A hugely important debate is currently underway in the ECB, according to Brendan Keenan. The distinguished Cypriot Governor, Athanasios Orphanides, understands the gravity of this crisis and the logical consequences for policy makers, but not everyone agrees with him.
What, I wonder, is the Irish Central Bank saying in Frankfurt?
6 replies on “Where does Ireland stand?”
From the article it seems that the Austrians and the Greeks are loudest in pushing the ECB towards ‘unconventional’ methods, especially the purchase of corporate bonds. The travails of those two economies are not too far from our own, so one would imagine that we should be adding our voice to the call.
The old aphorism “Where you stand is where you sit” should still ring true.
anybody find out what the ‘new measures’ are that the ECB will be bringing out in May? Will it relate to any of the plans being put forward thus far?
The inflation debate on TV in the US
Reading Brendan Keenan’s article, it looks as though Ireland had not only the lowest rate of inflation of any EU27 country in February, but also had by far the smallest year-on-year fall in manufacturing output. The average EU27 year-on-year fall in manufacturing output in February was almost 20 per cent, while in Ireland it was just 1 per cent. This calls into question the assumption that the fall in sterling is bad for Ireland’s competitiveness. It may be in the short-term, but not in the long-term. The assumption fails to take into account the fact so many of Ireland’s costs originate in the U. Kingdom. The way I see it is as follows:
(a) When sterling rises v the euro, there is an immediate improvement in Ireland’s competitiveness – however, as a large proportion of Ireland’s imports come from the U. Kingdom, this soon translates into Ireland having a higher rate of inflation than all other Eurozone countries – so, there is within months a disimprovement in Ireland’s competitiveness relative to these Eurozone countries – eventually, after up to 5 years, even the improvement relative to the U. Kingdom is largely dissipated as the differential (in the U. Kingdom’s favour) between Ireland’s and the U. Kingdom’s inflation rates increases.
(b) When sterling falls v the euro, there is an immediate disimprovement in Ireland’s competitiveness – however, again, as a large proportion of Ireland’s imports come from the U. Kingdom, this soon translates into Ireland having a lower rate of inflation than all other Eurozone countries – so, there is within months an improvement in Ireland’s competitiveness relative to these Eurozone countries – and, eventually, again after up to 5 years, even the disimprovement relative to the U. Kingdom is largely dissipated as the differential (this time in Ireland’s favour) between Ireland’s and the U. Kingdom’s inflation rates increases.
For confirmation of this, we can look at the March HICP indices for Ireland and the Eurozone for a range of traded items (all figures from Eurostat database and to base 2005 = 100.0):
non-alcoholic drinks: Ireland 105.9 , Eurozone 109.0
alcoholic drinks: Ireland 102.4 , Eurozone 108.5
clothing: Ireland 87.0 , Eurozone 103.3
footwear: Ireland 83.8 , Eurozone 104.1
furniture: Ireland 87.8 , Eurozone 107.1
carpets: Ireland 79.8 , Eurozone 105.1
glassware: Ireland 87.1 , Eurozone 108.4
motor-cars: Ireland 95.8 , Eurozone 103.1
games, toys and hobbies: Ireland 76.3 , Eurozone 98.1
jewellery, clocks and watches: Ireland 113.2 , Eurozone 133.4
In other words, for almost all traded items, prices in shops in Ireland are falling dramatically relative to other Eurozone countries. For non-traded services, the gap is, of course, much less. However, it is clear that Ireland is now in the middle of a massive improvement in competitiveness relative to the other Eurozone countries and this helps explain why manufacturing output in Ireland is currently performing so much better than in those countries.
Ireland’s main problem is the local property bubble and the banking insolvency. In the latter aspect we are like Austria which made loans to East EU members. In the former we are like Spain and Greece? We also have as John above points out a resilient manufacture sector. That has to be the real economy avenue for Ireland. It requires a strong public sector for future growth.
The banks are the problem. There is a shortage of capital internationally and domestically.
Nationalize and rationalize the banks. Or liquidate them and promote a new bank. Buying much is simply not feasible, and it will increase problems manifold. The best stimulus after this sort of bubble is liquidation. Free the assets and bury the bad debts!
Oh and criminal investigation of regulators and bank managers at or just below director level!
Remember Iceland!
The United States has pursued a Zero Interest Rate Policy (ZIRP) for some time now and has embarked on substantial fiscal stimulus, yet deflation was evident in the CPI in March. Brendan’s article seemed to suggest that the ECB follow suit.
The fall in the general price level as well as sharp contraction in industrial output are directly attributable to “Demand Destruction” due to rising jobless and too much household debt. De-leveraging is a painful process and takes years not days/weeks!
With regard to the ECB – well those in the know (financial markets) are acutely aware that Axel Weber & Otmar Issing have more of a say in Frankfurt when it comes to monetary policy than any Central Bank governor – especially one from a nation that constitutes less than 2% of Eurozone output.
Lastly, I would certainly agree with Pat Donnelly that we need to bite the bullet and nationalise the Irish Banks sooner rather than later and draw a line in the sand in terms of toxic assets (bad loans). Unfortunately in this country there is still massive denial e.g. Anglo Irish has not been nationalised but is a State-Sponsored Body, still operating as a ‘going concern’ having pursued an asset growth strategy of 36% p.a. for more than a decade – unheard of & totally unsustainable in the OECD world.
Too much emphasis is currently placed on NAMA and if taxpayer will ultimately benefit in the long run, instead of writing down the loans now, taking the hit (unfortunately has to be the taxpayer), but re-privatising the 2 main banks in 2012/13 following recapitalisation – then the State will receive some payback.