The Very Bad Luck of the Irish / Irish Miracle – or Mirage? Post author By Philip Lane Post date May 20, 2010 Peter Boone and Simon Johnson turn their attention to the Irish economy in this Baseline Scenario article (also published in an edited form as “Irish Miracle – or Mirage?” on the NYT Economix blog). Categories In Economic Performance Tags Irish economy 93 Comments on The Very Bad Luck of the Irish / Irish Miracle – or Mirage? ← Climategate (ctd) → Morgan Kelly: Burden of Irish Debt Could Yet Eclipse Greece 93 replies on “The Very Bad Luck of the Irish / Irish Miracle – or Mirage?” A downbeat assessment to be sure. There are 6 ways out this hole in which we find ourselves: 1.Fiscal pain – increase existing taxes and/or reduce existing government expenditure. This is more or less in the government’s control, though the EU is firmly positioning itself in having a greater say in our affairs. 2.Increase GDP. Sadly this is not within any government’s control – they can control a reduction in GDP but they can’t control an increase which will in any event be partly determined by international factors. They can try to influence a recovery in GDP (eg credit initiatives and regulatory reform) 3.Reduce interest charged on government debt (make ourselves look less risky and more attractive as a borrower). By behaving in a fiscally responsible manner, the government can seek to influence rates positively but again many factors will be outside its control and may be international in character. 4.Issue new money (we gave that up with membership of the euro – we’re now one of 16 voices, and a pipsqueak compared to France and Germany). The government can seek to influence but we’re a small fish in a big pond. Ultimately the constitution of the ECB and the Growth and Stability pact will work against any monetizing of debt that would have an inflationary impact. 5.Default. The government can certainly do that, but in the short term there would be a crash in GDP – despite others being fans of Argentina’s default in 2002, it is the case that Argentina is only now getting back to its 1998 GDP and it saw massive social upheaval where poverty rates were over 80% and to this day Argentina has issues with obtaining credit. 6.Bailout (free money! Brilliant! Except we could wave goodbye to our borrowing ability and the interest on our borrowings would rocket). The government can ask but there’s no guarantee the IMF or ECB will say yes. We would also need to have far more protesters making faces at the four or five Gardai on the gates of Leinster House. Withdrawal from the euro would enable us to control money supply and interest rates. What would happen though to our euros in our bank accounts? Who would want to exchange them for punt nuas (or whatever we may call them)? A new currency not widely accepted with a strong risk of depreciation against foreign currencies. Our inflation would rocket for imported goods (petrol for consumers and raw materials for pharmaceuticals for example), pensioners would see their savings wiped out, our international reputation would take a beating and where would that leave us with the existing MNCs and potential MNCs? Default would mean we’d have to instantaneously balance the books because no-one would lend us the money to cover the deficit and we wouldn’t have access to international capital markets for some time. The only real solution is fiscal pain. And the only question is how the burden is shared in a way that is timely, efficient and fair and just as importantly doesn’t stifle growth. Deep down we all know that we have to balance our books, our income has to equal expenditure. Also, our borrowing costs are nowhere near Greece’s and we’re some ways off Portugal and Spain so there’s something to the government argument that we’re being viewed favourably internationally (though it’s certainly not as rosy as the government would have us believe). I don’t agree with a lot this government does, in particular I wonder how much political and reputational considerations impact upon our dealings with the banks, but I do support the broad direction of fiscal tightening and behaving responsibly together with initiatives to stimulate GDP. @jagdip singh – “Bailout (free money! Brilliant! Except we could wave goodbye to our borrowing ability and the interest on our borrowings would rocket). The government can ask but there’s no guarantee the IMF or ECB will say yes.” I presume the US still runs the IMF? http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100005734/congress-blocks-indiscriminate-imf-aid-for-europe/ I’m also wondering what the conection is between this vote and Germany’s decision on naked shorts may be. “but I do support the broad direction of fiscal tightening and behaving responsibly together with initiatives to stimulate GDP” +1 but it’s time some of the less ‘fair’ tax breaks were removed rather than cuts that only punish vulnerable people. For example, how many people who are sick, disabled, made unemployed through no fault of their own over the past 2 years, frail elderly, disadvantaged, etc. do you know who are able to avail of things like tax relief at the highest rate on pension contributions? I think it’s time to do things that are in the broadly common interest rather than the present government’s position of seeming to still protect those with more privilege/power. All I’m saying is I agree with your statement “And the only question is how the burden is shared in a way that is timely, efficient and fair …”. I don’t understand why we should be disregarding the profits of foreign ccompanies when they employ so many people in this country. The GDP/GNP debate is far from clear. Good article! 95% accurate, which is very high. The Government ignored the effect of lower interest rates despite wanting them! Blindness. The last three years of the boom, the banks went berserk by getting wholesale market money and passing it around as deposits, allowing multiples of lending despite a sound regulatory system. What interest rate would all the borrowing attract on the outside of the EZ? Not really feasible! Jagdip Singh It is inaccurate to say that outside of the euro we could set our own interest rates. Lenders are not stupid, at least outside of Ireland. They will expect the currency to drop like a stone if the rates are not twice those of the EZ. Therefore they will not lend. Until the rates are far higher than now. After all, what about Ireland inspires confidence? Leadership? Prospects? Better performance than other competing borrowers? The article is plain and the truth hurts. Ireland must raise taxes and the sooner the better. Everyone will be working as hard as they can as they know what is around the corner. Leave it a few more years and those with peak earning capacity will have analyzed the Japan mess and applied it to Europe. They will have moved and their capital and future with them. Others will game the system. Corruption does not ever stop of its own accord! Semi-states making money for their managers. The rot marches on and will spread. This is the issue. How can anyone trust Greece? By supervising everything they do. Ireland is already on the lintel, with a lot of momentum. What can keep us from entering the sin bin? Interest rates depend upon perception of lenders. Every such article reduces Ireland’s attractiveness for investment. We need SPEED! More Taxes now, less taxes in future! @ Pat better t share the pain and preserve the incomes of the debt burdened middle years iicome earners. Cut public service pensions now, not the OAP and remove the payment of state pensions to certain DB scheme participants. @Pat I was referring to domestic interest rates which our Central Bank would presumably set if we took back our currency. Rates on international borrowings would presumably reflect currency risk (I would have said high) or the interest rates of lenders if denominated in the lenders’ currency. Intelligent fiscal pain = raising taxes and reducing expenditure in a way that is (a) timely – ie we do it now and not hang around like the PIGS (b) efficient – consideration of Laffer curve, collection costs, avoidance and evasion (c) fair – means different things to different people, capacity to pay, progressiveness, competitiveness for example come into play The trick is fiscally tighten without stifling growth (too much) and that needs fairy dust. The 2 key difference between now and the successful late 1980s austerity package are the banking mess and the euro. Have Irish commentators really addressed these issues in relation to their (perceived – in my case anyway) support for a repeat of 1980s austerity measures? The new problem surely requires new measures in addition to the programme to cut the deficit. @jadip singh – ‘Also, our borrowing costs are nowhere near Greece’s and we’re some ways off Portugal and Spain’ In common with much commentary over recent weeks the blithe, complacent belief that we’ve somehow broken free from Spain and Portugal in the perception of the Sovereign Debt markets ignores the facts! Irish 10-Year: 4.6% ; 5-Year: 3.6% Spanish 10-Year: 4% ; 5-Year: 2.9% Portugese 10-Year: 4.6% ; 5-Year: 3.5% @zhou_enlai. If this article doesn’t make the GNP / GDP debate clear then I’m not confident anything can. To me it’s blindingly obvious. Let me try to set it out in layman’s terms. Much of the turnover that is being recognized in the Irish accounts of MNCs has been artificially inflated by those MNCs whereby they shove stuff onto the Irish operation that they could, with the click of a mouse or few keyboard strokes, just as easily put onto their accounts in the US or UK or Germany. I guess it might work like this: MNC Corp. makes a widget in Ireland that requires input from teams in the US, UK and Germany – let’s say design and planning. When it leaves the factory the widget is in Ireland is priced at a €100 and sold at that price back to the US operation of MNC Corp – who then sell it to a third party for €75. Now I’m not sure how accounting rules work so if their internal accounts show it being ‘sold’ between operations for €100 but it’s sold to a third party for €75 this could be illegal – or might be made illegal by Obama some day..?…I dunno..? .but something like this internal transfer pricing is going on.. and the above is a guess as to the actual mechanics of this but I think the end result is the same. So, looking at the accounts for MNC Corp. in Ireland we get. a. Design and planning of widget charged internally by operations in UK, US and Germany = €5.00 ( revenue to UK, US, Germany = cost to Irish headquarters of €5.00 but who knows? Maybe it should be €95.00) b. Manufacturing cost = €5.00 (=’cost’ in Ireland but who knows? Maybe it should be €25.00) c. Sale to US operation €100. (but who knows – maybe it should be €20.00) = Irish ‘profit’ of €90 (manufacturing cost of €5 plus design cost €5 plus €100 So what is happening is certainly real but its measurements are being distorted so that the MNC can wash (as the piece says) money via Ireland where it will attract 12.5% tax. But these ‘costs’ may be fictitious. It’s an accounting trick. Now you may say that this is still revenue in Ireland and, yes, it’s true the Irish gov’t gets €11.25, but that’s a fee for providing tax-haven services. It is only recognised so that it can be taken ‘back’ to the US. But in reality the real value never left the US in the first place. – assuming the real cost of design and planning is where the real expertise and value is being added. So the GDP figure is distorted to suit the finance departments of MNC Corp. And the value they provide by employing people (though it’s high) is hugely exaggerated – allowing politicians to have (as Michael Hennigan says) ‘Bragging rights’ about how ‘successful’ the Irish ‘economy’ is. The real problem with this, in my view, is not the false accounting per se. It’s the fact that Irish gov’t provided tax arbitrage services impact on our political and institutional fabric rather in the way resource wealth operates on a country. The money is, quite literally, ‘free’ to the Irish government. It inflates the GDP and flatters the figures. And thus it both increases the volatility of the economy (by creating over reliance on a few large companies) which is bad and, as a corollary, making it less urgent for our domestic private and public sector to be competitive – a la Venezuela). So let’s look at what they pay for say electricity as a thread to judge how they are treated. A state monopoly tax-payer owned monopoly like the ESB charges them less than domestic residential customers who, in turn, they charge less than domestic small businesses – who pay the highest rates. So you could say that domestic small businesses are transferring wealth via the ESB to them..or at least taking the hit from the ESB to drive down the costs of MNC Corp. Accepting and adjusting policy to recognise the reality that one thing that helped make MNC Corp. so great in the first place what the fact that electricity prices in its home state of Texas are (say) were half what they are (were) in Ireland when it was pre IPO and so cutting domestic business costs by introducing competition to encourage enterprise would involve direct confrontation with the ESB unions. Creating a thousand jobs in small businesses is not as glamorous as creating 500 jobs in MNC Corp’s operation in IDA Park Bogville. Destroying them with high government-driven costs is not as noticeable. All of this shows that the Irish establishment, having convinced the people that they should retain their sense of grievance and inferiority by the widespread dissemination of the victim sciences – famine commemorations, propaganda about the Brits etc. – are happy to leverage this sense of inadequacy by treating the domestic population as irritating tenants some of whom can work in MNC Corp’s Bogville but most of whom can be ignored and occasionally bribed with some of this taxed ‘profit’. I should add that these tenants who don’t work for MNC are less likely to work at all since the MNC supports the dysfunctionality in policy (via its presence in IBEC – please don’t dare to challenge this…. IBEC supported benchmarking QED.) that ensures small business costs are too high. So MNC and others function in the Irish economy like resource companies in the third world. For years, I have tried to highlight the schizophrenic nature of the Irish economy: parallel with an economy where 90% of tradable goods and services exports were made by foreign firms was the bubble economy where the investment of windfalls from property put the Irish among the biggest investors in commercial property across Europe. Less than €200m was going into venture capital in Irish business annually where overseas property investment was grabbing at least €10bn. People with the begging-bowl mentality blame the Germans for saving too much and focusing too much on exports. It is certainly hard to compete with world class companies such as Siemens, Daimler, Bayer, VW and many more but consider these statistics in Ireland’s area of natural strength and it’s only idiots who would blame the Germans for their success: German food and drinks exports 1999: €20bn ———> 2009: €40bn Irish food and drinks exports 1999: €6.6bn ——–> 2009: €7.10bn The politicians default solution is to add more grants and incentives but there is no serious debate on banking all on the the so-called ‘smart economy’ and university research. Opposition politicians are as vacuous as the chairborne policymakers in the establishment. Glanbia has been trying to hive off its Irish dairy business and the best opportunity for developing an indigenous exporting base is not fully exploited. We have had fire-fighting to try and get the public finances in order but serious reform hasn’t been tried yet. Meanwhile, Eamonn Gilmore wants to have a gabfest on the Constitution. As to fiscal adjustment, we still have bubble salary, housing prices, public pensions and professional fee levels. Who really expects the Croke Park agreement to have a significant impact? Consider the inertia in restructuring the 800 quangos despite the red ink of €400m per week. As for a jobs strategy, most of those who have an input to what could charitably be termed a ‘strategy’, have never worked or lived abroad and don’t have a clue about the challenges in developing export markets. As for Opposition proposals on a State investment bank, we have no shortage of grants and incentives; they are no substitute for a strategy that recognises that the first step is to begin with a serious reality check. @ John its impressive that you were able to find an Irish 5yr cost of funding, given that we dont actually have a 5yr bond outstanding!! (deliberately left open so the banks can issue govt g’teed into that space). Irish 6-Year: 3.642% ; 2-Year: 1.815% Spanish 6-Year: 3.1826% ; 2-Year: 2.029% Portugese 6-Year: 3.874% ; 2-Year: 2.461% So we’re just under Portugal, and a bit over Spain. A lot of volatility though at the moment with the ECB buying… @Paul McDonnell Interesting perspective there, suggests there is a greater degree of greyness and complexity than otherwise apparent and well outlined. The semi-states in Ireland in general seem to do less with budgets in terms of operating in the wider public interest than in other countries. I may be wrong but I believe the Eirgrid East West Interconnector €600m price is an example of this, and they are overseeing a multi-billion budget in network upgrades over the coming years. They may do a good job on spending this money wisely but I would like to see independent oversight of this. @ MH-FF: “… … they are no substitute for a strategy that recognises that the first step is to begin with a serious reality check.” A reality check? Now what would that be? Anyone who seriously thinks that our current legislators are capable of such behaviour – needs a reality check themselves! I expect a very nasty economic/financial shock sometime. This may, just may, give rise to some reflective behaviour. Though my money would be on a disasterous attempt to ‘restore’ the business-as-usual model. We’ll see. Want to do something positive? Stop polluting our freshwater supplies. Its a priceless resource – and we should have plenty to spare if we would only mind our ways. B Peter @ MH-FF. I posted my comment before I realised that I had not completed 2nd para. It appears that I was fingering you. Not so – my apologies. Para should read:- A reality check? Now what would that be? Anyone who seriously thinks that our current legislators are capable of such behaviour – needs a reality check themselves. But how to get to it. Reality is necessary, but not sufficient. You need to follow it with behaviour. You raise a very trickey issue (so, clearly you are not one of the inhabitants of this ‘camp’). B Peter @zhou “I don’t understand why we should be disregarding the profits of foreign ccompanies when they employ so many people in this country. The GDP/GNP debate is far from clear.” The salaries are included in GNP. The profits, taxed at 12.5%, are in GDP, i.e. they are the difference between the company transferred in cost (MNC (to use a random example) pays x mn for for the components of wonderdrug) and the transferred out cost (MNC charges y mn for the wonderdrug tablets). Both transferred in and transferred out costs are intra-company – so it is, for example, MNC US –> MNC Ireland –> MNC UK –> customer. So the benefit to Ireland is twofold – one in terms of corporation tax on the profit, two on the salaries. Both count as GNP as they stay in the country. The remaining profit is exported, so the 77.5% that counts in GDP is without ‘use’ to the Irish economy. Some companies, like the pharma ones, add value while they are here. Others add little more than a bit of corporation tax and a few legal and accounting fees. The usage of GNP in the Boone & Johnson piece is, I fear, entirely accurate. I do think they underestimate the cost of leaving the euro. As we have noted on here before, it is likely that you can only leave to a better currency; you cannot go to something that is likely to be devalued. A missing link in the chain of ‘how-to-get-out’ reasoning, though, is the introduction of government scrip to pay public service salaries. Supposing you could go to California IOU levels and introduce a national currency that was used to pay public salaries and taxes. It would, effectively, be a second, national only currency. Would it be possible to also limit certain commercial transactions to this currency? The payment of bills to the state (tax, hospital charges, etc.), residential property transactions? Could it have a second interest rate? Given that any attempt to leave the euro is likely to result in a dual currency system arising, it surely makes sense to look at what a dual currency system would involve? There are plenty of examples of it, the Turkish lira was for a time subordinate to the USD for ‘big’ or ‘international’ transactions, as was the Korean Won or the Indian rupee (for example, there was separate foreign currency flight availability with foreign currency tickets preferred to rupee tickets). Ah! If it were so simple… “The problem is clear: when you cut spending you also lose tax revenues from people who earned incomes from that money…. Ireland’s spending cuts in one category are partly offset by more spending in another.” Now I know this view is commonly assumed, but the somewhat optimistic nature of this view clouds the seriousness of the challenges before Ireland. It seems to me that there was a sharp downward shock to Irish wealth and incomes in 2007-8. The government reacted by allowing the budget deficit explode. It is misleading to put much blame for the downturn on the (modest) attempts to cut the budget deficit since late 2008. I know some academics on this blog have preferred till now to argue just that, as a justification for ongoing large public deficits. This view suits the government too, and of course many of the recipients of government largesse. Unfortunately all this allows the fairytale to continue – widely held – that Ireland can somehow grow its way out of the doldrums. So the some EUR30bn of total government receipts this year will somehow become EUR50bn or more next year. We all wish! If however we accept that there was an exogenous and non-recoverable shock to income and wealth in 2007/8, that calls instead for a substantial downward adjustment in living standards. Until that happens, running a EUR25bn budget deficit pa (before bank support) runs the risk of a substantial calamity at some point. That day of reckoning of course can be put off by running a high cash position. Effectively liquidity risk in Ireland appears to be near zero, unlike Greece. Ireland’s moat of protection however only ups the ante, raises the stakes, and worsens the budget deficit (although the negative carry on such large cash holdings is a modest cost for the taxpayer relative to many other items). If, as a taxpayer, I could choose where to pay them, I’d certainly prefer a state that takes the pain on the chin, rather than hoping it will go away with pain killers. . @zhou Forget your imagined debate about sterile percentages. Time to talk cash! Never before in the history of the OECD (Iceland excepted) has the budget deficit approached / exceeded (on banks) total government receipts. Suggest levying those multinationals on profits and see where that pot of gold takes you. @Yoganmahew – you cannot go to something that is likely to be devalued. That can’t be true. Dollarisation can only occur if you can get Dollars (or Euros), and the only way to get them is to export to a hard currency area (our path to recovery). The Deutsche Mark was born in a Germany where the existing currency could not purchase imports (the Reichsmark). Germans had every incentive to use Dollars, but the D-Mark succeeded in the end, becoming one of the soundest countries in the world and, in the process, the Germans one of the best exporters. @Jagdip, there is no Gordian knot solution to the problems facing Ireland, essentially we need to build industries and jobs here to export abroad, but there is no quick fix here. It will take time, patience, foresight, and hard work. I disagree with a lot of the article, one of many coming out of prominent stateside/UK media sources lately drooling at the idea of the Euro toppling over. Prior to euro entry our currency was basically tagged to the GBP, and if there’s one economy we don’t want to be anywhere near in their current economic situation, its that of the UK. In particular I would argue with the blithe dismissal of FDI as not being a quantifiable part of our tax base – when you tally up not just corporate tax but income taxes and VAT paid by employees of these companies it comes to a very significant proportion of revenue (seperate from GDP but very relevant to the point they were trying to make, GDP/GNP notwithstanding). This is not corporate profit but the great many people who work for these MNCs in Ireland. To the extent that it wouldn’t be an exaggeration to say that if these companies moved out, Ireland would utterly collapse in a way that would make construction look like a long weekend. Its not completely wrong but there’s a good bit of alarmism in there too. Not the best article, to be honest. Ignores the sequences of unemployment and government austerity, Ireland’s trade performance over the past three years and the obvious fact that 2/3s of Irish workers don’t pay enough income tax. Let alone the even more obvious fact that Google, IBM and Microsoft, for example, each employ thousands of people in Ireland, which suggests something a little more than tax avoidance Seems more like an article that knew its conclusion – “Forget Greece, Ireland is an example of why the eurozone won’t work” – than a well-thought out piece of research. (On reflection, I appear to be agreeing with Ronan eile.) The article seems to have strong political overtones, like many that have been produced in the US recently about the various European crises. Ronan Burke is right on the article drooling over the idea of a Euro collapse – just as it was a source of pride for many Europeans when the Euro was trouncing the dollar, certain US economists seem to be reveling in its decline. Also, like a lot of US economists it seems, the authors seem to view currency withdrawal and sovereign default as mere academic exercises, as if there’s essentially no downside. They do include the “it won’t be easy” disclaimer, but the tone of the article seems to be that there’s a quick fix easy solution to a complex problem. I don’t blame them for not knowing all the intricacies of a tiny, insignificant economy like ours, but if you’re going to speak authoritatively on a complex subject it needs to be a lot less superficial than this. Similarly, they exhibit the sort of attitude to our low corporate tax rate as many of our European cousins – they seem to think there’s something inherently unfair or immoral about not imposing punitive tax rates on business. Bizarrely, they also seem to be put out that profits generated in Europe by a US company are being taxed by a European country. It’s… odd. Lastly, the comments section in these articles are always a riot. They always seem to attract a specific type of Irish ex-pat who can’t wait to wade in with some over-the-top comment about what an awful, immoral place Ireland is and always has been. Sorry yous didn’t get to come to the party, boys! Yoganmahew An excellent explanation. There are unaccountable spinoffs also, some of which are +ve and some -ve. Loss of personnel to overseas etc. Ronan Burke Correct, but alarmism is very appropriate, don’t you think? The article is written by strangers and presents the situation from their point of view. FDI is vital and as I have said before, it is going to be very helpful in the eventual recovery. But that recovery is being delayed by NAMA, Land policy as a whole and by a doctrinaire refusal to raise taxes. But that is inevitable while the current leadership holds sway. How much longer do you want this to go on? There are more losses and there will be more, until all the false capital, created by shadow banking, derivatives that amount to naked credit fuelled bets, etc is destropyed. Destroyed, I tells ya! All investments will be therefore reduced in value, but the greatest losses will be in fiat currency. As most paper investments are measured in such currencies, the losses are going to dwarf those already suffered. Then the recovery can begin. The warfare is simply competition between those who know this and who want to save/make the most capital. Everyone else is just collateral damage. Over-production has occurred and that includes infrastructure. We have done this by borrowing from our own future. There is therefore a reduction of capital in that future. We are now living in the future of 2007. Sadly we are still living beyond our means. Remember the end of Weimar? Wheel barrows worth more than the contents in marks? When shoppers had to buy essential items first as by the end of their shopping, the prices had risen so that they could no longer afford those? This sort of inflation has recurred but only in badly run economies. The west will avoid this, but the investment in tools and useful articles may be better than in gold ETFs or anything that depends upon the solvency of any other party. No one can be assumed to be solvent. Buying white goods? Remember that as the vendor goes into examinership or liquidation, then the item even though yours, becomes their asset to be shared out in the settlement of all debts …… Things will get that bad in some countries. Now explain why it cannot happen in Ireland? Recovery in industries means concentration in Ireland on fresh water, land policy and food production. Look carefully at the Dutch. The great thing about humility is that it encourages effort! http://www.safehaven.com/article/16860/gold-gets-all-political @Mack “That can’t be true. ” The D-mark succeeded because it was better than the Reichmark, not because it was better than the dollar. We could not immediately go to a punt nua from the euro, as the punt nua would be weaker than the euro and the reason for us going would be to devalue. Who is going to say yes to converting to punt nua in those circumstances? Does anyone know if there is a State-developed contingency plan for implementing a new currency? Given the rumblings around Europe and the US at present, we may HAVE TO implement a new currency rather than, as suggested by the present discussion, have a choice (and present discussion of our freedom to have our own currency seems to assume that most of Europe would continue with the euro whereas we could end up with 16 new currencies with many of them weak). So any national contingency plan that is developed beyond a rant? @Yoganmahew – The D-mark succeeded because it was better than the Reichmark, not because it was better than the dollar The Reichsmark was worthless, so traders, businessmen would have wanted Dollars so they could purchase imports – that’s what the D-Mark was competing against. It was the equivalent of launching a new currency into an environment were citizens provided a hard currency. I’m sure it took time to build up trust & a reputation etc. But they succeeded over the long term. And learnt a few valuable lessons too, I’m sure. Who is going to say yes to converting to punt nua in those circumstances? Irish citizens with huge debts for a start, long term unemployed with no prospect of a job for a second. I presume you’d convert all debts internal and external into the new currency (if that’s legal) – a default for sure, but markets are forward looking. After that, if you want Euros you would have to earn them, by trade. The public sector would be paid in Punt nua – if businesses and citizens insisted on being paid in Euros internally – we’d have to export a lot more to make up the short fall from reduced government borrowing. You might not want to be paid in Punt Nua, you just might not have a choice. I imagine life would be pretty tough for a while, imports would become expensive (but citizens debts might be eroded significantly). Our exporters should become ultra-competitive with a weak currency. As long as we learn our lesson – and we should be learning a new one at the same time about the value of having a sound currency – we might be able to run a hard currency sometime again in the future. I’m not suggesting this wouldn’t be incredibly painful – some projections for our future are pretty bleak (this article, Morgan Kelly, David McWilliams etc.) Can we tolerate persistent long term unemployment, emigration, endless years of austerity, if we don’t return to growth? I’m not in favour of leaving the Euro by the way, the idea that it can’t be done is wrong (perhaps you guys mean it can’t be done painlessly – in which case I agree). Also, some of those screaming the loudest about the strictures the Euro imposes may actually stand to lose the most, should we leave. Typo in the both ‘It was the equivalent of launching a new currency into an environment were citizens provided a hard currency’ should be ‘It was the equivalent of launching a new currency into an environment were citizens WANTED hard currency’ @Jagdip Singh – “So any national contingency plan that is developed beyond a rant?” Your comments are too intelligent to suggest that you are a betting man…. but if you were a betting man…. what do you think the factual answer would be to this question? For me, it would be ‘no’ but that’s just a guess. Perhaps we should move to the US$. Or even the UK£. It would save a lot of printing as they all seem to be printing plenty of it. @ Joseph “It would save a lot of printing as they all seem to be printing plenty of it” i thought you were a far more foresightful man than that! With the possibility of 16 new currencies being formed in the next few years, Ireland should be positioning and ramping up its print industry to take advantage of this event, creating a world class industry to export the new currency notes across the former-Eurozone!! @ Ronan. The fact that enterprise that account for c. 20% of total output, “employe thousands of people” in Ireland – we are talking c. 2% of total employment, is highly indicative of simple tax haven flows. Add to that the fact that these industries typically have little interaction with the wider Irish economy, if the Input/Output Accounts are to believed. @Eoin – yeah but, no but… The last time I looked at anything (printed material) from our illustrious Government, it was printed in Northern Ireland! Do we still have a secure printing industry in Ireland since the switch to the Euro? I have no idea where Euro notes are printed these days. I vaguely recall De La Rue used to do it (print notes, credit cards, etc.) but at their plant in the UK I think. “export the new currency notes across the former-Eurozone!!” – I’m sure that would only take a small amendment to the Third Life Directive and setting up a dodgy little one-man-and-his-dog company in the IFSC. @ Jagdip Singh “Does anyone know if there is a State-developed contingency plan for implementing a new currency?” Our record in national project management is very poor and planning for a state of emergency would unlikely happen before Doomsday. @ all Without the MNC sector, the economy would likely be comparable with Albania. There is a tax haven aspect such as Microsoft’s two massive money processing machines which operate from the offices of Matheson Ormsby Prentice. The big concern is that employment in IDA-supported companies is back to 1998 levels and was almost unchanged during the bubble. On a reality check, policymakers conflate the MNC sector with the native one and brag about “Irish” exports for example when the native performance has been so poor. Ten years ago, Ireland used be in the top ranks of countries for a range of factors broadly termed “competitiveness” In the latest IMD scorecard, Ireland is down to 21 and Malaysia is at 10 with its island neighbour Singapore at No. 1. As regards Ireland’s prospects, as in some other countries, there is a state of denial regarding a reality that living standards were elevated on the back of asset and credit bubbles. So rather than implementing serious reforms, we’re aching for painless panaceas like a new currency; debt restructuring and more foreign aid. There is going to be no manna from heaven but it’s depressing when an aspiring Taoiseach thinks a new Constitution is what should matter. http://www.finfacts.ie/irishfinancenews/article_1019736.shtml @Joseph Isn’t there a national emergency plan for terrorist/nuclear attack? I was thinking in that vein. We mightn’t have widespread deaths and destruction but we might have 80%+ of the population in poverty. And regardless of the new currency, from day 1, Government Expenditure = Government Income. So that €20bn deficit will need be balanced practically overnight. @Eoin If the DDDA can lose significant files as reported by the Independent today, then what country would trust us to safeguard stocks of their currency http://www.independent.ie/national-news/files-of-key-dockland-dealings-go-missing-2188596.html @ the two Ronans: I broadly agree with your assessment of the Boone and Johnson article. Some of my appraisal is below. Boone and Johnson: “The problem is clear: when you cut spending you also lose tax revenues from people who earned incomes from that money.” I always wince when this idea is rolled out: it’s obvious that there is a net saving when one considers the subtraction of one individual’s income tax contribution from one individual’s reduced (gross) public sector wage. It’s better for the government to collect 50% of 70,000e (which is 35,000e) rather than 50% of 90,000e (which is 45,000e) because though the Govt. forgoes 10,000e in tax revenue, it saves 20,000e in current spending. (A related mantra, though not rolled out in Boone and Johnson, is that the Exchequer can suffer from fiscal austerity due to the lost multiplier effect of foregone expenditure. I have three words for anyone who carries that torch: “Paradox of Thrift”: http://en.wikipedia.org/wiki/Paradox_of_thrift This idea was popularised by the same man who popularised the idea of the multiplier effect: one Lord Maynard Keynes. IMO, it’s better to avoid a debt-trap spiral rather than hope that individual actors will spend their money in a fashion that would bolster “domestic” *emphasise domestic* demand). Boone and Johnson: “Ireland’s problems are, sadly, far deeper than the need for simple fiscal austerity.” I do agree with this statement. The tax base badly needs to be expanded. Boone and Johnson “Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before now declining ever more rapidly.” I agree with the thrust of the above, but only for Ireland after 2002. The Irish Economy pre-2002 and post-2002 are two very different beasts. In his recent Vox-EU piece (Whatever Happened to Ireland: http://www.voxeu.org/index.php?q=node/5040), Morgan Kelly elaborates on the “Two Booms”: “Prior to 2002, there was rising employment associated with increased competitiveness and a quadrupling of real exports. Ireland converged to average levels of western European income”; and this was a positive development. Figure 2 in Morgan’s article aptly illustrates the madness of the property boom. Also characteristic of the “Second Boom” is the pro-cyclical fiscal policy of the Govt. between 02 and 07. And it was not just pro-cyclical fiscal policy, there was a charade (which Morgan mentions) based on simultaneously reducing rates of taxation (and relying on property-related taxes) while expanding the public service to an unprecedented level. It is quite telling to compare the famous Honohan and Walsh (2002) Brookings paper (Catching Up With the Leaders: http://homepage.eircom.net/~phonohan/Brookings.pdf) to Honohan’s new World Bank paper: “What Went Wrong in Ireland”(http://homepage.eircom.net/~phonohan/What%20went%20wrong.pdf): “Irish policymakers neglected the basics of public finance, wage policy and bank regulation.” Boone and Johnson “Finally, the Irish need to consider seriously whether being in the euro zone is worth the cost.” IMO, it was a shame Ireland broke the link with sterling in 1979. McWilliams constantly suggests that Ireland should leave the euro (see him give an entertaining talk here @ Google-Dublin: http://www.youtube.com/watch?v=ZYeFXOpHY4Q) but such rhetoric seems incredibly naive for a commentator who has worked in a central bank and an investment bank. Surely he must realise that a new Irish currency would not last two seconds in current market conditions (despite Germany’s recent unilateral efforts in financial market regulation). McWilliams should peddle a more realistic line of us re-creating the link with sterling (but of course, that may not be a headline that grabs enough attention). It should be noted that there was some good news for Ireland this week; the Swiss-based Institute for Management Development (IMD) yesterday released its yearly world competitiveness rankings. “It singles out Greece, Portugal and Spain for having a credibility problem based on the fact that their debts are high while their ability to repay them, based on growth rates, current account balances and investments, are inadequate. However, the IMD does not include Ireland in this category and includes it with other sinners which have less of a credibility problem but whose debts will limit competitiveness and citizens’ purchasing power.” The story is here: http://www.irishtimes.com/newspaper/finance/2010/0520/1224270711775.html It’s heartening to see a distinction being made between Ireland and Greece/Portugal/Spain! Especially in the week that Obama advisor Paul Volcker says that States should take a leaf out of Ireland’s book: http://www.irishtimes.com/newspaper/finance/2010/0520/1224270711189.html We’ve already had senior officials from the UK Treasury visiting Dublin… On a separate note to the Boone and Johnson article, I was just reading a quote from David Begg in an FT article (http://www.ft.com/cms/s/2/67ae51e2-5e35-11df-8153-00144feab49a.html) by David Gardner from last weekend (the article is another review of the Irish situation, which provides somewhat of a link). The following is an excerpt from the Gardner article, including the quote from Begg: BEGINS – David Begg, general secretary of the Irish Congress of Trade Unions (ICTU), says they lost the battle to stretch out fiscal consolidation to ease pressure on wages and maintain some demand. “We said 2017 was the right time to get [the budget deficit back] to 3 per cent but they said 2013. The compromise was 2014. But that could cast us into a Japan-style debt deflation for a decade.” – ENDS I can’t make sense of this at all, though maybe I am missing out on some of the context. The reason why McWilliams is talking about the euro is that we don’t have the option of devaluation. If we had the option to print money, we could devalue. However, this is not possible and the mainstream academic consensus is to pursue “internal devaluation”. The rationale is that this will go some way to redress the loss of competitiveness post-2002. Does Begg’s vision for “stretching out fiscal consolidation” give any consideration to the imperative for a competitiveness improvement? Furthermore, does Begg have any concern that without a wider tax base (which will take some years to achieve) we would amass debt simply to pay for current expenditure. If we pursue his vision of “pushing out to 2017”, we would in all likelihood end up borrowing funds to finance our debt-service. Also, Japan keeps getting wheeled out as some spectre of doom (by Begg and some others). Japanese banks in the 1980’s behaved much like Irish banks in the 2000’s (financing a massive property bubble which lasted from 1986 to 1991). However, the difference in Japan was that there was a massive (negative) impact on bank lending (which exacerbated deflation). The BIS call this a “negative financial accelerator”: http://www.bis.org/publ/work188.pdf The scenario in Ireland is different: the Govt. has helped Irish banks in relation to their bad loans (not necessarily in the fairest way re taxpayers) with the intention of getting lending back to normal. The aspiration to get lending back to normal is at least one thing to be pleased about; and this is one reason why Ireland should not be heading for a debt-deflation cycle similar to Japan. Furthermore, a debt-deflation trap can only occur if growth does not resume to pay off the outstanding debt. Ireland’s experience post-1987 is testament to the fact that growth can resume after a bout of fiscal austerity. It is not rocket science to appreciate that when one has a bubble in asset-prices, real-economy prices (including the cost of labour) will also froth up: in order to facilitate the purchase of assets at “bubble-prices”. Any sensible commentaor would have recommended (over the course of the crisis) that real-economy prices should move away from “bubble-levels”. For Begg to wheel out the spectre of Japan is either ill-conceived or irresponsible, IMO. He poses the risk of consigning Ireland to a lost decade: not one characterised by debt-deflation, but one characterised by a debt-cycle (of borrowing to service debt obligations) and low levels of competitiveness. @Jagdip Singh: “Isn’t there a national emergency plan for terrorist/nuclear attack?” Yes, and the iodine tablets were distributed some years ago. I hope everybody has them stored safely (and has checked the expiry date). I think the other part of the plan is putting a brown paper bag over your head. Somehow, planning for economic disaster seems vaguely reminiscent of that for nuclear attack. bjg ‘Death Penalty’ Needed for Euro Laggards, Slovak Finance Minister Says NSN L2RPIN1A74E9 for anyone with a Bloomberg. A sign of what some of the ministers at Ecofin now might be saying over lunch. I don’t think this view however will get much support. The European approach so far has been to want to save and preserve all. Welfare has barely been touched, savers are secure and only one bank of any significance so far has been allowed fail in Europe so far. Idem in Ireland in Ireland in protecting its entire domestic banking sector, when it is long past time to think about jettisoning dead weight before the whole boat is pulled down. This particular story also reflects a more general reluctance of some of the smaller states to extend fiscal transfers to spendthrift states e.g. “Slovak government backs premier’s reluctance on Greek bailout” http://www.aolnews.com/topic/slovakia/1273113477427660/?topicid=3028446483 @jagdip singh Fiscal pain is going nowhere. You can’t have a government that preaches fiscal pain and then goes out the back and builds an Anglo/INBS bonfire and burns 20% of GDP because “IT IS SYSTEMIC”. Once the match was lit under this bonfire and the NAMA sandcastle added the only routes available are leaving the euro – in order to inflate away the debt or default. Admitably fiscal pain might have worked about two years ago but I am afraid this option is no longer available – Fiscal pain would have involved bord snip in total almost €5bn a year, 20% reduction in social welfare and pensions and a constitutional ban on all bonfires greater than a 1bn without a referendum effectively stopping ministers making stupid decisions. A cursory examination of Irish political and economic history since independence highlights, more than anything else, the flipping from one orthodoxy to the next. We have no tradition of pluralism which, in my view, largely explains how we managed to build up, proportionally, the largest asset bubble/GDP the world has ever seen. There simply wasn’t a strong enough ‘other voice’ in the room. Now the latest orthodoxy is Fiscal Austerity, and perhaps that is the only answer. However I have yet to read a serious economic proposal on the impact of leaving the Euro, which is an option. And even if there is a convergence that fiscal pain is the only game in town it should not mean that we merely apply this and nothing else. For instance much of the contraction has been a collapse in domestic demand but at the same time our household savings rate has gone from 1.6% per bust to about 12% now. The scrappage scheme seems to have stimulated the car industry, why not try in conjunction with a reduction in state expenditure, other bigger programs to get people to spend their savings. Stimulate confidence. Perhaps income tax cuts now need to be applied, what about infrastructure development funded by 50 year bonds to employ the hundreds of thousands of unemployed construction workers, as a matter of urgency a property register needs to be introduced that would bring clarity to that market. We need to separate in our own minds the reduction in currently public expenditure with capital investment. Perhaps the wages bill is too large, it doesn’t mean that the Govt should undertake a this ridiclous experiment to see if we can deflate our way out of recession. Because we can’t. @Jules Although I have my suspicions that saving Anglo/INBS has an element of political and reputational considerations, from a purely economic point of view you save them to save GDP from dropping – I haven’t seen the numbers (has anyone?) but that’s what I understand what is meant by systemic (though the EU also set out a 10-point set of criteria with each point getting 10% and the banks had to get >60%). So you save Anglo/INBS because doing so is cheaper than the cost to our GDP if they fail. That’s what I understand. As others have pointed out – burning €25-30bn in TOTAL in the banks over 10 years is less than running a deficit of €20-25bn PER YEAR. And the only way to deal with that is fiscal pain. Leave the euro, having peoples savings collapse in value, import prices (petrol, pharmaceutical basics) rocket. And we would STILL have a big deficit to confront. If the present deficit is €20bn what makes you think the deficit on leaving the euro won’t be the equivalent of €20bn? The problem isn’t what currency we use, it’s the fact we’re spending far more than we’re making. Deep down we all know this. We hope for GDP growth for “something to turn up”, but meantime fiscal pain is all we have. And the only questions are about timeliness, efficiency, fairness and impact on GDP growth. In the Irish TImes today apparently Brian Cowen denied that there was a euro crisis. Maybe he knows something the rest of the world of doesn’t. Or else maybe he is trying his minister of Finance approach, put the ear-muffs on, don’t look at the news and never ever read newspapers or god forbid the web. @Jules Brian Cowen in denial? Surely not. TGIF Non-partisan Economist An oxymoron of some impact! Like it! “Also, Japan keeps getting wheeled out as some spectre of doom ” http://www.independent.ie/business/irish/get-real-and-take-losses-elderfield-tells-banks-2188453.html So you have no confidence in Matthew Elderfield? I do. The euro is the devaluation of the punt nua …….. http://www.independent.ie%2Fbusiness%2Firish%2Fnew-mortgage-lending-at-lowest-level-in-a-decade-2188452.html Yes, Nama is a success! All that money was a wise(acre) investment and I and many others were wrong to oppose it. Not. What about that, all you who said NAMA was going to save us? @Jagdip: How do Anglo and INBS contribute to the GDP and why would winding them up not result in that transferring to healthier banks? @Jagdip Singh I don’t know what the economic cost of cutting Anglo loose would be and I don’t think we will ever know. As for the cost of smearing it over a number of years as against a instant liquidation again I don’t know. One argument for taking all costs at the moment is that spreading over the years you will have a whole army of legal and accountancy people pouring over this paper for years to come reducing the efficiency of the country as a whole. I am not suggesting leaving the euro is a good idea, I am just saying it is result that will probably be forced on us because of the choices we made. When and if we leave the euro or we default an immediate fiscal adjustment will be forced on us which will probably include a halving of the number of civil servants, halving of pensions etc. The point I am trying to make is whatever the detail of the Anglo/INBS deal we can’t make it – We are not strong enough as a country to make that choice – Just as the Crock Park deal – The government is hostage to fortune. If the Greeks said tomorrow that they going to spend €10bn going to the moon, and justified it as an economic stimulus or a saviour of the economy and they went to bank machine – The ECB and the international bond holders they wouldn’t get the cash. Paul Krugman reckons that most us have got it wrong, we’re all so obsessed with fixing debt and deficit problems that we’re heading for another lost decade, when what we actually need is another stimulus package. http://www.nytimes.com/2010/05/21/opinion/21krugman.html?hp . Based on his past record I think Brian Cowen will certainly like the cut of Krugmans jib (give the addict more heroine and we’ll deal with the problem tomorrow. If he happens to die in the meantime, well tough s**t). Only problem is that the Germans are now holding the purse strings of any spare cash and its difficult to imagine that they are going to be very impressed with forward-planning documents such as ‘The Smart Economy’ and ‘Anglo Has a Future.’ . As Paul Brady sang; “ ..still trying to reach the future through the past” @Cearbhall We need a job stimulus package much, much more than any Anglo stimulus. If all government debt is owed to people or organisations within the country than the government just acts to redistribute wealth from people with cash to people who don’t. They can adjust the “tax”rate by changing the interest rate they charge themselves. Krugmans argument is very strong when the economy is competitive internationally. Why “stimulate” Irish people to build color televisions when the poles, with much cheaper wages, electricity and transport costs means they can do it cheaper. Besides a lot of these “stimulus” packages could be against competition law. If Government debt is largely external and they have no control over interest rates or currency then the debt effectively acts as current or future “tax” (depending on whether they can role over and increase the debt) with the interest liquidity being moved from the economy every year. The problem with the current Irish debt, private and Government, is that is large and in particular Government is growing every year. They are depending on the international bond markets, that we all love to hate, to give them their shot in the arm every month. The problem when you try to regulate these bond markets the very liquidity that they depend on will be withdrawn from the market. Any stimulus, (including the current deficits!) steals from our future. This is an URGENT problem. The only real planning by TPTB in Ireland is hoping that something will turn up! Turn up taxes, now and that will reduce the pain later. Apologies but I’m going off topic again here: Devaluation talk….. I have to say that my biggest problem with devaluation is the unfairness in all being exposed to reduced purchasing power. There are people who never got the boom salaries and have always (meaning: are still) on internationally competitive salaries but for some reason they need to show solidarity and accept a devaluation. A devaluation would reduce their economically justifiable purchasing power & why is that considered a good thing? Devaluation brings currently internationally overpaid people into a competitive salary while still allowing them to keep their relative wealth compared to their lower paid friends, neighbours, colleagues. I can see the attraction for people in positions where it is no longer possible to justify their relative wealth on economic terms. I’m not so sure if others are that interested. I don’t understand why a person working in a profitable company in Greece should have to suffer the same loss in international purchasing power as an overpaid person in an unprofitable company. There are those who argue for a devaluation, so there surely must be some more reasons for devaluation. Could any of those arguing for a devaluation enlighten me about those reasons? @Jesper One way you could theoretically improve competitiveness in an Irish and Euro-bound context would be to decree, by law, a 15% reduction in all salaries effective July 1st. This would be equally applied to all public and private sector jobs, public sector pensions, social welfare, etc. You could include rents and all sorts of other charges in the decree too, if you liked. Private sector industries or companies who would then be likely to lose key staff would react very quickly and on July 2nd they’d start to look at increasing salaries again, although since overall cost of living might have decreased they might not have to go back up the full 15%. Public sector salaries and uncompetitive private sector companies would not increase salaries on July 2nd. This would be rather dramatic, for sure. @ Killian Forde Perhaps income tax cuts now need to be applied… So are you proposing that in an unreformed system with a significant waste of public funds, there should be more spending on a short-term stimulus? There was no increase in employment in the tradable goods and services sector in the past decade while since 1998, the workforce has expanded by 400K and unemployment by 200K. After the bursting of the property bubble, how can domestic demand support this? Many of the costs in the economy are still at bubble level and yesterday in the High Court the Quinn Ins administrators requested that its PR firm Hume Brophy be paid €50,000 for work between March 30th and April 30th. I don’t know how many press releases were issued and press queries taken but it still seems ridiculous. Why are Irish law firms among the biggest earners in Europe? The cliché about putting lipstick on a pig is apt. The Irish are very conservative and there is not a big constituency for reform. @ Jesper Devaluation can seem like a panacea for spoofers and there is seldom a differentiation between commodity and finished goods exporters. The UK is not getting a big trade benefit from the fall in the pound and its inflation rate is rising. The majority of Iceland’s goods exports are fishery related and it can get a short-term benefit from a drop in the currency; in Ireland’s case, the majority of its goods exports are pharma/medical devices and the import content is big. So devaluation, provides no magic wand. With commodities, a country can sell into world markets; with finished goods, it takes years to develop new markets. Greece devalued twice in the 1980s without any long-term benefit because the same facts that ked to the devaluations, continued. Those who propose exiting the euro (while ignoring the resultant mayhem) are playing to the public gallery, suggesting that a Santa Claus solution is available with no impact on existing benefits, salaries. The minority of private sector workers who are lucky to have a pension would be the biggest losers while public service insiders would not be impacted by the plunge in value of pension funds. @Garo ” How do Anglo and INBS contribute to the GDP and why would winding them up not result in that transferring to healthier banks?” I don’t have the numbers because the government refuses to publish them but isn’t the rationale that Anglo/INBS being let fail would have a contagion effect on other banks, and therefore lending and basic banking functions, and would harm our international reputation and increase sovereign borrowing costs? These would be the indirect costs. As regards the direct costs of letting Anglo/INBS fail, for me and I only have a passing interest, the waters have become muddied as a result of the guarantees and the different owners of debt and assets (credit unions good, bondholders bad). Eat your heart out Ireland. They are beginning to open the taps in the States. Bloomberg describes a woman with $5,000 of debt on her credit card, who still owed $8,300 for a past auto loan. She just received $15,500 to buy a new car. http://www.businessinsider.com/subprime-lenders-already-slashing-standards-to-pump-auto-sales-2010-5 . Let the good times roll. Anyone heading for Shannon, lifes’ too short for all this fiscal austerity stuff. @ Cearbhall, “Let the good times roll. Anyone heading for Shannon, lifes’ too short for all this fiscal austerity stuff.” That gave me a smile!! @Jesper Would that all-knowing market that determines whose salaries are too high (internationally!) and whose are not be the same all-knowing market that decided that Ireland should spend 20 years of national wealth building hundreds of thousands of homes that will remain empty until they are demolished? Just askin’…. Why has no-one responded to the most salient comment on this entire thread, by Ciaran Daly: “The 2 key difference between now and the successful late 1980s austerity package are the banking mess and the euro. Have Irish commentators really addressed these issues in relation to their (perceived – in my case anyway) support for a repeat of 1980s austerity measures?” Is it because no-one has a clue what to do except austerity? I don’t see any easy options but fear that we are doomed to enter a Fisher-esque debt deflation. The St. Louis Fed has his article online, read it if you never have. I also think there has been far too much criticism of Boone and Johnson on technical small points rather than entering into debate on their substantive comments which for me were: – This is a situation we recognize from our experience in emerging markets. It doesn’t end well. – The Irish government made a mistake in guaranteeing bank debt in the mistaken assumption that if they didn’t their sovereign rating would be fatally impaired. As a result the country is drowning in debt publicly, to add to what we had already done privately. – Again, speaking from personal experience in emerging markets – imposing austerity is going to create such costs in terms of political and social stability that extreme options like leaving the euro need to start to be considered. Nobody has been in this situation since the Great Depression, it’s inconceivable that we don’t get much, much more strife than we are currently experiencing. Read John Lanchester’s “It’s Finished” about Britain in the LRB last year: “Even if we fall short of the IMF option in favour of a run-of-the-mill severe recession, the consequences for Britain are going to be horrific. Roads and schools and hospitals will go unbuilt and unrepaired, medical treatments will go unbought, nurses and policemen and council workers will be laid off. Six hundred thousand jobs have been created in local government in the last few years. Most of them will have to go. And then the really gigantic argument will have to be had, over the public service pensions which are paid for out of current tax receipts. I don’t know anyone who has studied this problem who thinks the government will be able to afford them. Can you imagine the fights that are going to happen? The political polarisation between public and private sector employees, the savagery of the cuts, the bitterness of the arguments, the furious sense of righteousness on both sides? It’ll be Thatcher all over again, and the current period of managerial non-politics will seem as distant as the Butskellite consensus did in the 1980s.” “I don’t have the numbers because the government refuses to publish them” When someone refuses to release numbers, it gives rise to a suspicion that cold hard facts would undermine their case. If you have nothing to hide, then why not release the numbers. “but isn’t the rationale that Anglo/INBS being let fail would have a contagion effect on other banks, and therefore lending and basic banking functions, and would harm our international reputation and increase sovereign borrowing costs? These would be the indirect costs.” Apart from what i said above, this is just argument by assertion. Everyone has an opinion and mine is contrary to yours and unless we put facts on the table there is no way to distinguish them. Do you have any facts to back up your case? Any past instances where the failure of a private entity and a government not taking over private debt resulted in a loss of sovereign credit rating? Relax, It’s the weekend. Monkey Time 😆 http://www.youtube.com/watch?v=KM-RjuKHhK0&feature=player_embedded @ Pat Donnelly: No oxymoron intended. And plenty of confidence in Matthew Elderfield. @ Mick Costigan: I don’t think that we are doomed to enter debt deflation. But there is more that we could do to ward off the threat. I see that Paul Krugman is running with the idea in yesterday’s NYT that the U.S. (insert Ireland if you want) could be turning Japanese. I take no pleasure in saying it, but is he just trying to fly a kite in relation to his “ideal” of more stimulus? http://www.nytimes.com/2010/05/21/opinion/21krugman.html?src=me&ref=homepage Japanese banks in the 1980’s behaved much like U.S. banks in the 2000’s (financing a massive property bubble which lasted from 1986 to 1991). However, the difference in Japan was that there was a massive (negative) impact on bank lending (which exacerbated deflation). The BIS call this a “negative financial accelerator”. The U.S. have been actively addressing the issue of distressed loans in their financial institutions; this is very different to what happened in Japan. While there is no guarantee that lending will recover, I strongly suggest that any further borrowing (by the U.S. or Ireland) should only be for the purpose of lending to consumers, entrepreneurs and existing businesses. A new national bank could be set up if that’s what’s needed: with a direct mandate to lend (but to lend responsibly!). Let’s not waste any money that we borrow; let’s make the most of it by stimulating enterprise and warding off deflation. A new national bank is not such a cray idea. For one thing, it will introduce more competition, and it may induce the private banks to return to lending sooner than they would have otherwise. Plus, we used to have state-owned lending corporations in Ireland. Does anyone remember the “Industrial Credit Corporation”? It was set up in 1933 by Sean Lemass to encourage investment in industry. We also had an Agricultural Credit Corporation. It is the banks (or a new state-owned bank) that can ward off deflation; not more stimulus. (Need I mention leakage, the paradox of thrift, deadweight loss or displacement?). Matthew Elderfield, the new Financial Regulator, today said that the banks needed to “face up to reality” and take their losses on property loans now to avoid dragging the economy into a lost decade like Japan. It’s lending that matters: lending can be directed much more easily towards viable business ideas. Unlike stimulus. http://www.independent.ie/business/irish/get-real-and-take-losses-elderfield-tells-banks-2188453.html I can only hope that Krugman will consider state-owned lending corporations before he warns us again about “turning Japanese”. @ Non-Partisan Economist A good suggestion. Far better to start a new institution than to try to turn Anglo into a credit-producing institution again, god help it. That said, I don’t know if that will save us from debt deflation and I think more extreme measures should also be considered in advance, rather than blundered into under crisis conditions. @All One has to admire Brian Lenihan’s skill in keeping the ship off the rocks thus far. However we are now closing in on the reefs and the storm shows no sign of abating. The Croke Park deal will probably pass. Social partnership and with it both left and right wings of the establishment may thus be restored to office but they will be only a shadow of their former selves. They will be like a discredited monarch who regains the throne but is only kept there as a puppet by force of foreign arms (specifically the threat of the untender arms of the IMF). The current government may stumble on until 2012 when a new one will take over a dreadfully wounded, cynical and bitter country. In the mean time our fates will be decided behind closed doors by the very people who caused the catastrophe. Surely Ireland can do better? It strikes me that what we need is a conference of politicians, policy experts, business, trade union and community leaders to discuss all these issues openly (and some if necessary secretly). This should be followed by the setting up of a panel from the above to then chart a way out of this mess. A change of government or a national government are also essential. An immediate and permanent infusion of expertise into the civil service and the setting up of a permanent Council of Economic Advisors (or ISBO) must also take place. Basically we need to go onto a war footing, not in order to implement draconian measures but to do what is necessary and pronto. Thanks Mick Ed Harrison continues to hit the nail on the head: http://www.creditwritedowns.com/2010/05/the-mindset-will-not-changea-depressionary-relapse-may-be-coming-european-version.html @All In a healthy democracy the above could be done by a respected government having an open, honest debate and then formulating a program of urgent action. Unfortunately the Dail went to the dogs many years ago – and that’s where they like to stay. From another forum: http://www.sbpost.ie/newsfeatures/rumblings-on-the-backbenches-49256.html @All From Niamh Connolly’s report in the SBP: “A record 41 deputies and senators crowded into an Oireachtas committee on the environment last week to hear dog breeding and animal welfare groups discuss the bill. All parties agreed that the attendance was far in excess of the turnout to discuss the banking crisis or the National Asset Management Agency (Nama). The meeting was stormy, with several Fianna Fáil TDs rounding on Green Party chief whip Trevor Sargent over the bill’s provisions.” @Ernie, yep, it would be the same ‘all-knowing’ market 🙂 Unfortunately anything that can be said to be ‘all-knowing” will also be very hard to decipher. The signals from the market that indicated that building more properties in Ireland was not such a good idea wasn’t heard/interpreted correctly 🙂 @ Oliver I agree with your suggestion for a conference. I have argued on this blog before, as has Pat Hunt and others, for a similar forum, potentially building on the experience of the New Ireland Forum in 1983. With today’s technology, the opportunity for far wider participation is possible. If there are any benevolent billionaires (unconnected with property and banking) reading this who’d like to fund it, let us know @All Least surprising news of the day: “RECORDS of key Dublin Docklands Development Authority (DDDA) meetings around the time of the disastrous €426.8m Irish Glass Bottle site deal have gone missing, the Irish Independent has learned. Notes relating to at least four meetings of the authority’s influential finance and risk committees, both of which disgraced banker Sean FitzPatrick sat on, cannot be found. The DDDA also admitted last night that other records failed to properly reflect what transpired at meetings…. The price paid for the 25-acre site was almost double what the DDDA had told the Department of Finance it would cost.” http://www.independent.ie/national-news/files-of-key-dockland-dealings-go-missing-2188596.html Cowen/Anglo/DDDA/WHPR/DDDA/Anglo/Cowen… The establishment’s golden threads are further analysed here: http://www.tascnet.ie/upload/file/MtGC%20ISSU.pdf @ Michael Hennigan, As to fiscal adjustment, we still have bubble salary, housing prices, public pensions and professional fee levels. Who really expects the Croke Park agreement to have a significant impact? Consider the inertia in restructuring the 800 quangos despite the red ink of €400m per week. As for a jobs strategy, most of those who have an input to what could charitably be termed a ’strategy’, have never worked or lived abroad and don’t have a clue about the challenges in developing export markets. Well said Michael. A lot of truth in what you have spoken above. @ All, Excellent discussion people. Only having a skip down through the comments now. Well done all. BOH. @Mick Costigan Thanks for that. We need the truth about how we were ruined but also the details of how bad things really are and will be for the next few years and the measures we need to take. A forum chaired by someone who will bluntly confirm in public what the NYT article says and then marshall the necessary debates could be very valuable. But as you can see from my post above our rulers have been taking all the decisions in private for so long that telling the public the truth and holding an open debate on what we should do just never occurred to them. Golden Circle +Government+Social Partner Leadership+Senior Civil Service have stitched the whole thing up in private for decades. As for the Dail, we’d be better off using it to host dog shows. @ Tim Morrissey, I may be wrong but I believe the Eirgrid East West Interconnector €600m price is an example of this, and they are overseeing a multi-billion budget in network upgrades over the coming years. They may do a good job on spending this money wisely but I would like to see independent oversight of this. My instinct, based on my own experience Tim, is that the private sector construction industry in Ireland was diabolical at management of large capital investment programs and such. The public sector is rarely caught out badly on that side of it. Namely because the public sector can afford to put in the ‘brakes’ in the design and consultation process – which the private sector doesn’t have the luxury of doing – because the bankers are always clipping at the heels of the private sector companies. The net result I feel, is that the public sector jobs, due to their lethargy in doing projects on a day-to-day, turn over basis, lack sufficient skills in screwing down prices in smaller components of the project. That is, a private sector company turning over a lot of work gets wise to how to manage small items of the budget. So we have this perception, which is justified, that on public sector projects you can get away with a lot of over pricing. On the other hand, the public sector projects rarely get the overall strategy wrong. You don’t see tonnes of ghost estates, empty hotels and half completely office blocks built by the public sector. The private sector has been guilty of getting the big picture very wrong in terms of financial management. As I suggested, as a result perhaps of an under-developed private sector in Ireland coming under too much pressure to perform by the lending institutions. The lending institutions could never put that pressure on the public sector projects. Because the public sector sources its finance for projects in a different kind of way to the private sector. BOH. @jesper I take your general point that high inflation would unfairly benefit the over paid and over indebted. I don’t understand why a person working in a profitable company in Greece should have to suffer the same loss in international purchasing power as an overpaid person in an unprofitable company” You have a stange view of how an efficient jobs market should operate however. An unprofitable company may need a good financial contoller (for example) even more than an profitable company. In an efficient market demand drives wages. Sure if your individual performance makes your company profitable you will have a good argument when asking for a pay rise (or smaller pay cut) but you can’t expect a pay rise if your companys profitability is due to others. This is what caused our wage competitiveness problem. For example ESB and the government awared pay unsustainable pay rises to staff because they had the cash not because each individual could justify their salary. Bottom line, if your employer could sack you and find someone else to do your job (to the same standard) for less, then you are overpaid. I’m been idiolistical of course, the jobs market is far from efficient in this country. The most demoralising manifistation of this inefficient jobs market is when your boss is an incompetent baffon but is paid twice you salary with excellent pre 95 pension simply because he has been there so long. Actually sorry unemployed people who know they would work their asses off, but can’t get a look in because those on the inside have organise together a lock in. @jesper I take your general point that high inflation would unfairly benefit the over paid and over indebted. I don’t understand why a person working in a profitable company in Greece should have to suffer the same loss in international purchasing power as an overpaid person in an unprofitable company” You have a stange view of how an efficient jobs market should operate however. An unprofitable company may need a good financial contoller (for example) even more than an profitable company. In an efficient market demand drives wages. Sure if your individual performance makes your company profitable you will have a good argument when asking for a pay rise (or smaller pay cut) but you can’t expect a pay rise if your companys profitability is due to others. This is what caused our wage competitiveness problem. For example ESB and the government awared pay unsustainable pay rises to staff because they had the cash not because each individual could justify their salary. Bottom line, if your employer could sack you and find someone else to do your job (to the same standard) for less, then you are overpaid. I’m been idiolistic of course, the jobs market is far from efficient in this country. The most demoralising manifistation of this inefficient jobs market is when your boss is an incompetent baffon but is paid twice you salary with excellent pre 95 pension simply because he has been there so long. Actually sorry unemployed people who know they would work their asses off, but can’t get a look in because those on the inside have organise together a lock in. @Pat Donnelly >”Any stimulus, (including the current deficits!) steals from our future. This is an URGENT problem. The only real planning by TPTB in Ireland is hoping that something will turn up! Turn up taxes, now and that will reduce the pain later.” If we turn up the taxes, FDI will be at risk. Ireland is already slightly less attractive for FDI because of increased VAT etc. THE ONLY way I can see is the government needs to be much more facile, efficient, streamlined. This country needs to become a model for efficiency – no money wasted that doesn’t need to be. i.e start privatising..but laws need to be in place to encourage enterprise whilst still not selling out too much and decreasing quality. Britain privatised a lot in the early Blair era if I remember correctly. There should be strategic protectionism. Countries that are closed and export a lot into Ireland yet don’t really import much from Ireland should have heavy taxes on their products. @Olver Vandt I agree that society cannot take too much of a back seat or none of our discussions will matter. @ Ciaran Daly/Mick Costigan So what is the case: new public jobs programmes and an unreformed system of bubble-era costs or begin reform of the public sector and the sheltered private sector while adding new programmes? Like James Carville, David Begg may be wary of bond traders but last year’s proposal to stretch fiscal adjustment to 2017, without any reform, looks even less credible today. 1. There are a a large number of State job incentives and the addition of a State investment bank, can have only a marginal impact. 2. Credit availability will continue to be a problem and the Government cannot set credit criteria. Last year bank lending in the US grew at the lowest rate since 1942. However, as Morgan Kelly points out in the IT today, the Government can have a major influence on the health of the banking sector. 3. The Government has rubber-stamped a flawed Innovation Taskforce report which commits the State to eventually spend treble the current science budget of €1bn. It could be called a “make work” stimulus program. The jobs targets are fanciful and the politicians are afraid to appear ignorant by questioning the vested interests in the universities. The few successful spin-outs from university research like Stokes Bio, will be acquired by overseas interests before there is any significant value added for Ireland. The big secret is that the output of all the thousands of new high tech firms — the majority of the 25 to 30% that will survive say 10 years will have less than 10 employees – – will be dependent on one big customer: the public sector. 4. A well governed competitive Ireland will need a jobs strategy, seeing the world as it is evolving and not through the prism of marketing spoofery. However, when the biggest milk processor, Glanbia, tries to spin off its low margin Irish dairy operations, so that it can expand abroad while adding little value to the Irish economy, one can wonder about the difficulties ahead. Glanbia’s counterpart in New Zealand, Fonterra, is responsible for more than on-third of international trade in dairy products and 25% of NZ earnings. Wonder why Glanbia’s plan was met by silence from Irish policymakers? What Ireland is suffering from is inequality. Expectation is key. We have enough houses for all. I am sure that Irish builders did a great job. What do we actually need? We can afford enough social welfare for food and basic necessities. The deficit is a stimulus that steals from the future. So we need to cut the deficit. Taxes will not stop growth, that has already stopped. It will enable those who have pay to those who do not have. It seems that the Irish have an objection to those who were caught out when the music stopped. Why? @ Michael Hennigan, In relation to Glanbia, how big is their pension hole? Perhaps that is one reason why they are trying to expand abroad. Money has to be generated to fill this hole. With high energy costs in Ireland, is it any wonder that industry is looking elsewhere for growth. @ Pat Donnelly, Not too sure if I understood your last post correctly, are you saying that spending 2/3rd’s of all tax revenue on social welfare is not enough? @Garo, You’re 100% right that the bail-out of Anglo/INBS to the tune of €25-30bn should never be taken as a given when the government has refused to provide costings to the Opposition and esteemed economists seem not to have access to the information (try as they might to project based on limited information in the public domain). We are left to trust the government and to an extent the EU who will be approving survival plans. When the news-cycle for a story has passed and the dust died down, I suppose we take the official version of the event, in this case that pouring another €20-25bn into Anglo/INBS is the cheapest option. You’re right though – when the matter hasn’t been debated or the facts made public it should not be treated in a shorthand way as if we have resigned ourselves to it and accept it as fact that Anglo/INBS must be propped up. @Pat Donnelly If you want to make sure growth becomes negative and never really restarts, raise taxes now. What needs stimulus, or at least permission to try to grow, is the efficient private sector. Raising taxes won’t help that. Meantime, to cut the burden on now and the future, other costs do have to fall.. Govt can cut spending by decree and yes, social welfare costs will probably have to fall. Local govt costs, energy, etc., should fall too. Raising taxes won’t help that either. The Irish economy and Irish government finances are not going down the toilet, they’re already flushed. While we should definitely have a witchhunt to find the culpable, we need to think of a practical future too. What you need now is to make it possible for someone to start to create the water (wealth) that can help rinse us off. Raising taxes won’t help that at all. Hugh Sheehy What is the difference between cutting services and raising taxes? As there is, and will be for years, no growth, there can be no (hypothetical) loss of growth due to nasty taxes. In fact, with taxes being imposed, some will have to work harder ….. Good news, no? There is already AN UNSUSTAINABLE stimulus, Hugh. The deficit. Something you seem to ignore? In the so called Great Depression, what did the victims say as they lived through it? “Recovery is just around the corner”. At first they said it because they believed, as all the media said so. Then, they hoped it would come true. Then, they said it bitterly, to remind each other that there were others worse off. Then they fell silent. Apparently a recent quote: Paul Volcker: “Any thoughts that participants in the financial community might have had that conditions were returning to normal should by now be shattered,” “We are left with some very large questions: questions of understanding what happened, questions of what to do about it, and ultimately questions of political possibilities.” Sporthog You seem to miss my point. What was my point? I can then address your concern on wasting taxes to keep plebs from burning down your homes. @ Sporthog The amazing thing about the Irish dairy industry that it has concentrated on low-margin products and the drug of EU intervention. Ireland’s cheese production has ranked with Sweden’s. http://www.finfacts.ie/irishfinancenews/article_1017985.shtml @ Pat Donnelly, Raising extra revenue is one thing, but spending it prudently is another. Just one example, How much money has been spent on renting pre fabs for schools? Renting prefabs for one or two years is fine, but for longer terms it does not make sense. This country operates on short 12 month cycles, all short vision. Taking long term costings into consideration does not happen. It’s all about trying to balance the books for this year, and we will worry about next year when next year comes around. In the short term the books are balanced, in the longer term the taxpayer pays dearly. Except this time the country has run out of road. While I have regard for those people who have worked hard, contributed to society and are now retired, social welfare has become a monster which is devouring this country. Is it really necessary to give out free TV licenses? If it is politically impossible to take back medical cards can the arrangement between the state and GP’s be rewritten. Instead of a GP obtaining X euro per medical card visit the GP receives X euro minus 20%. 66% of all taxes going to Social welfare is unsustainable. Something is going to have to give. @ Michael Hennigan Thanks for at least partially responding to Ciaran Daly’s question. You chose to interpret the question as a case for some other course, set up a strawman based on some cherry-picked facts and then took it down. A common blogosphere tactice, but not really that helpful. I interpret Ciaran’s question as, first and foremost, calling for an clearer examination of the likely effects of austerity. As he points out, unlike 1986/7 we have the euro and the banking crisis. And yet, the best the austerity proponents do is make reference to that period and ignore the differences. I would add as material differences in context the fact of generalized economic weakness in most of our trading partners and the event risk of financial sector and sovereign debt contagion in Europe, independent of whatever we do. I would also add that, from a theoretical perspective, we have a clearer means of interpreting the shape of the macro-economy through Wynne Godley’s “sectoral balances” model, which has been heavily cited by Martin Wolf, Ed Harrison at Creditwritedowns and others. Given those facts, what is austerity likely to lead to, is the important? I believe that Johnson and Boone have it right, as does Harrison in the article I linked to above. But I would like to see others describe what they see it leading to, rather than simply there-is-no-other-alternative arguments that focus on proving strawman versions of the alternatives wrong. So what do you think will happen? My personal preference would be to see far greater focus restructuring of debt, both of the banks, and if necessary our real sovereign burden. We will get there in the end, and I think it would be better to shortcut the terrible pain and strife that attempting to impose austerity without sharing the burden will provoke. Read Schama in today’s FT on The Age of Rage. http://www.nakedcapitalism.com/2010/05/schama-are-the-guillotines-being-sharpened.html The French Revolution occurred after John Law (a Scot,possibly in the pay of the English) had destroyed the middle classes, all banks had failed and they were mostly paupers competing with one another against skilled artisans who spoke differently and had no love for the bourgeois. There was also an unfortunate cliamtic circumstance which may explain why those who micturate upon us are so strongly telling us it is raining: a mini ice age which caused crops to fail and some years to have “no summer”. As I believe that AGW is more of the same, there may arise the perfect storm! We have moved on since then but we shall see how much we have moved on as this massive social experiement unfolds. Interesting times! @ Mick Costigan Most advanced countries face the challenge of cutting structural deficits in coming years to bring down debt. The UK, with its own currency, has a structural deficit of 6% of GDP that will require £80 billion of tax rises and spending cuts to eliminate it. Devaluation and the ability to print money to support demand does not provide a magic remedy. The ESRI estimated in March 2009 that the structural deficit was in the range 6 to 8% of GDP. Two budgets have been implemented since and last May, in a paper on recovery scenarios, forecast GNP growth of 5.9% in the period 2012-2015. That looks optimistic given the dependence on the US and UK and the expected contraction of the Western banking sector as a result of regulation and new capital requirements. The recession unemployed and most of the self-employed outside of sheltered sectors, have experienced the biggest drops in income. So being dependent on foreign lenders for most of our borrowings and a political reality that Germany is not willing to provide a blank cheque (in the federal system in the US, neither would California get an open check from Washington DC – – Californians who want low taxes and public services would not be given a free lunch), what is non-austerity? Countering say Bord Snip cuts with equivalent rises in job incentive spending? A restructuring of bank debt as proposed by Morgan Kelly would be a big plus; restructuring of sovereign debt would involve the IMF and the Croke Park deal would look like Noddy’s playtime; besides, who would of course miss the lawyer fee cartel, for example? Given that there were almost no job additions in the tradable goods and services sectors during the bubble, long term significant job creation is one of the greatest challenges for Ireland. The pharma/chemical/medical device sector has employed about 40,000 over the past 5 years despite a huge jump in output. Compared with the 1980s, interest rates are much lower and external demand is less reliable. It should be noted that Intel’s decision in 1989 to open an Irish facility, was taken at a time when Ireland was seen to be seriously tackling its public finance problems. The Intel decision was hugely important and ranks with Henry Ford’s decision to site a tractor plant in Cork, the birthplace of his father, where in 1930, as many as 7,000 were employed. http://www.finfacts-blog.com/2006/08/henry-ford-and-cork-ireland.html As regards Schama, in 1974, William Whitelaw (later Maggie Thatcher’s DPM: “Everybody needs a Willie!” she famously said) accused Harold Wilson of going “round and round the country stirring up apathy.” Apart from anti-Americanism, what would motivate the masses to rise? Automaic stabilisers have become the opiate of the masses! @ Michael Hennigan At some point policy makers are going to have to re-read Keynes and start printing money because although the austerity measures might lower deficits they will also lead to lower GDP and higher unemployment which in turn will lead to more problems. Good article in the Gaurdian by Dean Baker on this subject last week: http://www.guardian.co.uk/commentisfree/2010/may/17/keynes-danger-deficit-reduction @ George Orwell It’s easy for commentators who present their arguments without considering the downsides. Maybe the debt would be even worse if the banking systems in the US and Europe had been allowed collapse? With Ireland relying on overseas lending to fund most of its debt, is it realistic to say let debt rise? Almost 20% of tax revenues will go on servicing public debt this year. Should that matter? Should France be concerned about its average retirement age of 59 and a related pension fund deficit? Especially for Sarah C: http://globaleconomicanalysis.blogspot.com/2010/05/padded-pensions-and-what-to-do-about.html But the Americans are without Ruth. I thought most governments, including the EZ were printing money? The phrase as some know, is misleading as all they do is muck about with banks and a few electrons. No actual printing. The problem is, in a deflationary debt spiral, the last thing people and companies want is debt, so they don’t bite and v drops to near nil! Jagdip Singh says “Issue new money (we gave that up with membership of the euro – we’re now one of 16 voices, and a pipsqueak compared to France and Germany). ” My understanding is South Africa introduced a second currency and operated a ‘dual’ currency system for many years. I think the two currencies were called the Financial Rand and the Commercial Rand. So there might be a way for Ireland to introduce a second currency for internal use, and keep the euro for external trade. Sort of like how the ecu co-existed with francs and marks. Perhaps not practical but interesting to contemplate. Comments are closed.