Monday, February 08, 2010
Ireland: for the UK, the unwelcome shape of things to come?
Whatever you do, don’t bracket Ireland with Greece – but Larry Elliot Economics Editor of the Guardian just has. The argument is hardly new to Slugger, but here, it’s also invoked to say how right Britain was to stay out of the euro and contains a warning against a particular view of public spending cuts.
Ireland is Labour’s dystopia of a Tory Britain The consensus view in the markets is that Ireland will be rewarded for its prudence …. (but) there is a considerable risk that removing spending power from the economy will lead to more companies going bust and deter the survivors from investing more..
The onset of austerity, according to some commentators, has been greeted with a certain stoicism, as if there had to be payback time after the excesses of the boom years. Even so, the fiscal retrenchment is stretching the social fabric to its limits…
Ireland’s property boom-bust during the noughties was a textbook example of what can happen if a country loses control of its own monetary policy – rates were too low early in the decade, leading to a colossal misallocation of resources away from exports towards construction, whose share of the economy more than doubled from 6% to 14%
Brian Walker @ 07:38 PM
And you could prob add will be too high when Ireland is till trying to recover.
Posted by on Feb 08, 2010 @ 09:14 PMIt would seem that the original PIGS (Portugal, Italy, Greece and Spain) have grown into PIIGGS (Portugal Ireland Italy GB Greece and Spain). Look at GB’s debt and the forthcoming auction by the Tories, LibDems and Labour as to who will be the most prudent and cut the most services and raise the most taxes - all is not well in GB either. Look at default swap rates and you could also include Belgium amongst Euro pigs right now.
With respect to the euro, yes it does constrain a state from exercising monetary control through interest rates, money supply and to an extent exchange rates (the euro has appreciated by 50% in value against the pound sterling in the past 2-3 years and the UK is still Ireland’s No 1 trading partner). Some economists like David McWilliams have gone so far as to recommend a short withdrawal from the Euro (to the Punt 2.0) to allow the State rebalance the economy. However the euro has one great advantage, it is the world’s blue chip currency (overtook sterling and the yen some time ago and is arguably more respected than the US dollar). Given the government’s assertion that there are viable Irish businesses and consumers hungry for credit which would grow the economy, it is indeed a wonder that foreign banks are not queuing up to do business in Ireland (though Bank of Scotland today indicated plans to become the Third Force in Irish banking). There are arguments that the governments recapitalisation of the banks and the operation of NAMA are unfairly protecting domestic banks and stiffling competition (the NAMA competition point is currently before the EU). So yes the euro can remove options but it should also mean you have access to global finance and institutions who won’t have to fret over dealings in a marginal currency like the punt (and with respect the pound sterling isn’t an awful lot better).
And by the way, the euro does indeed remove transfer control of state monetary policy to the group of which the state is but a small part but you still retain fiscal policy (taxation, public spending and state borrowing). If the State had taxed property or property transactions in 2002, the whole construction boom could have been regulated and monetary policy wasn’t necessary. Instead the State introduced development incentives, tax free incentives (section 23) for offsetting purchases by consumers against income, holiday home allowances and regional regeneration allowances - it was arguably the poor application of fiscal policy which fuelled the boom.Posted by on Feb 08, 2010 @ 09:25 PMThe BBC business correspondent, who is from the South, said last night that Britian’s economic position was similar to that of Greece and will probably lose it’s triple A rating in the coming months.
Posted by on Feb 08, 2010 @ 09:27 PMTotally agree re control of monetary policy - although even then you’re only as good as one bankers opinion. In a market the size of the Republic that probably doesn’t give good odds.
But throwing your lot in with vastly different and larger economies in the Eurozone was still an obvious mistake. Not that realistically the Republic had any say in the matter. Always worries me that political egotism is so effective at papering over the cracks of clearly divergent interests.
Posted by on Feb 08, 2010 @ 09:28 PMThe current problems in the Eurozone (or Ireland) don’t stem from a mix of vastly different economies sharing a currency. The primary issue is we have a monetary union without a fiscal union. There is no mechanism or appetite for the transfer of tax revenues from the better performing states to those now struggling. In addition the ECB / EU scope in restraining fiscal policy in deliquent member states (hello Greece, Portugal) is rather limited.
It’s beginning to look like this will get resolved one way or another (e.g. by the break up of the Euro or the creation of a debt Union).
The Irish government made the mistake of promoting massively pro-cyclical fiscal policies in a period of ultra-loose monetary policy. The boom & bust was not caused by loose monetary policy alone, but the toxic combination of tax breaks for developers and property developers, 2% interest rates and huge amounts of readily available Euros made available to the Irish banks on the European wholesale markets. Had the government pursued more sensible counter-cycilical policies the post-2002 boom would not have been as large and this bust would have been much more manageable. Ireland still has a low-debt to GDP ratio, had our banks been more prudent there would be no need for bailouts / NAMA etc. None of this was a fait accompli it’s facile to blame the Euro..
Posted by on Feb 08, 2010 @ 10:52 PMThe above should read -
“but the toxic combination of tax breaks for developers and property investors”
Posted by on Feb 08, 2010 @ 10:54 PMThat’s a more balanced appraisal from you, Mack - compared to your usual ‘see, hear, and blog no evil’ approach to the EU.
However, the tax breaks for developers simply means that they were able to retain circa 20% more profit from development than would otherwise have been the case. It doesn’t mean that there would not have been as much development as if those developers only retained 600 million out of every billion instead of 800 million. 600 million retained profits per billion would still have been more than enough financial incentive to supply the consumer demand that was created and sustained by the ECB’s expansionist monetary policies. So your argument, like the ECB policies, is a bust.
The government has a constitutional obligation under the Maastricht Treaty (which is part of the Irish constitution) to support the monetary policies of the ECB. At no point could it have acted independently of those macroeconomic and monetary policies - it certainly could not have declared the policies of the ECB as the road to boom and bust ruin. Instead, it had to keep its little mouth shut (it is illegal for the government to offer any advice to the ECB or to criticise its policies), ride the wave and hope for a soft landing. Apart from that, the government must manage the economy so that its fiscal policy and other policies do not conflict with its monetary policy. If that policy is expansionist, then the government must allow the ECB tail to wag the dog since the dog has no control over the tail.
Unfortunately, just as the ECB’s management of Ireland’s macroeconomic and monetary policies has ruined the Irish economy that disastrous mismanagement will continue as the ECB designs its policies according to what the biggest economies in the Eurozone require - which will require higher interest rates when Ireland requires the opposite. I wouldn’t like to have paid half a million for a shoebox apartment in Dublin that is now worth a quarter of that when the ECB begins to raise its policy rate and interest rates increase - or perhaps more aptly, I won’t like being a taxpayer when that happens and the banks come back for more of my cash because folks are handing the keys back in their unemployed droves.
In addition to allowing the Eurozone to ruin the Irish economy, we also allowed the Eurosystem to flood the banks with too much money to chase too few investment opportunities and cause bubbles in all zones of the Irish economy where property was just one such zone.
Posted by on Feb 09, 2010 @ 02:34 AMBy the way, it wasn’t a case of “build them and they’ll buy them” so there is no point blaming the developers for supplying market demand. It was the case that the demand was so great that the developers could not build them fast enough to meet the demand.
Who gave the muppets the cheap credit that allowed them to speculate by buying 2 or 3 or even 15 apartments in the hope of selling them on for a profit? The ECB supplied the cheap credit and created the demand, not the banks.
While it is fashionable to blame the banks, that ignores the reality that membership of the Eurosystem means that a consumer in Ireland can borrow from any bank in the Eurosystem. If the Irish banks refused to offer the cheap money other banks would have filled that market demand.
The only way to stop that market demand was to increase interest rates. However, Germany and France needed lower interest rates when Ireland needed higher interest rates so instead of increasing the rate the ECB lowered it.
But as was pointed out at the time: joining the Eurozone was a political agenda aimed at promoting federalism and was not an economic agenda. Some of the best Irish economists told the government exactly what would happen if they gave away control of the economy to a lucky dip policy system, and they were right.
Posted by on Feb 09, 2010 @ 02:47 AM@Alias / Dave
By the way, it wasn’t a case of “build them and they’ll buy them” so there is no point blaming the developers for supplying market demand
Not the developers no, but the government (and the banks) could have applied the breaks. There were tax breaks for investors (and Owner Occupiers also) - various Section reliefs and mortgage interest rate reliefs. This could have been abolished or scaled down as part of a counter-cyclical fiscal policy to contain the boom. The abolition of such tax breaks (or even tax increases) could have raised the minimum yields required for any sememblence of affordability in property investment thus reducing the demand for money for investment (which in turn would reduce the amounts developers could borrow profitably, and in turn the amounts the banks could introduce to the Irish economy).
Posted by on Feb 09, 2010 @ 09:45 AMA good discussion gentlemen. Your forecasts?
Posted by on Feb 09, 2010 @ 10:20 AMBring back the Escudo, the lira, the Drachma, the peseta and the punt. The only way out of the mess is to allow each country’s currency find its correct level in the Market place.
Posted by on Feb 09, 2010 @ 11:11 AMThe media is looking a Greece,but no one wants to tackle the core of the problem. unaccountable hedge fund betting on short term gains, George Soros and the like. Who are these other un accountable companies who give out these credit ratings.what is their agenda.Until such time as this is tackle and it won’t be we go from Ireland to greece. to Spain to UK. back to Ireland over to Sweden.
Posted by on Feb 09, 2010 @ 11:12 AMYour forecasts?
Big Euro economic guns to back the wee uns and speculators to move along and give the pound a rollicking with Tories assuming power with small minority struggling to get the very cutbacks being urged on Greece through parliament with turmoil economic and social ensuing.
Queen to abdicate and public fist fight outside Buck Palace between Charlie and Willie with Charlie winning with a sly headbut just as Willie is distracted by the cheering crowd urging him on.
Britian then to apply to join the Euro, ignoring protest from Newry shoopkeepers and Ulster Unionists with Greece using its veto to delay membership and demanding stringent economic reform.
Or alternatively everything will be just ok, thats the joy of economics nobody understands what the hell is going on and nobody has the fainstest clue what is going to happen.
Posted by on Feb 09, 2010 @ 11:33 AMBrian -
I’ve no idea. I doubt the Euro will be abandoned easily, I’d guess we might see the ‘no bailout’ clause fudged with some form of support with strings attached (further reductions in bailed out states economic sovereignty)..
Robert -
I don’t quite understand why you think investors should be accountable, and to whom? These are the people the states are going to, to ask to finance their budget deficits at home. Every lender has an interest in getting their money back, that’s the primary agenda of the bond funds. Why should anyone lending their own money be accountable to the borrowers? Why would anyone lend under those circumstances? The hedge funds try to make money where they can - making bets on potential weaknesses. It’s not at all clear that Germany and France will bailout Greece - although they might. If you think the US hedge funds are wrong, that Greek fiscal policy is perfection itself - then Greek debt is now not only as safe as houses but has a fantastic yield.
Posted by on Feb 09, 2010 @ 11:34 AMMy forecast - Greece is in sh*te and will need major austerity programs to get it back on an even keel - and Greek citizens are a fairly rambunctious lot who don’t shy away from civil disorder. In the end it will be a balance of Greek domestic reform and austerity coupled with a handout from Germany and France which rescues the good ship SS EU. The other PIGS or PIIGGS will fare better.
Ireland will return to growth in 2011 though the extent of competitiveness reform really hasn’t hit home yet. A minimum wage of €9.32 (£8.17 per hour) in catering and mandatory time and a third on Sundays ? Just one of a thousand examples. Another €3bn needs to come off public spending in the Nov 2010 Budget so a bit more pain though the bould Brian has said this time it won’t be public sector pay to suffer. Go figure that one!
As for the UK, there’s a phoney depression going on with asset prices and employment stabilising but given the debt, the necessary abandonment of Quantitive Easing and the tax and spending bombshells coming from all parties, I think there will be trouble ahead for the UK and sterling. Remember the EU Motto, United in Diversity? In 10 years the Euro will be clear world currency (though maybe the Chinese RY will be a competitor). The UK and sterling will continue to wither and decline in global rankings, though no doubt like Norma Desmond in Sunset Boulevard, it will insist on living in the past and remembering former glories.Posted by on Feb 09, 2010 @ 11:47 AMJaggers -
Another €3bn needs to come off public spending in the Nov 2010 Budget so a bit more pain though the bould Brian has said this time it won’t be public sector pay to sufferI get the impression they’ll be looking to do a deal on public sector reform this year, rather than drive down wages.
Posted by on Feb 09, 2010 @ 11:51 AMMack,
If reform means providing the same service with fewer people, I agree that they will have to reform areas of the public sector but given the lack of other employment opportunties in the economy (12.7% unemployment now, an average of 13.2% this year and a peak of 13.5%) I think there will be strong resistance to this kind of reform. And ultimately unions would have to accept a little pain shared around (wage cuts) rather than a lot of individual pain for redundancies.
If reform means “efficiency savings” a la lexicon of UK political parties then that just pie in the sky and isn’t going to happen.
With a requirement to cut €3bn from the budget this year and €6.5bn frontloaded from 2011 - 2014, public sector pay is going to have to come down - it’s a glaring gargoyle the disparity between Irish and British public sector pay, with easily 50% differentials.Posted by on Feb 09, 2010 @ 12:46 PMmack ,
Your post 5 above sums up the situation accurately . We should NOT however forget the ‘other’ elephant in the room i.e the export of those financial weapons of mass economic destruction which had been exported from ‘Wall St’ and the USA financial sector.
As of now interest rates in the USA are the lowest they’ve ever been . Are businesses borrowing to invest ? are consumers borrowing to buy houses ? The buying power of a large part of the USA consumer economy has been gouged out via the stock market collapse and negative equity . Some 50% of USA home owners are expected to be in negative equity by the end of 2010 . It’s unclear if pumping the economy via ramped up public spending (future borrowing ) will be enough to stave off another retreat in overall economic activity .
This as well as the prospects of financial turmoil in Greece , Spain, Portugal and Italy is what’s unsettling the market .
The above countries unlike Britain and Ireland did not make the structural adjustments to their economies in the 1980’s that Britain and Ireland did .
So looking forward Ireland as long as it remains in the eurozone can hope to benefit from the monetary stability that the euro will continue to provide .
I think Jaggers is calling it right on Greece and on the need for further cutbacks in the Irish public sector .The UK is facing a similar choice between the financial rocks and hard places with the added possibility of ‘currency’ mayhem proferred by those who forecast a ‘hung’ parliament .
One would hope that the Irish political and financial establishments have learnt from this at least partly self imposed crisis .
But then I never knew a politician who cried out in the midst of growing perceptions of ever increasing prosperity—Stop .
Not the way democracy works .
Posted by on Feb 09, 2010 @ 01:37 PMGood interview with Joseph Stiglitz in today’s Independent (British). Stiglitz’s views on the banks are on the mark. He has a good word for Gordon Brown while he remains somewhat disappointed by Obama’s failure to confront those who are holding the world economy ‘hostage ’ and who threaten elected governments with even worse economic mayhem.
Posted by on Feb 09, 2010 @ 06:21 PMIt’s a good article - this is probably fair comment -
If there is a speculative attack against you it is not an issue of appeasement but a judgement about whether they can break your back.
The speculators bet against weaknesses, and can force changes that may not otherwise occur (or cause them to happen earlier). But they can also be wrong, and lose a lot of money. If you think the ECB will prevent a default Greek bonds look like a great investment at the moment.
He might be right about fiscal ‘fetishism’, but then it’s the lenders perogative to choose who they lend to and why. His viewpoint doesn’t seem to be universally accepted by bond purchasers.
The ratings agencies are private companies, investors can ignore them if they want to -in many cases that would be a more sensible approach, I imagine the likes of Bill Gross does his own due dilligence. But, the fact that they don’t ignore them wrt sovereign debt, I think means something. If you force the ratings agencies to behave in a certain way, they may well be ignored. So you’d achieve nothing.
On his points about Usury laws, that sounds interesting, but what happens if the bond price falls (due to a simple supply-demand imbalance - a lack of buyers at the current yield) - and you cap the yield. That imbalance will get worse not better and the state would be forced to default?
This is surely too general
that while financial markets started the crisis and governments got themselves into huge debts to bail them out and pay for the downturn, now the financial markets are punishing those same governments. You can imagine people feeling this irony, and it’s not healthy.
Financial markets consist of millions of buyers and sellers - they’re not neccessarily the same people. The hedge funds weren’t bailed out, and bond buyers presumably also still have money (to purchase bonds), so…
Posted by on Feb 09, 2010 @ 10:29 PMForecast
George to be even worse at sums that bungle sorry brown.Posted by on Feb 09, 2010 @ 11:09 PMThe big point is well made in #5: monetary union without fiscal union. But how many referendums would you need for fiscal union, and how many incumbent governments would campaign for a YES vote?
The discipline of economics is languishing at present for want of clear and credible doctrines. Are we all supposed to be Keynesians again? If not, what are we supposed to be? What would Keynes have prescribed for a world in which it is legal for one person to have several different credit cards? Can the whole science of economics in any generation be turned into mush by a few ‘events’? Do we need an EU minister of economics, are there any suitable candidates for that job, and if so what do they believe?
The new economic world needs a new John Maynard Keynes. Otherwise the Walrus and the Carpenter of weak-minded greed are going to eat us all for breakfast. (What is the strong-minded way to deal with the PMS? Let it go bust. Life is tough. Those who play football need to know that losing is part of the game. Same goes for those how make investments.)
Real monetary union will involve fiscal union, and fiscal union will have to be sold to the citizens of the EU by such a politician as we have never yet seen. Even the slow-minded ‘Stimmvieh’ is getting fed up with sleaze and lies and bribes and sure-we’ll-push-it-through-on-a-second-referendum.
Posted by on Feb 10, 2010 @ 10:22 AM“Real monetary union will involve fiscal union, and fiscal union will have to be sold to the citizens of the EU by such a politician as we have never yet seen.”
We’ve seen plenty of such politicians. One even gave his name to the English language: Quisling.
You, of course, are not talking about economic union but about political union - a single EU state. Ireland is a textbook example of what can happen when a government derogates sovereignty to third parties who do not operate those powers in their national interest. The policies are not devised thereafter for the needs of Ireland but for the needs of the Eurozone. It is true that economic union cannot work without political union but that how the EU promotes integration - step by step. The Europhiles in the Irish government were warned exactly what would occur in the halfway stage to EU integration but they ignored those warnings because their loyalty is not to Ireland but to the emergent state of the EU that they as Europhiles are engineering, and if that meant sacrificing the Irish economy then that is not what the new state requires.
It is not that we end up with bad policies per se but that we end up with Lucky Dip policies. Expansionist monetary policy was a good policy for economies that needed to stimulate consumer spending such as Germany and France but they had the effect to strapping a turbocharger onto the backs of those economies that were already booming, causing the economy to overheat to boiling point and causing too much money to chase too few investment opportunities thereby causing bubbles. Property accounts for a small amount of the total of 1.67 trillion borrowed in Ireland during the period of this expansionist monetary policy, with bubbles occurring in every sector of the Irish economy - from share prices to wages, et al.
To give you an example of how utterly moronic Lucky Dip one-size-fits-all monetary policies are: 16 patients are examined by a doctor who duly diagnoses a peptic ulcer, and proffers a prescription. The patient that has a peptic ulcer is cured, but the patients that have cancer, colic, kidney infections, jaundice and an assortment of other afflictions gain no benefit from the one-size-fits-all prescription, seeing there symptoms worsen as a result of the moronic medical practice they have agreed to be bound by.
Posted by on Feb 10, 2010 @ 12:04 PMAlias Dave,
Of course ECB monetary policy is devised for the Eurozone as a whole rather than a given state (e.g. Ireland). But then, monetary policy set in London is set for the UK as a whole rather than, say, Scotland. Monetary policy is a blunt instrument, and it was not monetary policy alone that fuelled the Irish property boom - fiscal policy had a much larger role.
Posted by on Feb 10, 2010 @ 12:20 PMmack ,
‘that while financial markets started the crisis and governments got themselves into huge debts to bail them out and pay for the downturn, now the financial markets are punishing those same governments.’
Not too general at all Mack - The big banks and financial players in the USA have spent hundreds of millions trying to prevent/slow down/hinder any financial reforms currently being considered by the US Administration that might give some more rights or offer some protection to the American consumer . They want to hold on to all the money making add ons they’ve been able to accumulate over the past two decades everything from outrageous overdraft and other fees to usurious credit card interest rates .
And this at the same time as the banks want to pay their top level executives billions in bonuses for helping them presumably to destroy and gouge out the american middle class and drive the lower income people into more foreclosures and destitution .
No mack it’s not too general at all . It’s only too true .
Posted by on Feb 10, 2010 @ 01:36 PM
