The Economist on the euro area

This week’s Economist magazine has a special report on the adjustment challenges for members of the euro area: you can read it here.

7 replies on “The Economist on the euro area”

“In Ireland propping up ailing banks that had lent too freely to property developers and homebuyers, at home and abroad, has bumped up the fiscal cost of recession. (Luckily for Spain, its regulators forced commercial banks to behave more prudently in the boom.)”

That stings…

Largely on target, but I don’t understand how the Economist gets to the conclusion that productivity growth in Ireland has been slow. I got the impression that the best economists in Ireland were unsure of this, and that at best, the jury is still out.

Also, I was baffled by the Economists assessment that high inflation acts, in practice, as an incentive for FDI? Never read any study to this effect…


You are right, productivity is terribly difficult to measure, and any comment on it should be treated with huge caution.

The first problem is in measuring productivity in local services: Meaningful measures of public productivity simply don’t exist. Further, the published measures for local production based on VA are hopeless, as they essentially just capture the price of a non-tradable product less the cost of non-tradable inputs. For example, the VA measured productivity of construction fell between 1993 and 2003, despite the huge increase in mechanisation, greater scheme size and greater specialisation. Simply dividing # houses built by # workers suggested a 27% increase in productivity, which makes more sense:


The second problem is that changes in industry composition dominate aggregate productivity numbers, and are often misused. I’m tired of the argument that Ireland had two problems: construction was too big, AND productivity was falling. The latter was caused because of the greater share of (low productivity) construction workers, which dragged the national aggregate down. Employing more construction workers in Swords (wisely or otherwise) does not make computer chip makers in Leixlip less skilful.

Even with internationally tradable products, the problems don’t end. Large MNCs tend to be able to replicate to a large extent productivity levels in one plant in other plants overseas. As such, productivity (when looked at thru the economic stats) looks endogenous to the firms decision to locate. Thats before you start talking about Ireland’s specific GDP/GNP issues.

Philip, With Ireland being locked into a hard currency completely unsuitable to our current economic circumstances how can a recovery ever take place? Portugal has been in a virtual depression since joing the Euro and we seem determined to journey down the same road. While Britain’s public finances are arguably in an even worse state than ours they at least have the ability to inflate their way out of debt and back into growth. Why is there no serious debate about the merits of leaving the Euro in this country (David McWilliams excluded)? Is there any precedent for leaving a hard currency and fixing your external debt at a set exchange rate on the day of departure rather than leaving it to the mercy of floating exchange rates? If this is a possibility surely it merits serious economic and political debate. There is now a significant movement in Greece from the tourism and agri sectors who are strating to lobby for a review of Greek continuation in the Euro. I don’t think they will be the last country to do so.

Unless I’m reading the wrong part, I don’t think the article is saying that productivity growth in Ireland was slow. This is the part I read:

“In Ireland and Greece gains in output per worker were healthy but wage inflation was high. In Portugal and Spain inflation was a little lower but still well above the euro-area norm. The bigger issue was dismal productivity growth, which was Italy’s main problem too.”

Maybe I’m wrong, but I interpret that as meaning productivity growth (gains in output per worker) was healthy in Ireland and Greece, but dismal in Portugal, Spain and Italy. Which accords with the actual published statistics for all five countries.

Regarding the subsequent claim in the article about Ireland’s lack of competitiveness, the figures for EU manufacturing output in April were published today. They showed: in Ireland manufacturing output in April was UP 3.8% on April 2008 – in the Eurozone manufacturing output in April was DOWN 21% on April 2008. Ireland is now the first country in the developed world to record a year-on-year increase in manufacturing output in any month in 2009.

Monthly figures can be extremely volatile, so I wouldn’t pay too much attention to just one month’s figures. But, if we take the first four months of 2009, the figures show: in Ireland manufacturing output in January-April was DOWN 1% on January-April 2008 – in the Eurozone manufacturing output in January-April was DOWN 20% on January-April 2008. Some lack of competitiveness!

Following on from these output figures, given what we know about manufacturing employment, it is extremely likely that manufacturing productivity in Ireland was UP y-o-y in January-April, while in the Eurozone it must have been DOWN by a truly staggering amount. And, a further consequence of that must be that, while manufacturing unit labour costs in Ireland were almost certainly DOWN y-o-y in January-April, they were probably UP by around 20% in the Eurozone.

I am no prophet, so I don’t know if the manufacturing trends evident in the first four months of 2009 are going to continue for the rest of 2009. But, I will say that, if they do, the predictions that Ireland is going to have the largest fall in GDP in the EU in 2009 will prove hopelesly inaccurate.

The Economist is part of a anti-euro cabal. They all dance naked at midnight when the moon shines!

They neglect the obvious counter-balance to low interest rates: fiscal tightening. Ireland was free to pursue this. Indeed the commission was trying to indict Ireland at one stage in the very early days, for too much looseness, something the author ignores. The euro is sound but when the editor tells him to write against it, no problem. Tripe from the Economist.
Journalistic integrity ………?

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