Ireland vs Iceland

There were a couple of mentions of Iceland on tonight’s Prime Time. One chap in a vox pop said they were living off food parcels while we were drinking pints. Brian Lenihan stressed that defaulting on seniors would lead to a fate worse than (paying back) debt, namely what Iceland has experienced.

So out of curiosity I went to the OECD’s statistical website to see what the quarterly accounts of the two countries have to say on the subject. I looked up the stats for quarterly GDP, seasonally adjusted, volume index, expenditure approach.

The relative declines of the two economies depend on the quarter you start from. Ireland peaked in 2007:4. Relative to that quarter, Ireland’s GDP in 2010:2 had declined by 13.4%. Iceland’s had declined by 11.8%.

But, to be fair to Ireland, you might also want to compare movements since the Icelandic peak, in 2007:3. Relative to that date, Iceland’s GDP in 2010:2 was down by 16.3%, while Ireland’s was down by 10.5%.

There is a twist in the tail, however. As we all know, GNP and GDP are very different in Ireland (and our GDP data have traditionally been regarded as unreliable because of transfer pricing). Taking Irish figures for GNP (seasonally adjusted, constant market prices) from, you find that between 2007:3 and 2010:2, Ireland’s GNP fell by 17.0%, slightly more than the decline in Icelandic GDP during the same period.

If you are of the view that we should only be interested in developments since 2008:4, then the declines since then are: Iceland (GDP): 11.6%; Ireland (GNP): 9.9%.

And of course, if you regard GNP as the more reliable indicator in the Irish context, then it is important to note that Irish GNP has been continuously declining since this crisis started. Call me old-fashioned, but I am one of those fuddy duddy types who thinks in order for a recovery to count as a recovery, GNP should actually stop falling. Once again, Iceland and Ireland are not quite as different as the Minister made out during his interview.

As for unemployment, according to the OECD the harmonised unemployment rate for Iceland in 2010:2 was 6.8%. Our rate in July 2010 was 13.6%. I actually think that unemployment is important.

The Minister got very agitated about people suggesting that Irish taxpayers should not in fact pay back senior bondholders everything our rotten banks owed them. An increasing number of these rabble rousers are foreign, it should be noted. For example, the Roubini crowd said today that “we think it unconscionable that bondholders are protected at the expense of taxpayers”. There have been many such sentiments expressed in the international media in the last while. But the bogeyman used to shoot down any such suggestions when they are made in Ireland is invariably Iceland.

It is not such a slam dunk argument as the Government appears to think.

Argument for an Election Growing?

Today’s banking announcements were marketed as bring finality to the banking crisis but that was always unlikely. The final costs and implications of the crisis still depend on stuff that happens in the future which, word has it, can be tricky to predict. Jagdip has an as-always excellent discussion of the various loose ends here. I think the point that AIB and BoI’s non-NAMA loan books have not been subjected to the same stress tests as Anglo’s is an important point and one that could come back to haunt us again.

On the fiscal front, Minister Lenihan’s announcement of a new four year plan is welcome. Though the official statement didn’t say this, the Minister’s said during his press conference this morning that the plan would detail both expenditure cutting and revenue raising measures which would make it a more credible plan.

That said, the effect of multi-year plan in convincing the bond markets that we are on the road to sustainability will be severely limited by the fact that the government will have at most two budgets, and far more likely one, before the next election.

With the government having taken the decision to stay away from the sovereign bond market until January, there is a strong argument in favour of calling an election to take place in November.  Each of the political parties could be given 3 weeks to prepare their own multi-year budget proposals, followed by a 3 week election campaign, giving a new government another four weeks to negotiate a program for government and introduce a December budget.

This course of action would have the following advantages.

1. Because we are on a temporary break from the bond market, the movements in bond spreads that would take place during the campaign would be essentially irrelevant. All that would matter at the end of the day would be the budget and multi-year plan implemented by the new government.

2. The multi-year plan would be seen by the outside world as having political legitimacy. The question of whether the government had a mandate to introduce unpopular measures would disappear. And despite regular claims from journalists that the opposition are irresponsible and have no policies, both Fine Gael and Labour did produce plans last year detailing how they would implement a €4 billion adjustment. Likewise, I would have little doubt that they would be forced to provide multi-year plans to match the government’s and that the election debate would be dominated by the comparison of these plans.

3. The difficult decisions in the upcoming budget would be taken by a new government, most likely with a large majority and not worrying about elections for another five years. Difficult decisions like the introduction of a property tax could be taken without concerns about discontented backbenchers and with the knowledge that the economic situation will look better in 2015.

I’m sure in writing this I’ll get the usual flak from the usual sources, claiming I’m putting this argument purely because I’m a Labour supporter or a Blueshirt or something or other. In truth, I have no affiliations or loyalty to any political party. I just think that there are a number of objective arguments for calling an election now.  If the government puts together a concrete multi-year fiscal plan and runs an election campaign on the basis of it, they will have done a considerable service to the country.

Smart, smarter, smartest

Another day, another committee. Forfas has established a high-level group to identify research priorities for Ireland. The group’s composition suggests that its recommendations will be demand-driven. Research is no good, however, unless it is top class. Ireland should research those things at which it can beat the world — and import all other knowledge.

Batt O’Keeffe reminds us that economic growth and job creation are driven by technological progress but forgets that this is true in the medium- to long-term. In the short-term, other factors are more important, as reported earlier by John McManus. Ronnie O’Toole adds that it is all good and well to focus on the export sector, but that the domestic sector urgently needs to be smartened up too — through regulatory reform rather than by spending money we don’t have.

Cuddly Lenihan

The BBC has been leading its bulletins this morning on the latest statement by Minister Lenihan.  He gave an extensive interview on the influential Today  programme on Radio 4.  Listeners can make their own assessment of its tone by listening to it at

You might be alarmed to learn that the BBC headlines the interview on its website as “Lenihan: Ireland ‘can’t print money'”.  Is the Minister restarting his midnight visits to Dave McWilliams gaff?