Living with the Euro

Cormac Lucey has a piece in Saturday’s Irish Times on the implications of EMU membership for Irish macroeconomic adjustment: you can read it here.

Clarification:  There is an important typo in Cormac’s article. “In January 2005, Rossa White of Davy Stockbrokers used the Taylor rule to estimate that European Central Bank interest rates were appropriate for Ireland.”  This should read: “In January 2005, Rossa White of Davy Stockbrokers used the Taylor rule to estimate that European Central Bank interest rates were inappropriate for Ireland.”    You can read Rossa’s original note here.

5 replies on “Living with the Euro”

Wages here are laughably small compared to the UK, Switzerland and the USA – three markets whose wages I’m familiar with. For skilled workers, pay here is low enough compared to those markets that workers require non-economic reasons to stay in this market.

I already know a number of people who have left Ireland for jobs with higher wages and better conditions. If wages are dropped further, why should skilled workers stay?

“Different people have offered different explanations for our current economic crisis…In my opinion, there is a more convincing, economic explanation for what went wrong.”

There is seldom a simple explanation for any complicated outcome, but the convenient rationalisation that the membership of the euro system was the main reason for the Irish economic meltdown, is simply a cop-out.
There was an international backdrop of a liquidity glut and outside the EMU, a high Irish punt rate, given the boom triggered by the influx of FDI and then the property bubble, would have attracted a lot of hot money – – so how high would an Irish punt rate have been while the Taoiseach and Fin Minster of the day, were cheerleaders of the property interests?

Before rates fell to 2% in 2003, in the late 1990’s, Charlie McCreevy opened the throttle as the boom was taking off, crucially cutting the CGT rate to 20% and extending property tax incentives, as the central bank governor Maurice O’Connell, was pleading for restraint from the banks.
Cheap credit and tax breaks helped boost hotel bedroom numbers 150% since 1996 while tourist numbers rose just over 70%.

Cormac Lucey’s party, the PDs, supported tax cuts and sham benchmarking on the basis of a property bubble, while windfalls from the boom, put Irish investors in second place as the second biggest investors in commercial property in Europe.

€10 to €15 billion was invested annually overseas while less than €200 million was invested in venture capital in Irish business.

After the crash, the “smart economy” is the mantra, while Irish economic fortunes depend mainly on US owned companies.

While the two biggest Irish banks are on respirators, Spain’s two largest banks, Banco Santander and BBVA, reported reasonable second-quarter results last week, despite having been part of another bubble.
During the boom, the Bank of Spain didn’t depend on finger-wagging impotence, but insisted a much more robust assessment of risk than its Irish counterpart.

Cronyism, a failed governance system where the buck stopped nowhere and so much else cannot be ignored.

The insiders took benchmarking increases and nobody made a public protest or saw fit to resign on principle, in response to reckless mismanagement.

Many thousand are suffering the consequences and while membership of the EMU inevitably required discipline, shouldn’t the biggest indictment be against the politicians, including the leadership of the PDs, in regard to their failure to act in the public interest?

It a lamentable fact that the biggest proposed public sector reform in the past decade was the Tammany Hall-style decentralisation “plan,” which the PDs supported.

Now as membership of the EMU during a global recession, shows what the huge advantages can be for a small economy like Ireland, it’s bizarre to claim or imply that such membership should have come without any obligations on the part of an Irish government during a boom.

Remember 2001 and the reaction to the European Commission’s criticism of the budget?

“the convenient rationalisation that the membership of the euro system was the main reason for the Irish economic meltdown, is simply a cop-out.”


There were all manner of counter-cyclical actions Fianna Fail could have taken, (notably on mortgage interest relief and other priming incentives) but most of them would have (a) incensed the Galway Tent crowd and (b) incensed their other clients, the “social partners” who expected government largesse which could only be delivered by the sort of income surge the triple whammy of VAT, stamp duty and income tax the building sector could supply.

How convenient, we are all innocent and the ECB made us do it. The gov’t had many levers at its disposal which it could have used to curb excessive development and excessive lending to developers and others. Domestic selfishness and greed fueled the gravy train, as the party went on it led to a self reinforcing euphoria with the brokers, bankers and gov’t in the lead and the people following the judgmentally impaired. Sober up boys the lame excuses will make you look even more pathetic.

Comprehension includes accepting the constraints of reality and not wishful hindsight – national policy directed the flow of cheap credit into an unsustainable construction led consumption boom.

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