute of International and European Affairs; and Dr. Constantin Gurdgiev, adjunct lecturer on finance at Trinity College, Dublin.

The European Central Bank and central banks in the eurozone have pledged to buy €60 billion worth of bonds every month between March 2015 and September 2016, totalling €101 trillion, to support growth and, in turn, employment across the eurozone. This initiative is known to us all as quantitative easing, one of the main purposes of which is to combat deflation and promote price stability. We look forward to hearing the distinctive perspectives of our guests of the effects of this initiative to date and its implications into the future. I know that what is happening in Greece is on everyone's mind. I propose, therefore, that we devote some time towards the end of the exchange of views with our guests to this topic. Rather than allow the entire engagement revolve around the situation in Greece, we can look at the issue of quantitative easing and then deal separately with the situation in Greece at the end of the session. I will indicate when we will deal with it.

The discussion will begin with opening remarks made by each of our guests in the order in which I introduced them. Questions may then be put to them by members. I invite Dr. Kinsella to make his opening remarks.

Dr. Stephen Kinsella

I thank the joint committee for its invitation to speak to it. It is really good that we are having this discussion.

As a small open economy on the edge of Europe, it is very important that we take cognisance of the large-scale macro-financial changes we are seeing on the policy landscape. I have circulated a very small discussion document about which I will speak in a while. I will not necessarily read every word of it, but I will take the committee through it as it is written.

The first thing to be said is that it is very exciting when one tells an intermediate economics student that what one has been teaching them for the previous year has been a lie. One watches the shock as one realises this has been happening. Standard school textbooks tell us that banks exist to facilitate the interaction of savers and investors. While that is true to a certain extent, it does not give rise to the theory and practice of why and how money is actually created. Money is not created via something called fractional reserve banking in the modern economy. That is just not how it works. The way it works these days is that money is created largely by commercial banks such as AIB or Bank of Ireland in creating loans. When a bank extends a plumber an overdraft of €1,000, it creates a corresponding deposit on its balance sheet. This allows it and the Central Bank to see that money is being created, particularly once it is paid back, which is a very important point. When money is being paid back to the bank, effectively, deposits are being destroyed because they are written off against loans. It is very important that we understand money is a social institution. As we will talk about money later, it is very important that this comes up. Money relies on trust to function, but we have been labouring under a misconception, particularly as economic modellers, that the Government can create money. There are such things as Central Bank reserves and digital reserves, but these days more than 95% of the currency in circulation that is part of the monetary base comes from loan creation by private banks. For this very reason they are central to the functioning of the economy.

Since currency is effectively created through the private banking system, there is no effective limit on its creation. When many thought about the idea of quantitative easing, they said the Central Bank was going to print euros, hand the money to the banks in exchange for some bonds and that this would lead to inflation because an increase in the monetary base should lead to an increase in inflation. That is precisely what has not happened. It is not a fact that the commercial banks have been given more money to enable them to do this. The Central Bank has increased its reserves and that has permitted a series of asset purchases.

We have a modelling fallacy to which students are exposed. Students are told that the Government or the Central Bank can control the supply of money, but they cannot. The way we manage monetary policy is that we set the interest rate on Central Bank reserves, to which every other interest rate is key, for example, trackers. In normal times the way the Central Bank operates is that it raises the interest rate when it thinks the economy is overheating and lowers it to create more lending at a given moment. That is what happens in normal times, but we are not in normal times. In fact, we have not been in normal times for about five or six years. To give the committee a sense of just how abnormal it is, the interest rate set by the Bank of England is at its lowest rate since 1696 when the bank was created. It is, therefore, an incredibly odd time in the history of monetary policy. We call this state of affairs "zero-bound". We cannot reduce the real interest rate the Central Bank charges much below perhaps 1% or 2% and that changes the dynamics of how the average person wants to hold money.

If one wants to do that for a sustained period, one must say the euro in someone's hand is only good for a month and he or she must spend it. In effect, that creates a discount rate. One can see how that would change the life of the average person in society. With the interest rate effectively useless - it is a bit like pushing on a piece of string - in a situation where the price level is falling way below its mandate and growth is stagnating, a central bank must consider alternative options. Increasing the size of the balance sheet has been one of those. We call this quantitative easing. Given that a central bank can manipulate the size of its balance sheet ad infinitum and is the only power that can do so, it simply buys assets like government bonds in the open market, changing the pricing of the bonds and, therefore, changing the relationship between those. Not only can it change the price in real time, by intervening in a bond market and increasing or lowering the price, it can also change how investor expectations react to those prices. Those two things are crucial.

If members look at the first chart in the document I am showing them, it sets out a piece of really interesting research by Krishnamurthy et al from 2012. It looks at the US experience of quantitative easing. One can see that quantitative easing causes a portfolio change. By exchanging central bank reserves for government debt or any other asset, one gets this very large portfolio change where the banks and financial intermediaries that now hold the reserves simply start moving their money around. They move it into gilts, corporate bonds or equities and one can see that the demand for cash is pretty flat there. The US QE example is the largest and it has the most developed markets, but it is important to say that every experience of quantitative easing has been different. It is not fair or accurate to compare the US experience of quantitative easing to that of the Japanese because the institutional differences are so vast. The way they operate is different. My colleagues will speak to how the ECB's QE is being done. Overall, QE is a success if the amount of inflation one wants to see is increasing and, obviously, one is not having very large changes in inequality. This is something that everyone has been concerned about because in effect one is handing people who are, if not cash rich, certainly asset rich a great deal of cash.

There are many channels through which QE can work and we can talk about that, but I give an example in the handout of the impact on balance sheets . I look at the situation before asset purchases in asset and liability space. At the top of the table, members will see a pension fund. Look at the assets and look at the liabilities. The pension fund simply swaps its government debt, which in this case was Irish Government ten-year bonds, for deposits, which are handed out by a central bank from its reserves. The bank simply does that by expanding the size of its reserves which it can do because it is the central bank. One is using the central bank's balance sheet elastically. It changes the balance sheet of the pension fund, but as members will see at the bottom of the table, it also changes the balance sheet of a commercial bank, which is suddenly far more liquid with many more deposits and reserves. It is this mechanism that the central bank wishes to exploit to increase inflation, which is crucial.

I turn to the idea of expectations. Figure 2 shows the ten-year bond spreads for Germany and Ireland. Germany is in blue and Ireland, predictably, is in green. The ECB's QE was announced in late January. As members will see, the market had already priced in the fact that QE was going to happen. QE changes market expectations not only when it is going to be enacted but in terms of how much and when it is going to be turned off. Again, my colleagues will speak to this. It is about what the future might hold given that the markets are being deluged with this kind of liquidity for this long. Figure 3 shows the ECB's measure of expected inflation. After QE is announced, we see it dropping and then it comes back up after 21 January, so inflation expectations are increasing. If members look at where they are right now, it is slightly below 1.6 or 1.7. That is in five years' time. If one is an investor, what one is telling the European Central Bank is that one thinks there will be inflation at or near 0% for the next three or four years. What that tells one is that one can expect to see QE for a bit longer.

Finally, one of the other very large things that QE does is affect the exchange rate. For a small, open economy like Ireland's, and we are one of the most open in the world, a weaker euro is better on every level for exports, tourism and everything else. If one is Ireland, QE has been unambiguously good. Given that all the other major central banks in Europe will be doing some kind of easing, including the Sweden's Riksbank, the Swiss National Bank, Norges Bank and others, the major players in the European system are easing their monetary policy. The conditions are there for a reasonably large level of inflation. For a small indebted nation like Ireland, positive inflation levels are brilliant for debt dynamics. At this initial stage at least, QE has been a clear winner from the Irish perspective, particularly with respect to the interest rate.

Mr. Dan O'Brien

As Stephen has done the plumbing stuff, I am going to ask whether it works. I will not really be looking at Ireland but at the available evidence and the risks associated with it.

Does it really work? As with many things in economics, it is often very difficult to get a consensus. Certainly, there is not much of a consensus in the economics community on whether QE works. There are many reasons for that. One is that there is quite a small evidence base. The first time it was really tried was only this century in Japan. A second reason is that it has most frequently been tried in the post-2008 context when the world has changed and there is a very different environment. It is very difficult to know what effect any policy instrument or lever is having in such changed times. The most difficult aspect is disentangling the different things that happen in an economy. In any day in the world economy, billions upon billions of transactions take place from people paying for taxis or buying loaves of bread to much bigger transactions. There is a huge number of things going on and it is very difficult to disentangle how a button a policy-maker presses in one place will impact on the real economy. In effect, we simply do not have petri dishes whereby we can do QE in one and not in the other and compare the two. It is inherently difficult to say.

However, let us consider the IMF's economists' conclusions. They attempted to assess the impacts of QE and their research, which comes from late in 2013, which is not even two years ago, illustrates very well just how difficult it is to evaluate. When they looked at policies, mostly QE, that try to get beyond the problem of the zero lower band where one can bring interest rates no further, their conclusion was that such policies appeared to have boosted growth and prevented deflation although such effects were considered difficult to measure. Another point they made was that the biggest obstacle to obtaining a clear view of the effects on growth and inflation was establishing the proper counterfactual, that is, the petri dish where one has not tried it. It is difficult because we do not have the petri dishes. Finally, they came to the general conclusion that they thought it had boosted growth and inflation. Anyone who is being honest is going to say, however, that we just do not know.

Let us have a look at some of the evidence. I go back to Japan. Central bankers get very worried when they think prices are going to fall as there is an asymmetry. If prices rise by 100%, which is to say that we get consumer price inflation of 100%, banks know they can increase interest rates to 110% or 120%. They can go all the way to infinity. They have always got some extra fire power if they want to dampen inflation where it spirals upwards and out of control. If prices start falling and spiral downwards, what do they do after they cut interest rates to 0%? As such, there is an asymmetry in the way central banks can deal with inflation and deflation. They have much more power to deal with inflation than deflation. That is why they start getting worried when prices go to zero or below. They feel that if they let that out of control, they will not have the levers to do anything about it.

Let us consider what happened with Japan and its inflation rate, dating back to the time when it started dipping into deflation at the end of the 1990s. During 2000 and 2001 those responsible saw that Japan had fallen into deflation and that the economy had been in a slump for ten years. They decided they needed to act. They had said they would never do quantitative easing, QE, but they decided to do it. Between 2001 and 2006, the five years of QE, the measure was not very successful. There is little of that period when inflation goes above 0%. Prices in Japan over that first period of QE stayed flat or falling. That example is not a strong case of where quantitative easing brought inflation back into the economy at a low level, as desired.

Let us move on to 2013, when Japan tried an even bigger bout of QE. The slide shows that inflation spiked, but it has faded rather quickly. Last October those responsible went even further, and it seems to be having the opposite effect. Prices are falling even further. Certainly in Japan, in terms of generating inflation, the record of QE has not been strong.

Let us move westward and look to the big three economies there, the United States, the eurozone and Britain. What has happened there? Let us consider growth because, ultimately, most of us are more concerned about growth than inflation. Let us consider what has happened to growth in those three economies since 2008. The picture for the US indicates a weak recovery, but we can see that the United States economy is approximately 8% bigger than it was before the crisis. Although it has been a weak recovery, the shape of that recovery is normal. There was a dip into recession and then it moved out of recession. By contrast, the eurozone economy today is still smaller than it was seven years ago. It is unprecedented in living memory to have a smaller economy more than seven years later. Effectively, we have had no growth. The trajectory on the slide indicates that since we bounced a little out of the depths of the recession in 2009, we have had a very weak period with no growth - a second recession. As we know, the eurozone did not implement QE. Let us consider the case of the United Kingdom. It is not by any means conclusive that QE, which started in the depths of the recession, made a major impact on the recovery in the United Kingdom. The recovery in the United Kingdom did not really gain traction until 2013, four years after QE began.

Therefore, although we can say that the US and the UK, which had QE, have had stronger recoveries, and the eurozone, which did not have QE, has had a weak recovery, correlation is not causation. We cannot say definitively in any way that this means QE has been the cause of the difference in performance between the two economies - that is to say, the US and UK on the one hand and the eurozone on the other. We see no real difference in the trend in inflation over the last four years between the eurozone, the UK and the US, despite the operation of QE in the UK and the US.

What are the risks and the downsides? One of the major risks is taking QE away. Do economies become dependent on it? Do financial markets become dependent on it? I understand Dr. Gurdgiev will deal with these questions.

Another question is hyper-inflation, and Dr. Kinsella has dealt with that. There is a concern among some people to the effect that once that approach is taken, a central bank un-anchors inflation expectations. The view is that everyone may believe inflation is going up, people may look for pay rises and it will get out of control. Clearly, that has not happened, and, if anything, we are in a period of extreme low inflation, almost deflation. The measure has not triggered that.

Another major factor, to which Dr. Kinsella has alluded, is asset price inflation. One of the big things we learned from the crisis was that central banks spent too much time looking at consumer price inflation and forgot almost entirely about asset price inflation. In fact, asset price inflation or an asset price bubble can be far worse than a period of high inflation for real economies. An important question is whether we focus enough on asset prices. One of the major criticisms is that QE will exacerbate bubbles in asset prices.

The current slide shows the euro stock market or an aggregate for stocks in the eurozone. We can see clearly that from the beginning of this year, when eurozone QE started, there has been a sharp increase in stock prices. It has come off a little since then for other reasons, perhaps, but there is a clear pushing up of asset prices, which is what the measure is designed to do, in one way, although that is not the ultimate aim. This can have a number of effects, including the creation of new bubbles or spillover effects in other countries - for example, what is going on in China at the moment. There is major panic in China and there has been a collapse in the Chinese stock market. There are fears or some views that there has been some spillover from QE in the Western world to areas outside the Western world, including China. There are also distributional effects, to which Dr. Kinsella has alluded as well.

I agree with Dr. Kinsella's points to the effect that QE has been good for Ireland, mostly through the exchange rate channel. We do more trade with non-euro area countries than almost anyone else. Clearly, a more moderately priced euro relative to our big trading partners, the UK and the US, is good for Irish exporters. It has also had a clear effect on the Government's cost of borrowing and, for Ireland, as a highly indebted country, this has also been good. At this point for Ireland and in the European context it appears that there have been benefits from QE. Given the balance of risks on both sides, I am strongly of the view that QE was a risk well worth taking and one that should have been taken earlier.

Dr. Constantin Gurdgiev

I thank the committee for this opportunity. I agree with most of what my predecessors have said. The committee has my slides and members can look through them as we go along. I do not intend to cover all of them. I will move fairly quickly to cover as much of the ground as possible.

I want to touch on the background first, because this is important in the case of QE. There are two sides to the background. The first is the monetary side - in other words, the monetary environment to date. This is quite abnormal, and complicates significantly our ability to analyse the effects of QE across the eurozone and in Ireland in particular. The zero-bound policy rates, which have been mentioned previously, create a certain prevention and distortion in terms of analysing how quantitative easing transmits into the real economy. In addition, we have severe market fragmentation. This was caused partially by the previous quantitative easing programme deployed by the ECB, particularly the long-term refinancing operations, LTROs. In part, this was what triggered the programme parallel to the current programme of quantitative easing - that is, the targeted long-term refinancing operations, TLTRO, programme. We have unconventional monetary policies which are deployed by a number of the national central banks at the same time within the euro system. A great example of this, which I imagine we will touch upon presently, is the emergency liquidity assistance in Greece, but it applies to other banks as well. Another factor is unconventional European Central Bank policies, including those I have referred to, the LTRO and TLTRO programmes, as well as other asset purchases and so on. Finally, we have the big-gun items on the monetary policy side, which complicate but in some ways support the quantitative easing effects as well. Most notable among these are the outright monetary transactions, OMT, which amount to the whatever-it-takes so-called claim by Mr. Draghi in the past.

That is the monetary environment. It is difficult to disentangle it from the direct effects of QE. I will not discuss the real environment in depth but I would be happy to provide the committee with a link to a longer paper of mine on the matter. We have an environment featuring what is known as secular stagnation. This is affecting not only Ireland but the entire group of advanced economies from Japan all the way to the United States. Basically, it is a premise that the demand for investment is going to be low. It is low, and it does not matter what we do on the monetary side - in other words, it does not matter how much QE we generate - because borrowing and lending in the economy are going to be subdued none the less. The reason is the direct effect on the lack of demand for new investment. In other words, companies are simply not going for new credit and are not funding investment through credit. There is a lack of new credit creation in the system as well. This arises from a number of sources on the supply side, such as weaknesses in the banks' balance sheets and so on. This relates to the severe debt overhang in the real economy. We have external and domestic demand weaknesses. Demand for exports and consumption is weak. Finally, we also have increased risk aversion among investors. This is not surprising in itself because companies have seen how they and their counterparts have been dealt with by the banks in a crisis environment and, simply and frankly, they have no wish to get more into debt unless it is really necessary. Secular stagnation causes a significant drag on the potential effectiveness of quantitative easing in terms of real policy.

That said, quantitative easing has two channels through which it transmits into the real economy, at least in theory, and into the markets as well. The first channel is the ex-ante channel. This channel operates when the European Central Bank issues forward guidance about future policies. In the case of quantitative easing, this can be traced back to April 2014.

That is an important date for us because that is where that effect starts. It was amplified during the period from 21 January to 6 March. The latter is the period between the official announcement of the quantitative easing, QE, programme by the ECB and the deployment of first purchases by the bank in the markets themselves. That is the ex ante channel.

The second channel, which is equally important, is the ex post channel. This channel relates to what happens in the economy once the ECB begins buying assets, as it did after 6 March this year. It must be borne in mind that in conjunction with that, we have one targeted long-term refinancing operation, LTRO, programme, which attempts to address, in part, the fragmentation in the markets and which runs in parallel with QE.

I will start with the ex-ante transmission channel. Here we can see some of the positive effects of QE. These are very strong and some were mentioned by the previous speakers. I will deal first with the effect on the yields in the eurozone government debt markets. Between 21 January and 6 March of this year, there was a significant decline in yields across the eurozone, especially when account is taken of the adverse effects of the Greek crisis and others events in the news. On average, yields declined between seven and 50 basis points during the period in question. Maturity, bond quality and bond ratings come into play in this regard but this is a significant average over a short period. There has been a high impact, as expected, at the longer duration of the yield curve. In other words, 20 and 30-year securities and AAA-rated bonds have declined by 21 to 25 basis points on average and old bonds with 20 and 30-year maturities have declined by between 40 and 50 basis points on average. This is a very significant effect. Interestingly enough, the significance of effect rises in respect of lower quality bonds. As a result, countries such as Ireland have benefited more than have countries such as Germany, France, etc. Since April 2014, when the forward guidance period on QE started, through March of this year until purchases began to be made, there was an average of more than two percentage points decline on yields relating to eurozone bonds of upper maturity.

The immediate inflation effects are not yet apparent. However, the five-year, five-year swap rate, in other words, the expected inflation by the markets from five years from today to five years thereafter, or a five-year to ten-year horizon, has dramatically increased. This is the measure which the ECB monitors closely in terms of targeting inflation. There has been very significant uplift in this area in recent months. There has been some positive effect on inflation expectation, if not on inflation itself.

On ex post measures, this is, as already stated, the second channel. Dr. Kinsella mentioned one of these measures, namely, the so-called portfolio effects, in other words, the changes that happen in the composition of portfolios by investors in the markets once the ECB starts purchasing bonds. In addition to this, there are also supply and demand changes. The ECB has taken very significant quantities of bonds out of the secondary markets. These are not newly issued bonds. The ECB does not buy them from governments but rather from investors directly. It is expected that the ECB is going to take up to approximately 30% of all outstanding bonds of high-quality maturity in the German markets, over 20% in the Spanish markets and over 20% in the Italian markets, which will have a very significant impact. That impact has been present in the markets since April. The first impact of this activity is reduced liquidity in the markets. We have seen the explosion, in terms of the spreads of quoted bonds, between the bid and ask prices being quoted in the markets. That is not a good sign. In effect, the ECB purchases are clearly priming the bubble in terms of bond prices in the markets themselves. In other words, current yields do not correspond to the realities of the risk assessment. If, for example, members look at the Euromoney Country Risk assessments of sovereigns such as Germany, Italy and France - the larger ones - and also of Ireland, they will see that the quality of sovereign risk has not been commensurate with the uplift in bond prices. In other words, a bubble is developing there. This is very much consistent with the evidence from the investment markets.

Euromoney Research Group's survey, which includes data collected up to April of this year, of 1,924 institutions and bond investors indicates that 80% of the latter are concerned about the development of price bubbles in the bond markets and 62% of them expect things to get even worse. Another survey carried out on behalf of the Financial Times contains exactly the same findings. The decline in the inventories of the market makers, namely, those who hold inventories of bonds they are ready to sell into the markets, has been approximately 80%. This means that the surplus of bonds available for transactions has shrunk significantly. This is causing major problems in the context of the front-running of bubbles in the markets themselves. As a result, the average quality of the bonds outstanding in the markets is also slipping. There has been a decline in quality and investors are now being incentivised, by the purchases being made by the ECB, to shift into lower quality bonds and assets. This, in turn, bids up the valuations of stock markets and, for example, government related bonds, which are not eligible for purchasing under QE, so government agencies, companies, development banks and so on are benefiting from the uplift without a corresponding improvement in their risks. What I am saying is that there is a mispricing of risk taking place in the market.

I will now deal with some of the Irish evidence relating to the real economy. This is also an ex post channel. In other words, it is a channel that is currently open as the ECB is buying those bonds. First, let us consider the interbank markets premium. The chart I have provided covers the difference between the 12-month EURIBOR rate - the interbank market rate - and the overnight Eonia rate, and members can see that we are currently at near historical lows. On average, the current period is just about the second lowest ever. As members can see, we are trending along those lows and slightly below the average for that period. What does this mean? It means that we still have more ex ante effects than ex post effects. We are yet to see the full effect of QE on the interbank market but there has been a very strong response since the announcement of QE. This means the markets are pricing in future QE but they are not yet pricing in actual QE. The effect is reasonably pronounced and positive overall. What do I mean by positive? Basically, I mean that the markets are currently incentivising the banks to seek longer-term funding in the interbank market. This is more stable, higher quality funding and it should translate into banks issuing longer-term loans on more favourable terms to companies and households. That should be the effect but if members look at the next slide, they will see that good news for banks does not equal good news for the real economy. It is apparent from the data that in terms of the quantum of new loans issued, there has been a small, fragile uplift in terms of the number of loans to the corporate sector. However, there has been absolutely no movement away from the downward trend in respect of the issuance of debt to the household sector. The slide includes Central Bank data up to April but we do not yet have any for the subsequent months.

QE has had no effect on lending to households in Ireland but it has had a very strong effect in respect of the lending to corporates, a matter to which I will refer in a moment. There are questionable terms of lending composition and evidence that the uplift is not down to SMEs obtaining new credit but rather to the larger corporates obtaining it. The quality of that credit from the point of view of the borrower is not necessarily good and I will also discuss that matter further in a moment. The slide shows that larger loans significantly dominate smaller ones. The pre-crisis average of loans in excess of €1 million was 75.3%, whereas the current rate in this regard stands at 96%. The March-April average was 90.2%. This is not exactly a good thing. There has been nothing spectacular from QE on this front and a lot of questions are arising. In the first instance, we do not know how much of that is down to QE as opposed to the other measures, including targeted LTROs, which have been introduced. Second, we do not know how much of what is happening is due to the post-crisis bounce. In other words, the fall was very significant and the recovery should also be significant. The third aspect relates to how sustainable all of this is and whether it represents a new trend.

I am coming close to finalising my arguments in respect of all of these matters. One way of examining the quality of lending is to consider for how long companies and households are being offered a fixed rate. The ideal is to have the real economy operating on the basis of longer term as opposed to shorter-term rates. This is not happening. Proportionately, we are closer to the shorter-term rate at the back of the curve. We are still at crisis levels in the context of short-term borrowings dominating long-term borrowings and this is a significant problem from the point of view of seeking to move forward. The banks are being given incentives to lend long but they are lending short. This is a major issue. There are two big risks emerging as a result of QE and these are already in play. The first of these relates to the debt overhang - the biggest problem for the Irish economy - which remains unaddressed as a result of QE. In fact, it is potentially being made worse by QE.

What does that mean from the point of view of households and companies, the real economy? It simply means that quantitative easing, QE, superficially reduces the rates of interest charged on the loans-----

Acting Chairman (Deputy Arthur Spring)

Can Dr. Gurdgiev expand on how it could potentially be made worse by QE?

Dr. Constantin Gurdgiev

Yes. I will come back to that point in a moment.

The problem with QE is that when it ends there will be a reset back to the average historical interest rates. I have provided a comparison in the table in the presentation, which uses two different ways of treating the margin. One of them is the lower margin, which is based on the lending and deposit margin spread, and the other is the upper margin, which is based on the short-term/long-term lending spread in the EURIBOR and Eonia markets. If one takes the average of that, currently the interest rates for households' house purchases with a fixed rate for one year plus is about 2.86% lower than they will be once the QE is ended. It will be a significant shock to those households when that happens. As to when it will happen, we do not know. We know how long QE will last, but we do not know how fast the rates will revert to historical averages.

With household consumer loans, there is slightly less adjustment - less than 1%. That is because they are currently priced outrageously high. Beyond that, the non-financial corporations will also suffer a 2.59% to 2.86% potential increase in future rates. These are very significant rates and they call into the question two issues. First, what will happen to the restructured mortgages and restructured corporate loans that are currently performing? The second issue is how many of the currently performing and non-restructured loans will go into arrears under this scenario and how fast that will happen. QE does not provide us with an answer to that and it does not help us to address that.

With regard to the Acting Chairman's question, the long-run effect of QE is that it reduces or adversely impacts the future profitably of the banks. This is a very significant issue because that in turn reduces the banks' ability to deal with non-performing loans. In particular, QE eliminates what we call the interest carry trade. In other words, it is a trade whereby the bank can borrow at low ECB rates and carry it into safe or relatively safe assets at high rates of return. Because the high rates of return have been eliminated by QE in the safe assets, the carry trade is no longer available to the banks. If the banks do not benefit from the carry trade, they have to extract their profit margins somewhere else. Effectively, they will have to get blood out of a stone from the currently defaulting or weakly performing loans and, as a result of that, we are facing a problem there. In the long run, what it means for us - this does not apply only to Ireland - is that, traditionally, QE carried out at the zero lower bound rates implies that the banks do not deal with non-performing loans; they have no incentive to do so, but they have an incentive to hold them as much as possible in order to extract a higher rate of return in the future. That is a problem. One eliminates the high-yielding, high-quality assets and one incentivises the banks to hold low-quality assets for longer in the hope of generating a high yield from them. That means that household loans and company loans currently in arrears will not be restructured fast enough and loans not yet in arrears but at risk of being in arrears in both categories will not be addressed very aggressively by the banks.

To summarise, my view is simple. QE has had a pronounced effect so far and, hopefully, it will continue to have a pronounced effect in terms of the monetary variables such as exchange rates, which have some transmission to the real economy, although I believe it was overstated here. In addition to being a very open and exporting economy, we are a very open importing economy and if households are dependent on imports of food, as all of us are, they will suffer from the deterioration of exchange rates on the imports side. In addition to that, it has had a significant impact by reducing, in the medium term, the cost of funding the Exchequer, which is good news for us, but in the long run it transmits that cost, probably through the banking channel, in terms of the cost of funding the economy, and there is the lack of a resolution of the problem of non-performing loans. In real terms, QE has so far not had a significant impact, and most likely it will not have a very significant positive impact.

Acting Chairman (Deputy Arthur Spring)

I must read the notice on privilege. I wish to advise to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the Chairman to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Deputy Sean Fleming

A vote has been called in the Dáil.

Acting Chairman (Deputy Arthur Spring)

We will have to suspend the meeting for the duration of the vote and resume directly after it. I do not know about the Deputy's Whip, but mine would not be happy if I did not go over to vote.

Deputy Sean Fleming

The Government will win the vote in any event.

Acting Chairman (Deputy Arthur Spring)

There are about five members against me on this. That sounds about equal, intellectually. I apologise to the witnesses, but we will have to suspend for the duration of the vote and resume after it.

Sitting suspended at 2.55 p.m. and resumed at 3.14 p.m.

Acting Chairman (Deputy Arthur Spring)

We will continue our discussion on quantitative easing. EUROSTAT provided a breakdown of inflation or the harmonised index of consumer prices, HICP, for the period from 2003 to 2014. The figures show the rate of inflation in the European Union in general, the eurozone and individual member states. I share Mr. O'Brien's view that the eurozone was a little late in adopting quantitative easing. Why did it act at such a late stage, given that the Federal Reserve in the case of the dollar, the Bank of England in the case of sterling and the Bank of Japan in the case of the yen all engaged in quantitative easing much earlier than the European Central Bank? Surely European competitiveness was eroded by the ECB's refusal to respond to other central banks. Who decided not to engage in quantitative easing and why?

Mr. Dan O'Brien

There is a clear difference in views in member states on what central banks should do. Some member states, specifically a large member state in the centre of Europe, take a strong view that central banks should do less rather than more. This particular country was doing relatively well. While it had not had a particularly good seven years, these years were better than in most of the other member states. For that reason, it needed less in terms of a monetary fiscal stimulus. The country in question also had a very large current account surplus, which means that it was selling much more to the rest of the world than it was buying. This is a subject of controversy within the eurozone. If the exchange rate had depreciated, it would have increased this surplus, which would have placed further pressure on the country in question. There are a number of reasons one prominent, powerful country did not want to experiment.

Acting Chairman (Deputy Arthur Spring)

I presume the country in question is Germany.

Mr. Dan O'Brien

Yes.

Acting Chairman (Deputy Arthur Spring)

Does Germany have a disproportionate degree of leverage over the European Central Bank and the euro when it is compared and contrasted with the leverage available to other eurozone countries in terms of inflation and deflation?

Dr. Constantin Gurdgiev

It is probably proportionate to the size of Germany and the core economies. This is a tragedy of the eurozone construct which brings together heterogenous economies with different needs. Mr. O'Brien mentioned Germany. We should not forget other core member states, including the interesting examples of Finland and the Netherlands. In the period in which Germany was doing very well the Netherlands was experiencing a sustained recession which, in terms of duration, was officially longer than the recession in Ireland. Despite this, it insisted on a tight monetary policy for a long period and was highly sceptical about unconventional monetary policies, particularly quantitative easing.

There are other effects, including the effect of one central bank trying to match monetary policy to a highly disparate set of countries with different objectives and requirements at different times. That is what I describe as the ECB pooling effect, which is a tragedy of the euro construct. In addition, there has been the effect of the European Central Bank's balance sheet which increased to approximately €3 trillion at a certain point - 2011 if I remember correctly. The reason for this increase was that the ECB had engaged in quantitative easing, albeit not through the traditional channel. As I indicated, it had long-term refinancing operations and substantial emergency liquidity assistance exposures to a number of countries, including Ireland. At that stage, Germany was looking at the large quantum floating through the ECB channel and concluded that it was effectively engaged in quantitative easing through the back door.

Acting Chairman (Deputy Arthur Spring)

To return to the issue, the average inflation rate in the eurozone stood at 0.3% in 2009, whereas the ECB's inflation target is 2% per annum or thereabouts. Notwithstanding the quantitative easing that was taking place at that point, albeit in an alternative form, why did the ECB not do as the Bank of England, the Bank of Japan and the Federal Reserve did if average inflation was so low? I am aware the figure is the quantitative measure rather than country average.

Dr. Constantin Gurdgiev

The crucial issue is that the figure is the spot estimate, in other words, an immediate number in this month, which is available after the fact. The ECB is looking forward at inflation expectations. I mentioned the quantitative measure for inflation is five years - five-year swaps - but this is just one year. In ballpark terms, if the ECB is expecting the economy to lift in the future, it will adjust its inflation expectations towards high inflation and may not do anything. Back in those days - the Acting Chairman referred to the years 2009 and 2011 - if one looks at one-year forward forecasts of economic growth, we even used to joke that the 3% growth rate was always forecast for the following year.

Every year, the ECB was predicting higher and higher rates of growth. Its forecasting was basically shot; it was not good.

Acting Chairman (Deputy Arthur Spring)

Five years after 2009, the actual rate achieved was 0.4%. I apologise as we will have to suspend because another vote has been called.

Sitting suspended at 3.20 p.m. and resumed at 3.35 p.m.

Acting Chairman (Deputy Arthur Spring)

Returning to the point I was making before the suspension, it seems the European agencies were very slow to react. Does Dr. Kinsella have anything to add to what his colleagues said on that point?

Dr. Stephen Kinsella

When one considers matters in terms of reaction functions, one sees that central banks never overreact; they always under-react. The ECB, because of its administrative structure, is sort of designed to under-react to everything, because it proceeds by negotiated consensus. While it does seem as though there is parity between member states in terms of the voting structure, in practice, the larger nations hold more sway, simply because they have larger shares within the ECB.

What was required to be done, first, was to change the president of the ECB. Second, the new president, after he was embedded, had to win an argument about the logic of introducing quantitative easing, and that all took time. We must remember, too, exactly as Dr. Gurdgiev said, that there were many different balance sheet expansion exercises going on in 2009 and 2010. In addition, there was no real certainty as to what the evidence was from the US case. Moreover, as Mr. O'Brien pointed out, the Japanese case up to 2010 was not exactly a great success. The logic of doing it, the evidence for doing it and the administrative structures to carry it out were just not there. In other words, the buy-in was not there.

For policies to be successful, they must be administratively possible, technically feasible and politically saleable. When it comes to considering the technical feasibility of quantitative easing in the eurozone, we must bear in mind that we are talking about a very fragmented capital market where everything basically works around the Italian bond market, which is used for everybody who has a liquidity hedge. When we look at the administrative structure of actually running QE, we see it has to be run through national central banks, which means there must be certainty that all those banks know what they are doing and how to do it. The institutional details really matter here. I was at pains in my note to get across the message of why the technical exercise is important and how, when one stares at these things for long enough, one begins to see the political, technical and administrative feasibility aspects.

On the question of whether the European agencies could have reacted faster, the answer is "Yes". Would it have made much of a difference if they had done so? Not really. The ECB spends most of its time telling us what it cannot do because of its legislative mandate. It cannot do monetary financing because of Article 123 of the Maastricht treaty. It cannot do this and it cannot do that. However, one of the things it absolutely is tasked with doing is maintaining a forward inflation rate of at or near 2%. Once that rate looked like it was dropping below 1%, the ECB had no choice but to act on its own forward guidance.

Deputy Sean Fleming

I have several straightforward questions to put to the delegates. For the purposes of getting as clear a picture as possible, I will put myself in the place of Seán or Siobhán Citizen who might be watching these proceedings. My first question relates to the figure of €1.1 trillion.

What percentage of additional currency would that have put into the system? What was the volume of electronic currency in euro in the ECB Central Bank system and how much did the €1.1 trillion add to it? That is my simple question.

Dr. Stephen Kinsella

We do not know.

Deputy Sean Fleming

Is Dr. Kinsella joking?

Dr. Stephen Kinsella

We know by how much the reserves expanded; we have that number. However, we do not know where it went in the sense that we know that it went-----

Deputy Sean Fleming

The ECB balance sheet.

Dr. Stephen Kinsella

Yes, it expanded the reserves exactly according to the diagram I showed the committee. It expanded those reserves out but then it turned around and bought - I was about to say Greek bonds but it did not buy Greek bonds - Irish bonds and German bonds so that it has been spread out. We do not know, for example, how much precisely Ireland has benefitted because of the increase in the €1.1 trillion.

Deputy Sean Fleming

Has anyone an idea? Why do something when one has no idea of the impact? Have we any idea?

Dr. Constantin Gurdgiev

I showed the committee the table of estimates. In the case of Ireland, it is just around €14 billion, or €14.4 billion. It depends on the proportion of capital held by each central bank in the ECB. About 70% of the ECB capital overall base is covered by the national central banks. When one does the adjustment, the whole programme at current prices of the bonds is somewhere in the region of the €14.4 billion. However, it should be remembered that it is buying bonds in the markets, so it is paying market prices. As the price of bonds rises, the quantum of actual purchase will decline.

Deputy Sean Fleming

There is no total on the bottom of that column.

Dr. Stephen Kinsella

That is precisely it. Assets are being bought at a certain price. I do not wish to use the term "long-term economic value" but we will need to look back in five years' time to figure out how much it really was worth to the Irish economy.

Deputy Sean Fleming

Is the paid-up capital €7.6 trillion?

Dr. Constantin Gurdgiev

That is by the national banks. That covers about 70.4%.

Deputy Sean Fleming

So €10 trillion would be-----

Dr. Constantin Gurdgiev

Of what?

Deputy Sean Fleming

Dr. Gurdgiev is saying if that 70% paid up capital by the banks-----

Dr. Constantin Gurdgiev

No, €7.62 trillion is the actual paid up capital. That accounts for 70% of the total central bank capital itself. The other 30% comes from other sources and not from national central banks. One must re-weigh those capital key percentages in relation to the 70% total base and that gives that third column which is the capital share per country for the purposes of the quantitative easing, QE. This can then be converted into euro. This is making a lot of tall assumptions in terms of pricing of those bonds. The other problem is crucial and this is just the price in one which is marginal. Maybe it will be €15 billion for Ireland or maybe €12 billion. The really big issue is what happens with the money when it leaves the ECB. When the ECB takes on the bond and gives the money to the investor in the market, that investor does not have to be a European investor as such. Therefore, the money can be carried out of the European economy and invested somewhere else. It can be deposited in an ECB facility or in another central bank facility-----

Deputy Sean Fleming

Quantitative easing could help Russia as much as it could help-----

Dr. Constantin Gurdgiev

Technically, if one goes back to the long-term refinancing operations, LTROs, that the ECB has conducted before the quantitative easing, most of the money was locked up. The banks did pretty much the same except instead of using government bonds, they used the commercial assets which they deposited as collateral and they borrowed from the ECB. In regard to the money they borrowed from the ECB, they either put in their national government bonds or they deposited the rest of it with the ECB. That is the co-liquidity trap. There is no real money going into the real economy.

Deputy Sean Fleming

I have another question. Other than for legal reasons, would it be a good or a bad idea for the European Central Bank to be a market-maker as it only operates in the secondary market? It could have more direct influence if it were a market-maker.

Dr. Constantin Gurdgiev

It cannot under the EU treaties-----

Deputy Sean Fleming

I know that is the law but would it be a good idea or a bad idea?

Mr. Dan O'Brien

The purpose of this is to intervene in the market to push down interest rates that it does not control. In normal times, because the central bank basic rate is such a benchmark for every other rate, it changes and that spills down through the other rates but because the transmission mechanism is broken, it then needs to go out into these other markets to deliberately affect the rates in those other markets. Buying government bonds directly from governments would not have the same spillover effect or may not have the same spillover effect as going into the markets among private traders.

Deputy Sean Fleming

Grand. I have that. My next question is why is this 2% plus inflation in the medium term such a sacred cow? Who said 2%?

Dr. Stephen Kinsella

It is a really interesting piece of the history of economic thought why it is 2%.

Deputy Sean Fleming

Dr. Kinsella will say it is improvement in services and quality of life but that is what the Governor of the Central Bank told us last week.

Dr. Stephen Kinsella

No. The reason it is a 2% target is because 1% was too low and 3% was too high.

Deputy Sean Fleming

Who says so?

Dr. Constantin Gurdgiev

The Bundesbank.

Dr. Stephen Kinsella

There is a rule called the Taylor rule. It relates the inflation level to the level of desired output. What one wants to do is to keep the level of expected inflation around about 2% and it keeps things more or less stable. When they were coming up for the optimal size of the Taylor rule, 3% seemed a bit high-----

Deputy Sean Fleming

Is it in a European treaty or a central bank-----

Dr. Stephen Kinsella

That is precisely where it comes from. Inflation targets of 2%-----

Dr. Constantin Gurdgiev

It is mandatory-----

Deputy Sean Fleming

Is it not in the treaty?

Dr. Stephen Kinsella

Four per cent would be way better for us.

Deputy Sean Fleming

Is it the ECB rule?

Mr. Dan O'Brien

My recollection was that it was an agreement among the member states at a certain point but my understanding is that it is not written into the treaty.

Deputy Sean Fleming

Can I ask a different question? Two, one, zero and minus one are numbers. I am asking a completely different question. If one wants to get real money moving in the economy to stimulate economic activity, if the ECB set a negative interest rate of minus one percent, people who lodged €100 would be told that if it is left on deposit, it will only be worth €99 this time next year. That would force money out into the real economy rather than have it sitting in banks. Would that not be another way of moving money into the real economy rather than people putting it into safe assets? I am talking about a negative interest rate.

Deputy Richard Boyd Barrett

Could Deputy Fleming repeat that question?

Deputy Sean Fleming

I will put the question again. If the European Central Bank said it was setting the interest rate at minus one percent, a person depositing €100 today would get €99 in one year's time. This would provide a tremendous incentive to move money from sitting in bank accounts or government bonds.

Acting Chairman (Deputy Arthur Spring)

The Deputy's question is perfectly clear. We are running short of time.

Deputy Sean Fleming

I was asked to repeat the question.

Dr. Stephen Kinsella

I made this point in my submission. The only way one can get it to work is if one does something like that but that fundamentally changes the nature of what most people consider money to do. They regard it as a store of value and a medium of exchange. If this thing is not a store of value any more, if things become negative and if when I put my pension into my bank account and I come out less, then one might actually get people to spend more but they certainly will not save more and that will create a problem with investment. It will increase spending in the real economy but it will undermine the trust of the people in the currency and given the current situation, one does not want to do that. The Deputy is entirely correct that the technicalities of it could work perfectly but, on balance, I would keep the trust of the people in the currency.

Deputy Sean Fleming

Currency is set relative to every other currency and currencies devalue. That happens anyway. The value of the euro in the bank today might be worth whatever it is against the dollar and it might be worth less in 12 months' time. That is what is happening. It is keeping its nominal value but it is not keeping its real value.

Dr. Constantin Gurdgiev

I am not quite sure which deposits the Deputy means. The deposit rate set by the ECB has been on average for the past 12 months - negative point 18%.

Deputy Sean Fleming

Negative.

Dr. Constantin Gurdgiev

Negative point 18%. That is the negative rate. The ECB is charging the banks to put the deposits with the ECB. The reason they are doing it is with exactly the same logic. The reason it is not working so far is because the bank has a choice between having a safe asset of a deposit with the ECB versus a safe asset of the German bonds. The returns on German bonds are more negative than the ECB deposit rates. Therefore, from the bank's point of view, if I have to put some money into the risk-free asset, I chose the lowest negative deposit rate possible in absolute value so that I minimise my losses and that is in the ECB.

In a way the ECB would have to go much more dramatically under-carded. When it is under-carded, in effect, it introduces a distortion into all the safe assets markets. There is no guarantee that the bond will not rise in price even more and the yields on bonds drop even more. In other words, it is like chasing one's own tail in the relationship-----

Deputy Sean Fleming

Dr. Gurdgiev is saying the Bundesbank in Germany is doing that already.

Dr. Constantin Gurdgiev

No, the Bundesbank is not doing it. The ECB has the deposit facility so that European banks can deposit money with the ECB - there is a deposit facility. That is already at a negative rate. In the markets, if a bank wants to buy German bonds, it is generating negative return. That negative return is more negative than the ECB deposit facility. If the deposit facility continues to reduce, it might also trigger a decline in bonds and they are, in a sense, chasing their own tails because the German economy is a proxy for safe assets in the European economy.

Acting Chairman (Deputy Arthur Spring)

We will wrap up the question and answer session. I call Deputy Tóibín.

Deputy Peadar Tóibín

The presentation so far has been very interesting. The country has recently experienced a deleveraging by the banks and by citizens, which has a counter-effect on the process. The witnesses mentioned how cash and currency can be created. We are seeing the opposite effect in the economy with regard to that. I have a question on the Irish banks. Are they soaking up this quantitative easing to improve their own balance sheets? Are they also soaking up the interest rate? One of the big controversies we have had here is obviously the representatives of the banks coming in and telling us about their interest rates. They tell us that their interest rates are not fully reflective of the component with regard to the cheaper interest rates as a result of quantitative easing because that has been late in the timeline of the debt.

Dr. Constantin Gurdgiev

I mentioned in my statement that the banks across the eurozone, including in Ireland, are certainly incentivised under quantitative easing to take longer-term funding because it is made significantly cheaper. However, the overall cost of funding for the banks has declined dramatically and QE has a direct effect on that in terms of flattening the U-curve. In other words, the cost of borrowing in the longer term and the shorter term has declined. The banks are not passing that on to the borrowers at a retail level, that is, to companies and to households for consumer credit or any other credit.

We are at very strong margins. In other words, the margin between what banks can effectively borrow money in interbank markets and what they charge for new loans is very significant. This has nothing to do with the legacy loans. It is only used by the banks to subsidise some loans, including tracker loans, etc. However, this is a consistent policy we have pursued in repairing the banking sector. In the regional 2010-2011 plans for reconstruction of the banking sector, the uplift in lending margin is the second pillar of the whole restructuring of the banking sector in this country.

My concern is that we are already in a fairly expensive environment of borrowing with historically low rates at the government level and at the policy level, and with near historically low rates in interbank markets. These rates are not being passed through. However, when these rates are rising the banks have not repaired themselves sufficiently to allow for that margin to shrink, so the margin will stay up as the base rates are rising and as a result the charge will rise.

Mr. Dan O'Brien

I might put that another way. Banks pay out interest on the money they borrow and they take in interest on the money they lend out. The money they take in in interest has been pushed down on average because of the tracker legacy, so the amount of money they are taking in is lower because of the tracker picture. On the other side, the amount they are paying has two components. One is the deposits, which is very low. Therefore, they are making a profit on that side, which is good.

They are in trouble with those famous bank bonds. As Irish banks were very risky, the interest rates they had to pay on those bonds was high and the money they were getting for all their loans was lower, so they were loss-making. However, because of QE in general in other countries and specifically since it started here, interest rates on Irish Government bonds are now ridiculously low. This means the average cost of interest the banks are paying out has fallen and if banks are put together in the aggregate, the domestic banks have come back to profitability. Much of that relates to the compression of bond yields for banks. Irish banks can now issue those bonds again at a very low rate of interest. Therefore, QE has certainly affected the banking system here in helping to bring it back to profitability. I hope that is reasonably clear.

Deputy Peadar Tóibín

I think Dr. Gurdgiev has answered the question in saying that they have not passed on that benefit yet.

The primary objective of this is, obviously, the inflation rate but there are many other objectives with regard to stimulating the general economy. This seems to be quite a blunt tool to a certain extent. Would it not have been more useful and targeted for the EU, for example, to invest in a stimulus programme throughout Europe, increasing the capital infrastructure to improve efficiencies and competitiveness into the future and also put people back to work given the crisis in unemployment levels? That would have had a similar effect to increasing aggregate demand which would also have addressed the inflation issue but would have been more targeted and would have left us with more as a society.

Dr. Stephen Kinsella

As an old-school Keynesian, I completely agree with everything the Deputy has just said. If large-scale infrastructural investment cannot be done now in a place like Germany where the roads are pitted with potholes - if one drives there, one will realise that they really need large-scale infrastructural investment which would do an enormous amount to help - and if we cannot build big airports, etc., now at historically low interest rates, we will never be able to do it. Central banks never want to be the first to do it; their reaction function is incredibly low.

The economists Eric Lonergan and Mark Blythe came up with the suggestion that if we are crediting the bank accounts of commercial banks with reserves and deposits, why do we not just credit people? Why not just have QE for the average person? That would solve the balance sheet problem of the household and create a massive increase in spending. Returning to the triptych I mentioned of politically feasible, administratively possible and technically correct, all three of these things are true, so why does it not happen? It is because it is a new idea. If the problem is that inflation is low, particularly HIPC inflation, giving real people access to money could even be time-dated as Deputy Fleming mentioned. We could stipulate that €500 would appear in an individual's bank account which if not spent within a month would disappear again. It would be an interesting prospect, but central banks do not want to be that innovative.

Dr. Constantin Gurdgiev

I am glad Dr. Kinsella mentioned QE for people. I am one of the original signatories to the Financial Times letter on it. I disagree with the notion of an expiry date or that it would need to be used for consumption purposes. The balance sheet of the household is about debt and we can write it down.

The reason we cannot fund infrastructure out of monetary policy and cannot fund the reconstruction of the household balance sheets and instead are obsessed with governments' balance sheet and the banks' balance sheets is precisely the set-up of the euro. The set-up of the euro prevents the use of the monetary policy tool for real economic stimulus. This is why we only have an inflationary target and do not have pure Taylor rule targeting, such as unemployment or nominal or real GDP targeting or anything else.

Accordingly, if we want to have a stimulus programme, we have to find the source of the funding. That funding in Europe is debt but we are not allowed to effectively monetise that debt like the Americans do. The Federal Reserve System buys central government debt. By the way, they also did that in Japan for large infrastructure projects. In a way, Europe is hamstrung on both fronts in terms of repairing household budgets, corporate budgets and investment flows. However, that goes back to the set-up of the euro.

Mr. Dan O'Brien

There is a fiscal aspect to this and a monetary aspect. The argument would be that the Juncker plan is doing that to some extent at an infrastructural investment level. The idea is that €315 billion over three years will provide some fiscal stimulus.

On the monetary side, the issue raised of quantitative easing, QE, for the people is a fascinating one. Dr. Kinsella referred to there being no political obstacle. I slightly disagree with that. When one talks about issuing €1,000 to every adult in the eurozone, those involved in central banking ask what political implications such an action would have. Further down the line, do people think we can just conjure money out of thin air? One can do that but one does not have to be an economist to know that a central bank giving people money is not how a country gets rich. If that were the case, every country would be extremely prosperous. We know this will not make countries rich but it could provide a kick-start for economies. However, there is a political problem around that issue. If one does it once, what happens in the future?

Acting Chairman (Deputy Arthur Spring)

One would be popular at election time.

Deputy Peadar Tóibín

Tapering was a big issue in the United States. There were a number of engagements by the head of the Federal Reserve System and there were rollbacks. Dr. Constantin Gurdgiev said expectations are that quantitative easing would last three to five years. Is that correct? What would be the process for tapering?

Dr. Stephen Kinsella

Mario Draghi said the European Central Bank will keep doing this as long as it needs to be done. There is no effective limit to the amount involved. They could do it for five more years. They would signal well in advance as to how much they are going to taper or buy. Say, at a given moment they are buying €60 billion a month but will reduce it by €5 billion over the next eight months and level it off, they will do that to increase the amount of forward guidance they give the markets about this. In this realm, the guidance that is given about the future is as important as the spot market today. They are very careful about how they message this stuff. They will work very hard to keep that message. The markets will price it in beforehand and we will start to see things trend up again.

Deputy Peadar Tóibín

Is there a danger that there could be an excess negative at the end of that?

Dr. Stephen Kinsella

Yes. As Dr. Constantin Gurdgiev said, if the banks have not repaired their balance sheets, then the margins will continue to trend.

Sitting suspended at 4.05 p.m. and resumed at 4.20 p.m.

Acting Chairman (Deputy Arthur Spring)

I call Deputy Richard Boyd Barrett.

Deputy Richard Boyd Barrett

I thank the Acting Chairman and all the guest contributors for a very interesting run through quantitative easing. Having listened to all the contributions, which were all very informative, one is left with the conclusion that what we are describing is the intractable contradiction that is now facing the European economy and arguably the entire global economy. While quantitative easing was a sort of belated reaction to austerity and its failure, its impact, which may incidentally be somewhat beneficial for Ireland although we are not even sure of this because it is indirect, creates another problem on the other side, namely, the potential for asset bubbles.

Having gone through an austerity experiment which, frankly, was a disaster and has put the European economy on the floor, we are going back to what we did before but it is not even working. We are trying to give money to exactly the same people who caused the crisis the last time around. What we should be thinking about is how we got into this intractable contradiction and mess in the first place. I will put the following narrative and ask the witnesses to comment on it. The fundamental problem is the amount wages take as a share of the economy has dropped consistently since the Thatcher-Reagan period and the amount taken from the economy through profits has increased by more or less the same amount. I have seen some figures which suggest it is approximately 10%. When workers who have lower wages do not have the money to buy houses or goods, they must take out loans from the people who do have the money, who charge them interest. We end up in this intractable contradiction. The way to deal with this is to rebalance what was done over the past 30 years since the Thatcher-Reagan period and give more back to workers through higher wages and a higher proportion of the wealth our economy produces and take a correspondingly similar amount back-----

Acting Chairman (Deputy Arthur Spring)

A phone is going off which means the proceedings will not be able to be picked up by transmission services. I ask people to switch off their phones.

Deputy Richard Boyd Barrett

The thrust of what I am saying is this is the fundamental problem. We end up with an economy totally geared around debt.

Dr. Stephen Kinsella

Over the past 30 years there has been a process called financialisation. It has many definitions, but basically it means finance becomes more and more important to the arteries of the economy whereas before it was not that important. Credit as a share of GDP explodes, wages as a share of GDP go down and profits go up. I have finished a very large study comparing Iceland and Ireland in terms of financialisation. The larger financial structures get, they become a death sentence for small open economies because the chances of a crisis happening are just so large that making them a bigger proportion of the economy relative to other things such as construction is a real problem.

Rebalancing these things is very interesting. A hedge fund manager called Toby Nangle wrote a brilliant article on VOX in which he completely destroyed the secular stagnation argument, which is that falling worker productivity due to ageing and excessive indebtedness means we will have low growth and low inflation forever. He stated the reason is labour's bargaining power has fallen, therefore wages have fallen, and because wages have fallen we will not see large increases in aggregate demand, consumption and investment. It is a really intriguing argument, effectively a Marxist argument, made by a hard-core asset manager. Is it more important to rebalance these things? I absolutely believe so. I am an advocate of large-scale taxes on profits. If one is able to-----

Deputy Richard Boyd Barrett

It is great to meet a kindred spirit.

Dr. Stephen Kinsella

It comes from a particular place, which is economic history. We saw massive increases in productivity in the US in the 1940s and 1950s, when capital was taxed at 50%, 60% and 70% and sometimes 85%. It is not true to say these things harm productivity. We have tried the Thatcherite experiment and we know to where it leads. Increasing people's wages overall is generally a good thing, especially as a proportion of GDP.

Deputy Richard Boyd Barrett

I am interested to hear whether people agree with this, given that Dr. Kinsella seems to be endorsing it. As many others have said, it is the essential problem we face. When it is compared, which is very technical and it is important Dr. Kinsella has done this, and when one cuts through it all, at the bottom, this is the problem we are trying to deal with and unless we address this core issue, we will go nowhere. We will go from one inadequate, inappropriate and potentially dangerous response to another.

Dr. Stephen Kinsella

I do not want to cut across anybody else's time. I am sympathetic, but the research I have seen to date does not identify the mechanism exactly. Until we identify the mechanism exactly, we are just choosing effectively from a menu of which mechanisms we think are more important. I believe there is enough evidence in the wage argument, but it is only historical evidence. It is not econometric for statistical analysis.

Acting Chairman (Deputy Arthur Spring)

Internationally, if one continent is doing it against the others-----

Dr. Stephen Kinsella

Does the Acting Chairman mean taxing large scale profits?

Acting Chairman (Deputy Arthur Spring)

Yes.

Dr. Stephen Kinsella

We might see large scale profit repatriations. I hope the base erosion and profit shifting schemes which the OECD will put together will help somewhat. The ability of global capital to move around is the point of global capital.

Dr. Constantin Gurdgiev

I have to disagree with what Dr. Kinsella has said. I believe the problem rests somewhere else. I do not see it as debunking the secular stagnation thesis, which goes way beyond demographics and there is much more to it than this. I sympathise with the problem as outlined, but I do not see Dr. Kinsella's suggestion as a solution. It is not just about taxation itself or taxation of capital alone. If we start with the 1940s and 1950s in the United States and Europe, the post-war capital base was effectively destroyed in Europe. When we start from a low base and introduce new investment in physical capital, the rates of return to that investment are very high, but as we keep building better factories and better roads there is a marginal decline in returns and productivity. In the 1980s and 1990s, when we began to experience this decline, we recognised it and continued to stimulate investment in physical and technological capital by lowering taxation rates. At the same time, we effectively created the disparity with the rate of taxation on human capital, in other words labour and wages, by introducing higher and higher rates of taxation on them. For me, the problem is not just about wages and capital taxation, but in the disparity between how government structures use taxation systems to incentivise the accumulation of physical and financial capital over and above human capital. This problem is entirely different, as is the solution to it. It is not about taxing capital more but about simultaneously reducing the gap between the taxation of labour and human capital, which are two different things although they are related, and physical and technological capital. It is crucial to distinguish between them because-----

Deputy Richard Boyd Barrett

I am conscious of time.

Dr. Constantin Gurdgiev

I will finish with this point. It is crucial to distinguish between these because human capital taxation relates more to the upper than lower margin of wages taxation, and labour taxation relates more to the lower than upper margin of taxation.

Mr. Dan O'Brien

These are some of the most fundamental questions. Let me start with some specific reactions and move out more generally. Germany has seen wages fall as a percentage of GDP, therefore, the trend in Germany is similar but households have not become more indebted. I am not sure there is a direct link between financialisation of debt and the decline in wages. Germany is different from most other countries. That is just a country to refer to as an exception.

On the issue of what is happening to wage growth and why it is lower or lower in parts, the globalisation picture comes into it. A lot of the lower skilled jobs have gone elsewhere. Is that more an explanation of why wages as a percentage of GDP have gone down? It is a possible explanation. Another explanation relates to one’s annual income. One puts 10% aside and save that every year. One does that more and more every year. The amount one has saved relative to one’s income rises over time. If one earns €100 every year and one saves €10, after ten years the amount one has saved is €100 and one’s income is €100, which means the income one is getting back from the €100 one has saved is a significant amount compared to one’s wages. Over time, as the stock of wealth rises, that is something else that has an impact on the percentage of income that comes from wages. That is another factor going into the mix.

Finally, to come to the biggest picture of all, what is really going on, there has been an argument about sectoral stagnation. The Toby Nagle argument has also come up. Another even more depressing argument is that in fact we are at the end of growth. Economic growth is over. We had a great period of 150 years of economic growth and all the figures are showing productivity is declining and we are into a period of no economic growth. There is a big debate about that.

Deputy Paul Murphy

I thank the witnesses for their presentations. I will start with a quick question for all three speakers. What do they think is the key underlying factor in the decline in inflation rates and the near deflation that we have? Oil prices are a temporary factor that has occurred more recently, but what is the underlying reason for the fall in inflation rates in Europe?

Dr. Stephen Kinsella

When Deputy Murphy says inflation rates, does he mean by that consumer prices, asset prices or wholesale prices?

Deputy Paul Murphy

Consumer prices.

Dr. Stephen Kinsella

The answer is energy costs and then lack of demand. One cannot have a situation where there is inflation in a country like Greece with more than 50% youth unemployment. There are just not enough people buying to have the average retailer jack up the price of anything. They cannot do it. They do not see the footfall. One sees that in retail sales all the time. It is a lack of demand, fundamentally.

Dr. Constantin Gurdgiev

Very much so. I will elaborate a little bit. One has the income declines on the household side, sometimes through the wages, sometimes through unemployment and sometimes the aggregate income has declined across the whole economy as well, and sometimes all three together. One has precautionary savings motive, which is very strong in that people are saving anything that they can, even people with jobs are still saving. In addition, one has the sectoral stagnation. One has the demographic effect in addition to the other effects of the sectoral stagnation.

Ireland is a great example and laboratory of that. We have in addition to it the wealth effect. By destroying vast amounts of paper wealth, imaginary wealth we used to hold in our homes, we destroyed the security of the entire generation in terms of their pensions. As a result of that, what does one expect them to go and buy? They are going to save and they are going to try to find any outlet to safely save for the future.

Mr. Dan O'Brien

I will just throw in globalisation again. If one looks at services and goods, we have had deflation in goods for a long time. The price of clothing is now much less than it was 15 years ago, and a lot of that is because we have had more people participate in the global economy so there is a supply-side effect to that, but I would agree there is no doubt a lack of demand has definitely been a factor recently.

Deputy Paul Murphy

That is more or less what I was getting at, namely, lack of demand for a variety of reasons, but central to it being unemployment and also wage depression over a period of time, and the race to the bottom that exists within the eurozone in particular, on which Germany was first out of the blocks. We see it in terms of the contradiction between the core and the periphery of the eurozone at the moment.

If a primary driver of deflation is wage depression, as well as other factors, how can increasing the money supply necessarily have a very significant impact on addressing those deflationary pressures?

Dr. Constantin Gurdgiev

The Deputy should send that on a postcard to Mr. Draghi because I agree that it is a very big question. If one wants to increase demand, one must find a way to do it without increasing future liabilities relating to that, in other words, the debt, because one would scare the daylights out of the households who are already indebted by hiking their debt on the side of the Government. In a sense, we are back to the same conversation we had before about key relief for the people. No monetary policy is going to generate any significant impact, unless one is injecting the money directly and the monetary policy goes to the heart of the problem, namely, two areas, the first of which is households and the other is companies, the latter for the purposes of investments and the former to shore up their finances and maybe for some consumption purposes. One need only look at Japan.

Dr. Stephen Kinsella

It is the case that we have a generation of monetary policy makers who believe in something called the quantity theory of money. That basically says the price level is related to the amount of money in the system and that is somehow related to the amount of GDP growth one will see. They believe that holds true in the short term, medium term and long term. I probably believe the long term, where that is 20 years, but I do not believe the short term at all. I do not think the mechanisms are there. To return to the question, the mechanisms have not been correctly identified and until they have, there is no point in talking about them. That is an article of faith, that Europe’s policy makers have but I do not think it is justified by the evidence.

Acting Chairman (Deputy Arthur Spring)

Dr. Gurdgiev must leave now. I thank him very much for his contribution. It is much appreciated. We will continue with the session.

Mr. Dan O'Brien

If stimulus can kick-start a recovery, one gets stronger demand, stronger growth, unemployment comes down, the labour market tightens, wage bargaining increases and wages go up. That is the mechanism. If it works and if quantitative easing, QE, boosts demand then that will feed into the labour market and then wages will be pushed up.

Deputy Paul Murphy

It is a version of a trickle-down effect. Is it not the case that the overwhelming effect of QE, let us say in the United States, which is the most recent example in a similar type economy, although obviously there are some differences, is an asset price bubble, and that very little of it trickled down? Are there any examples where QE had a demonstrative, significant effect on inflation rates?

Is it not also the case that asset price bubbles lead to an increase in wealth inequality because it is the top 10% and top 1% who own shares, bonds and assets of all sorts and that has been the effect of QE in the United States in particular?

Dr. Stephen Kinsella

This is an open research question. There has been a huge amount of research but the picture is too mixed. Many people say QE disproportionately benefits the 1%, but many say the real beneficiaries of QE are pension funds. That is why I use pension funds in my example. In the case of the US in particular, because most people’s pensions are invested in the stock markets, via something called the 401(k), by increasing returns to assets in those markets, one helps to shore up the pensions of individuals by helping the entire pension structure. It really depends on which part of the story one wants to examine. The elephant is too big to examine via one simple, nice story.

Acting Chairman (Deputy Arthur Spring)

The time is up, but is the point that the QE in which Europe is engaged involves very much a trickle-down effect rather than a spontaneous creation of demand and inflation for the consumer?

Mr. Dan O'Brien

The use of trickle-down is clearly a loaded, political view. There are three points. The question was asked whether there is any evidence that QE has led to inflation. There is not. It has not led to inflation going to 3%, 4% or 5%. In the US, unemployment is close to 5% now, so one could argue that one of the best ways to help people is to get the unemployment rate down.

We are all agreed that there is a real risk of an asset price bubble, the biggest danger of which is a crash resulting in people losing their jobs and becoming dependant on the State. It seems to me that the real concern around the creation of an asset bubble is that it will cause another recession. Clearly, recessions hurt most the people who have least.

Acting Chairman (Deputy Arthur Spring)

I will allow Deputies five minutes more for questions during this session as we need to conclude this session at 5 p.m.. Is that agreed? Agreed.

Deputy Peadar Tóibín

Most economists I have heard discuss the Greek crisis have been of the view that Greece's debt is unsustainable and it is necessary, therefore, for there to be a write-down of that debt to make it sustainable for the economy to function, yet the EU appears to be pushing Greece into accepting a deal that does not include a write-down. Is it a mistake on the part of the EU to push Greece into a deal that everybody agrees cannot work?

Mr. Dan O'Brien

The terms "debt relief", "debt restructuring" and "debt write-down" are often mixed-up. Debt relief is a very general term.

Deputy Peadar Tóibín

I am speaking about debt write-down. The IMF figure in this regard is approximately 30%.

Mr. Dan O'Brien

I am not sure the IMF specifically mentioned a "write-down". I did not read the entire paper but I am not sure it referred to "write-down". Debt relief can come in many forms. Write-down is to disappear the money, which means the lender will never get the money back. As such, the debt is removed from the balance sheets of the lender and the receiver. One can make debt sustainable in many ways. If the Deputy were to lend me €10 million, in respect of which I was not required to make any repayment for ten years and thereafter only needed only to repay €1,000 per annum, I would be crazy not to accept that because effectively a large part of it would be free money. Any amount of debt is sustainable. What is at issue is how the repayments are structured.

Greece, Ireland and Portugal have already had a series of debt relief changes, which have driven down the cost of servicing their debt. For political reasons, in many of the creditor countries a write-off is not going to happen. However, debt relief along the lines of what has happened, including lowering of the reservicing costs, stretching out of payments, in terms of having an effect on an economy can have just as good an effect. It is possible to help a country by providing an interest rate holiday and not requiring any repayment until after five years when, hopefully, its GDP-income will have increased and everything will be much easier to deal with.

Dr. Stephen Kinsella

I agree with Mr. O'Brien. There is a need in the context of the debate on debt relief to talk about hair-cuts. A lender might expect to be repaid 100 cents but instead gets only 80 cents. Capital hair-cut is a technical term. It is a stupid term but none the less it means precisely what everybody here thinks it means, namely, that one expects a return of 100 cents on the dollar but instead gets only 80 cents on the dollar. We basically meet in court to figure out the difference. That is more or less how these things work.

I believe Greek debt is fundamentally unsustainable. As a percentage of its GDP, it is too high. If the context of the production structure of the Greek economy, it does not work. Greece cannot do what Ireland did. The structure of its economy is totally different. Ireland is often touted as-----

Acting Chairman (Deputy Arthur Spring)

Perhaps Dr. Kinsella would expand on that point.

Dr. Stephen Kinsella

Yes. I will give a good example. Exports as a percentage of our GDP is well over 100%. We can trade our way out of austerity. We have the structures in this country to be able to do so. Greece cannot do that. The structure of its economy does not allow for it, unfortunately. I am deeply concerned about this and have written a great deal about it. Neither side is focused on what is really necessary, namely, a restructuring of the Greek economy and a permanent interest rate holiday. Unfortunately, this is politically unpalatable. In my view, there is a failure of leadership on both sides.

Deputy Peadar Tóibín

Is Dr. Kinsella suggesting there should be a hair-cut on the Greek debt?

Dr. Stephen Kinsella

Yes. The first programme entered into by Greece was remarkably the same as that entered into by to Ireland in that it required austerity measures such as increased general inequality, increased tax rates, reductions in expenditure and so on. The second programme was completely different.

Deputy Peadar Tóibín

On the broader euro issue, the euro has been in crisis for half its history. Currently, the European economies that are outside of the euro are functioning better in a number of areas, including employment, etc. It appears to me that there is an in-built unsustainability within the euro in terms of higher productivity in the core countries and far different levels in the countries along the periphery.

Acting Chairman (Deputy Arthur Spring)

To be fair to everybody else, I must ask the Deputy to conclude.

Deputy Peadar Tóibín

The mechanism seems always to be towards breaking. In other words there appears to be a continuous pull within the euro system. I know it is taboo to discuss the issue but given it is unlikely that the European Union is going to accept a hair-cut would Greece not be better off outside of the euro?

Deputy Richard Boyd Barrett

I was surprised to hear reference to a crisis in leadership on the Greek side. To my mind, given what we have been told, namely, that the Greek debt is unsustainable and the people in Greece cannot take any more, the Greek side has made too many concessions. The people cannot take any more but Europe is insisting that they do. It seems to me, in so far as the Greek Government believes this debt is unsustainable and the ordinary people cannot take any more - I hope they stick to this line - that Greece is right and what we are seeing is political vindictiveness on the part of German Chancellor Merkel, the neo-liberal ideologues, big business and anybody else who stands to lose if we challenge the austerity agenda. Is it not just politics at this point in terms of the opportunity being taken to punish these people to set an example for everybody else across Europe?

Deputy Paul Murphy

I would like to explore the question of a euro exit by Greece. The idea that a good deal for the Greek people will be done is ruled out and so there are two options remaining, which is a bad deal that contains a commitment to discuss something in terms of debt but slightly further down the line and austerity measures. If these are the two options open to Syriza and the Greek Government they would be better off exiting the euro. I would like to discuss how that could be managed. Greece had a trade surplus last year. Figures for the last month available show a slight trade deficit. There is no question but that what is open to Greece is that of a parallel currency and a period of turbulence in terms of its economy. Given Greece has a primary balance, is no longer dependent on the ECB, which means it can burn bondholders left, right and centre and that ECB will not get a penny of its ELA back, and it can write off a huge portion of its national debt, which gives it €20 billion to pay this year in terms of repayments and interest, is it not possible for the Greek Government to take steps over a period to stabilise the currency? This would free up space for the Greek economy, thereby giving it a chance of recovery outside of the eurozone.

Acting Chairman (Deputy Arthur Spring)

Dr. Kinsella referred to the fact that relative to Greece, the Irish economy had multiple engines and an ability to drive itself out of austerity. Perhaps he would expand on the reason Greece is in such a precarious position?

In addition, did Greece get a write-down, or was it the banks, to the tune of approximately €100 billion in 2012? Why has that not had the catapult effect of releasing some buoyancy in the economy as well? I do not believe anyone, across any party, wishes to see the Greeks in this situation but ultimately, in the witnesses' individual opinions, will Greece leave the euro? That is it for the present and I ask the witnesses to keep the answers brief.

Dr. Stephen Kinsella

As to whether it is political vindictiveness, there is a bit of that. Jean-Claude Juncker has stated people need to leave their egos at the door and stuff like that; I am not certain they have. As to who loses, it is interesting. The Deputy talked about a period of turbulence, which I believe is understating massively what would happen. If one reads the sociological studies that have been done about Argentina in 2001, one basically has the destruction of a middle class and the destruction of an entrepreneurial class. That effectively is what happened. Interestingly, the economy rebounded since but that probably was on a commodity boom. While it obviously depends on what is the deal being offered, one would take a lot of austerity before one would leave a currency union like this. That said, it seems as though, at least from the referendum results, people actually might welcome that. I am not sure but then it depends on who one is. If a person's pension is paid by a bank and that bank was giving the pension to the person in euro but now is giving it in scrip, in drachmas or whatever, that would change many people's lives and would hamper the growth of a generation.

The Deputy mentioned the primary balance, payments and some other areas but that is all gone, as many businesses have not being paying. I make the point that what was fundamentally strong about the economy in January is not there any more. That said, an extremely large write-down might help them because, exactly as Dr. Gurdgiev has noted, it would take them from a very low base. As to whether Greece will leave the euro, I think it will, as I do not believe there is enough time to organise a reasonable deal. As for who loses, the average Greek citizen will lose massively from that. While I do not think we will be that badly affected, who knows? Nobody knows what will happen. Everybody thought Lehman Brothers was going to be fine.

Acting Chairman (Deputy Arthur Spring)

As members must vote again, would Dr. Kinsella mind if we move on to Mr. O'Brien? As we must conclude he has two or three minutes.

Mr. Dan O'Brien

On whether Greece will leave, I still think there is time. I do not believe so much energy would have gone into five and a half years to keep the currency union together if there was not a willingness to go the extra mile. Consequently, there is time and I do not believe it is inevitable at this stage. I still believe there is time, although there is no doubt but that the politics of this mean the 18 want to have the other one move most of the way. As to whether it is vindictiveness, no one comes out of this well but one must note that even before this Government came to power, the previous Administration had alienated everyone else, even their own cousins in Cyprus and even centre-left governments around Europe. There simply was a sense - rightly or wrongly - I am not giving a view but simply am saying that rightly or wrongly, the things people were saying about Greece in different member states, whether they were on the centre-left or the centre-right, were extremely negative. That is how people felt and as to whether they were justified in that regard, I simply am telling members what I heard. I do not believe it is a vindictiveness but that relations soured to such an extent that there is a real frustration that this has dragged on for so long and so many hours of prime ministerial time and the time of finance ministers have gone on the whole thing.

On the costs, they are huge as for any country to leave a currency and establish a new one, there are massive balance sheet issues for the private sector and the government sector. There are huge costs. As for the benefits, were Greece to write off all its debts, every single cent, and not pay anything back, it would save about 4% of GDP in debt servicing costs. Incidentally, 20 years ago it was paying 12%, or three times that. It would not have any roll-over issues but the question then is: when its GDP collapses and its deficit balloons out again, how does it fund the deficit? It is an austerity machine. If one has seen austerity up to now in Greece, what would happen were they to leave would be infinitely worse.

Acting Chairman (Deputy Arthur Spring)

I thank all the witnesses for making themselves available to the committee today, for their insight and for their contribution to today's meeting. The discussion had been very useful. The meeting will suspend until after the vote, that is, until 5 p.m.

Sitting suspended at 4.55 p.m. and resumed at 5.15 p.m.

Senator Aideen Hayden took the Chair.