It wasn’t just Americans who were skeptical!

Paul Krugman had a post the other day which pointed out that a lot of US-based economists were skepical about the euro project back in the 1990s, and that their meat-and-potatoes-style analysis actually turned out to have had a lot of useful things to say on the subject.

Patriotism is the last refuge of a scoundrel, and over here there are plenty of people who suggest that it was ignorant outsiders who were skeptical about the euro project. Krugman links to this article which is bound to become a standard undergraduate reference, but I find the recent references by Klaus Regling to ‘outside “experts”, who always seem to know what is good for Europe’ to be more telling given their provenance.

So it seems fair to point out that Irish academic economists also expressed skepticism regarding the euro project during the 1990s, most notably Peter Neary and Rodney Thom. I’m sure Rodney won’t mind if I point out that Peter was not just anybody in the context of the Irish profession, but its most prominent member by far, and someone who went on to become President of the European Economics Association. Here is an article by Neary and Thom, and here is another article by Peter writing on his own.

Nor were Peter and Rodney alone in worrying about the consequences of euro membership for Ireland. Here is an entertaining newspaper column by Jim O’Leary. Indeed, to quote Peter writing at the time,

to my knowledge every university economist who has commented on the matter has expressed grave reservations about our joining EMU if sterling does not.

The key word here is obviously ‘university’, since the pro-EMU Baker, Fitzgerald and Honohan report written for the Department of Finance was an ESRI production. But the point remains that the Neary-Thom view was by no means an uncommon one at the time.

Finally: I don’t think anyone has linked yet to Colm’s Stephen’s Day piece on Estonia and EMU, which shows that even economists are capable of enjoying the holiday season. So here it is.

92 replies on “It wasn’t just Americans who were skeptical!”

1. Colm McCarthy already linked to his Sindo piece:

Imo, it’s among the most sensible, balanced takes I’ve encountered.

2. Many economists, in particular those from unitary or federal states outside the EU, fail to recognise that the EU is simply an association of sovereign nations states that, under binding treaties have agreed to pool elements of their sovereignty and to empower EU instititons to govern the exercise of this pooled sovereignty. As Colm points out, the EMU is political, but just because it is doesn’t mean it can’t work. But it needs the members to be well-governed, and if they’re not, to apply the necessary remedies.

3. And yes, this high-profile academic dissent was ignored, but we’re in now. So, should we jump, be sufficiently sulky, cranky and awkward that others push us out, or (my preference) take the medicine and cheer on the sovereign bond market?

The Regling article basically states that countries like Ireland are capable of internal wage devaluation and therefore critics of the Euro are wrong. What he fails to appreciate or even acknowledge is that shifting the entire burden of adjustment on to labour markets and public spending is a political response to crisis with real consequences. Only those countries with weak trade unions are capable of doing this. Countries with strong trade unions (unsurprisingly the more coordinated market economies of the Euro area) will pursue different mechanisms to adjust costs (reduction of working time etc). We need more not less politicisation of macro-economic policy in the Euro area. A technocratic approach to economic Euro-governance will not work in the long run.

@ Aidan R: “What he fails to appreciate or even acknowledge is that shifting the entire burden of adjustment on to labour markets and public spending is a political response to crisis with real consequences.”

Presumably Regling is alluding to some specific economic model which has no linkage between wage/income levels, disposable income and consumer spending. This latter being completely independent of income!

So, increasing our ability to compete with ‘low-cost’ economies by reducing wages/salaries will do what to our consumer spending model? Decisions have consequences!

Trim the ‘fat’ – good idea. Yes, but whose fat? Can those who will be doing the trimming even recognise the difference between adipose and muscle tissue?

Reckon we need a new economic model – one far less dependent on credit and debt and annual incremental expansion of aggregate economic activity.

Cost reductions have to start with our high services costs: insurance, local charges, health and safety costs, VAT and excise duties, bank charges, professional fees, etc. All these have to be reduced by 20% across the board, together with an indefinite moratorium on any increases.

@ All: While you are in the reading mode you might like to check out the charts-only entry over on


Although it is a good few years ago now since the debate about whether Ireland should join the euro, I remember reading a number of articles from Irish university economists at the time suggesting caution. Apart from the Neary and Thom, I remember reading one from Gallagher
who makes a similar point as Neary and Thom.

The influence of non-university economists was at the time so much greater in the media and in political circles and continued to be the case (especially stockbroker/banker economists) even into the recent credit crisis.

Kevin, you say it wasn’t just Americans who were skeptical!

Maybe but before getting too overzealosus about the prescience, isn’t it the default mode across professions, politics and possibly the rest of life that we promote what we have got right and we try and bury the inconvenient truths on our failures? So an old cynic like me who claims to know both the price and value of some things (rather than everything), reacts with a so what!

Last February, a dinner of hedge fund biggies in Manhatten plotted how to profit from the crash of the euro; US financial commentary on the prospects for the euro, has been generally alarmist and US economists are reported by the New York Times to be considering developing a code of ethics following the documentary ‘Inside Job’ which exposed the failure to foresee the US financial crash and money-making conflict of interest pursuits of the profession’s big names.

The NYT says the film is particularly critical of R. Glenn Hubbard, dean of Columbia Business School and a director of MetLife; Frederic S. Mishkin, a professor at the same school who advises investment firms; and Martin S. Feldstein, a Harvard professor who resigned from the board of the American International Group, the insurance giant, after it was bailed out by the Fed and the Treasury.

Prof. Frederic Mishkin of Columbia University and a former Fed governor co-authored a report on Iceland, which was published in 2006 and concluded: “The analysis in this study suggests that although Iceland’s economy does have imbalances that will eventually be reversed, financial fragility is not high and the likelihood of a financial meltdown is very low. However, the possibility that multiple equilibria could occur in which self-fufilling prophecies could do serious damage to Iceland’s economy suggests that policies to bolster confidence in the Icelandic economy and financial system would be very beneficial in the current economic environment.”

If Ireland had remained outside the EMU during the bubble period, there can hardly be any doubt that plenty American economists, as well as most domestic ones, would have been lining up too to coo about the ‘miracle’ economy.

While the EMU had serious governance flaws, it should be also recognised that job creation since 1999 outpaced the US until the crash and job losses during the Great Recession were much lower than in the US.

Exports and imports of goods and services within the euro area rose from about 31% of GDP in 1998 to around 40% of GDP in 2007. The rate of increase in extra-euro area exports and imports of goods and services even exceeded that in intra-euro area trade, rising from about 32% of GDP in 1998 to almost 44% of GDP in 2007. Extra-euro area trade has, of course, also benefited from a period of strong external demand and increasing integration at the global level.

We are of course where we are and there is no way ‘oot of the Euro.

But we should not be where we are. The fundamental mistake was made back in 1979. We then decided to join the ERM independently of sterling. Wind back 60 years – a period of rebellion and rejection of our nearest neghbour even to the point of being ambivalent against Nazism – but one thing Dev et al knew was totally not on and that was to have a currency independent of sterling.

We were fooled by the snake mechanism of ERM to thinking we could be both independent of sterling but that our EU partners would ensure that the rate would stay close to parity. Luxembourg was not so rash, it did not join ERM, rather it kept its rigid parity link with the Belgian Franc. Ireland should absolutely have done the same with sterling.

20 years later we had drifted to around 85p when the Euro thing came along. Of course the right thing to do was to stay with sterling but with the parity link now a distant memory and with a competive exchange rate and with our never far from the surface anti British sentiment, it would have taken a political colossus to have rejoined sterling at parity.

The Euro was wrong for us and even the skeptics did not spot why exactly it would prove wrong. We got the feared sterling devaluation to be sure but it hasn’t seemed to matter too much. What really sunk us were the low interest rates, access to a vast exchange risk free liquidity pool, a perception (not entirely unjustified at the time) that we were the place to invest your capital – the rest is history.

If we had stayed with sterling the pool of liquidity would not have been nearly so great, in fact it would have shrunk as clearly sterling now presented an exchange rate risk to international lenders.

The one think which of course we have never tried and never should try is a truly floating independent currency. We have to link to one of the major reserve currencies and sterling remains by far the prime candidate, but alas it is almost impossible to contemplate the practicalities of a change to sterling now.

This comment on Krugman’s post from a Gerard Fritz in Austria makes some important points:

“Hell yes there WERE risks and costs involved in creating the Euro zone, and SOME of those that advocated the Euro were very much conscious of those risks and costs, just as the “founding fathers” of the European Community knew, back in the Fifties of the past century, that ECONOMIC cooperation (starting in the fields of coal and steel) would not only reduce potential conflicts and causes for one more European war but would also REQUIRE more political integration. The founding fathers wanted POLITICAL integration, so they started with economic steps that would inevitably lead to political consequences. And if this meant putting the cart before the horse, that was exactly what they were doing, on purpose. Because the horse just was too stupid. Same thing in the Nineties. Of course the Euro zone was far from being an “optimum” single-currency zone. ”

It is entirely possible that some if not all of the people driving the Euro project knew the risks but chose to plough ahead regardless.

It’s a fantasy to believe that membership of a sterling area would have offset the second period of reckless Irish mismanagement since 1922.

In 1978, Ireland achieved a record 17½% of GDP deficit for a developed country in the period 1970-2008, according to the IMF.

Between 1977 and 1982, the combination of  tax cuts and huge spending increases (in the single year 1979, the public service pay bill was increased by 34%), resulted in a trebling of the National Debt.

At the risk of some self-advertisement, I would like to add a few references to the views of Irish economists about the wisdom or otherwise of Ireland’s joining the European monetary union in 1999.
In the last chapter of the fourth edition of our text book (The Macroeconomy of Ireland, published in 1998 and labelled the “EMU Edition”), Tony Leddin and I asked “Will Membership of EMU be Good for Ireland?”
Twenty pages on we concluded that
“Faced with the difficulties of making a definite judgment on the balance of costs and benefits [of joining the EMU], [we argue] that a more sensible strategy would have been to ‘wait and see’ . . . Irish membership [of EMU] entails very significant risks”.
The alternative was, of course, to stick with the floating exchange rate that had served us well between 1993 and 1998.
In the subsequent edition of this text (2003) we added the warning that
“The evidence of history is that systems of fixed exchange rates do not endure. From the gold standard to the EMS, previous attempts to stabilise the world’s currency markets have collapsed. The most important reason has been that sovereign countries have retained the right to implement independent economic policies. Sooner or later incompatibilities between national economic policies have led to strains, speculative attacks, and ultimately the abandonment of fixed exchange rates.”
It is also relevant to draw attention to an article in the European Economic Review (2002) in which Rodney Thom and I discussed the Irish experience following the break in the link with sterling in 1979. We used the lack of evidence of disruptive effects on Anglo-Irish trade to pour cold water on the extravagant claims made by some American economists about the beneficial trade-creating effects of a currency union. [].

A technical gitch or gag – I’m getting:
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@Paul Hunt
You have a combination of * @ or : that the blog fairy is seeing as an instruction to do something difficult. I find it happens if you try and type debt to GDP ration with : instead of ‘to’.

Thank you, Hogan. Can’t see any funny combinations, but, in any event, and in the midst of the recital of these tonnes of wise counsel that were issued more than a decade ago, all I want to know is what the sages think we should do now: jump, go into sulky teenager mode and get pushed – or grin and bear it.

I’m beginning to think that Ireland doesn’t belong in the EU any more – there is negligible sharing of interests or values with core members, and, in particular, no shared concept of what good governance involves.

@Paul Hunt:
“[…] there is negligible sharing of interests or values with core members, and, in particular, no shared concept of what good governance involves.”

We haven’t even got a shared concept ourselves, never mind one we could share with other countries.


The Euro could have worked – it just needed a proper ECB. One that could oversee credit flows rather than just counter inflation.
Setting up a new currency might not be as hard as people think. Look at all the recently independent Eastern European countries (at least some of them had to do it I think – though could be wrong). Hard for a year or two but pretty good after that.
This project had it’s good and bad points but it is now useless for the peripherals.
Dragging this our just puts off the natural remedy of default and puts more Europeans in the pockets of Goldmann and the likes through the Euro bonds.
This is not working for us – don’t look back – default, leave and devalue!

@ Brendan Walsh

“From the gold standard to the EMS, previous attempts to stabilise the world’s currency markets have collapsed. The most important reason has been that sovereign countries have retained the right to implement independent economic policies. Sooner or later incompatibilities between national economic policies have led to strains, speculative attacks, and ultimately the abandonment of fixed exchange rates.”

On a World scale fixed exchange rate systems have never survived, agreed. But at a more local level they have. Our very own parity with sterling lasted for 60 years through the most traumatic of geo-political-economic upheavals as well as through huge politico-economic stresses between Ireland and the UK. So far as I am aware this was not a currency union but a commitment to maintain parity between two separate currencies. The punt-sterling parity ended not because of the forces you allude to but because we volunteered for the grand scheme. As I said, if only we had not so volunteered…, but that is water under the bridge.

The Euro is of course not a system of fixed exchange rates. It is a monetary union between independent states, my guess totally unparallelled in economic history, a grand experiment.

The forces of economic incompatabilities are still there, speculative forces aren’t (unless you count the bond markets), and so the response to these forces has to come in a different way than adjusting exchange rates.

Some would argue that the response is more painful or less tractable than an exchange rate adjustment but that depends on your perspective. A pensioner dependent on accumulated savings is certainly very relieved indeed that the exchange rate option has been closed off.

@ Eureka

“Setting up a new currency might not be as hard as people think. Look at all the recently independent Eastern European countries (at least some of them had to do it I think – though could be wrong)”

There have been many many successful transitions to a new currency. Old Francs to New Francs, Old Lire to…, Punt, Franc, Lire etc. to Euro, Eastern Europeans from the Rouble(?) to anything.

The reason for the orderly transition in all cases was because the populace had confidence in the new currency. Even Germans, who might have preferred to keep their D-Marks had to accept the Euro – no point in a flight to sterling, dollars, gold etc.

If Ireland was to announce an exit from the Euro, just imagine the capital outflows – would you trust the Punt Nua? An exit to Sterling or the Dollar could possibly be managed but the David McWilliams proposal of exit and devalue is simply as impossible as expecting Newton’s apple to jump back up on the tree.

The premise of this post seems to be that membership of the euro is the cause of our present problems. Colms McCarthy’s piece – the final link gives a more balanced view. Our problems were not inevitable once we joined the Euro, or even as a result of the bubble blown up by the bankers and developers as result of easy credit combined with greed and poor regulation. As Colm clearly points out it was the blanket guarantee and a continued insistence on honouring the stupid guarantees of bank bondholders which has resulted in us being cut off from credit. Given the identification of a problems cause the solution then seems obvious.

“Under the eurozone as designed, the detection of problems in the banks, and their rectification once detected, was left to the member states. This has turned out to have been a disaster for Ireland, since the Central Bank and Financial Regulator failed to spot the bubble, failed to do anything about it and then compounded these errors by misleading the Government as to the scale of the problem once the bubble burst. The result was the ill-advised blanket guarantee of bank liabilities which led directly to the loss of the State’s access to credit.”

“The textbook procedure in resolving a banking crisis is to quantify the losses rigorously and then get the pain distributed as quickly as possible. If banks have made disastrous loans on a large scale, then bank shareholders need to get hit, followed by bank bondholders, followed by unguaranteed depositors if there be any such.”

@Brian Woods II
Can we put in controls to deal with capital flows? And would the lack of confidence be that bad – a politically stable, well connected sovereign hub that has full control over its corporation tax rate?

From KoR’s post above.

“Patriotism is the last refuge of a scoundrel, and over here there are plenty of people who suggest that it was ignorant outsiders who were skeptical about the euro project.”

At the time I noticed that the noisiest proponents of EMU both in the UK and Ireland were those who could discern an advantage to their own narrow interests – so much like all political decision making and lobbying in Ireland, even today. S a car dealer who wouldn’t have to get his calculator out before pricing his latest transporter load, could lobby his TD with a clear and easy to understand story about why the Euro was a good idea.

This blog is entitled “Irish Economy” but it is administered by academics so the author’s focus on academic contributions to the debate is understandable. However, that was only a small part of the process that led to EMU.

Winston Smith’s comment above makes reference to bankers and stockbrokers. Ask yourself how many employees of the very small and parochial grouping were going to campaign against a move that was going to remove the exchange rate “barrier” to capital flows. These are businesses that feed off flows in various ways. In the UK the input from this group was much more balanced.

Winston may be missing out the asset management side that doesn’t talk much, but focuses on the implications for economies and assets. Here the basic “trap” that awaited consumers in the UK and Ireland was understood to be the trap that would open up after membership as inflation remained low over the medium to long term thanks to the German influence.

It was thought by many that the trick of gearing-up to buy real estate and have the debt inflated away over time, would be assumed to be still a runner – because it was so firmly ingrained in the cultural experience. It would, however, prove different as the money borrowed would retain its value and eventually people would appreciate that it had to be paid back at full value. It took a decade for this penny to actually drop with Joe Soap.

There was a second thing that made the trap more dangerous. For Ireland, there was actually a boom in house prices at the end of the nineties. I remember being told by tuned-in Dublin types that they were very nervous and should get out because real estate had to be unsustainable and would crash just like a decade earlier in London. They couldn’t see that the mechanism that had caused the UK property price decline was ruled out for the foreseeable, by EMU.

At the time Ireland required interest rates to go up. There would have been an accompanying punt appreciation. What it got was a nice, low exchange rate fix, a series of ludicrous interest rate reductions to pretend that there was some economic convergence and an asset price boom that became turbo-charged with all downside risks of interest rate rises (aka the brakes) switched off.

This effectively baited the trap.

I’ve written this before but I think it bears repeating. I remember advising people in rhetorical fashion along the lines of “what do you think is going to happen to house prices as interest rates are forced down?” for those that didn’t get it the follow-up was “things will go totally mad”. What I found most disturbing was that most said nothing but acquired a stupid grin and a few muttered something like “oh, as bad as that” and then acquired the stupid grin. For those that were warned it was short termist gombeenism that motivated joining and for a lot of the rest it was about giving the finger to the Brits.

The argument against was always about how volatile the cycles for each country were, where they were in that cycle vs Germany and France, and how the longer run impact of joining on their cycle would be managed within the EMU structure. For Ireland it was just the wrong move at the wrong time and nobody was in the mood to listen.

Without joining the Euro the little island’s quite mediocre bankers wouldn’t have been given the keys to Europe’s booze cupboard. Ireland would have continued with a modest boom and its population’s wealth would have increased partly via an appreciating currency rather than crazy asset price inflation.

At some point there would have been a downward move in the punt when competitiveness started to be a problem and the drawn-out pantomime of everyone – academic economists included – keeping their heads down waiting for everyone except them to chip-in to an internal depreciation, would have been avoided.

A bit like now in a way – ordinary people don’t go looking for quietly-spoken, dull considered advice. More than a decade ago there were some Irish academics whose advice fell into that category, along with the more sober end of the asset management industry and financial journalism. Whoever makes noise now is likely to get public following. It is a lesson that just doesnt seem to get learnt.

re: Colm McCarthy’s peroration.
“Meanwhile, let’s welcome Estonia to our poorly designed, poorly managed and poorly led currency union, and hope they don’t come to regret it. ”

All of the above may be true but was it not Ireland’s own recklessness (and worse) that has caused Ireland’s problems?

I note also that no blame is attributed tothe government of the day. The Central Bank and Regulator are rightly pilloried but are governments elected to govern. Who in government or government dept is omitted?

“This has turned out to have been a disaster for Ireland, since the Central Bank and Financial Regulator failed to spot the bubble, failed to do anything about it and then compounded these errors by misleading the Government as to the scale of the problem once the bubble burst. The result was the ill-advised blanket guarantee of bank liabilities which led directly to the loss of the State’s access to credit. the government of the day”

Brendan Walsh:
re: “The evidence of history is that systems of fixed exchange rates do not endure…”
Your contribution seems to offer little hope for the €euro. Is this your opinion or am I misinterpreting? Are there any circumstances in which a
well designed, well managed and well led central currency would work?

Could it be argued that FDI and hence economic growth would have been significantly lower if we had not joined the euro? I had always thought that part of the rationale for joining was that since we shared the same currency with the vast majority of the EU luring their corporate operations to Ireland would be easier.

Not to say that our dependence on FDI is a good thing but on its own terms the strategy worked, even if it has beggared (and now infuriated) our neighbours.

@ Joseph
“was it not Ireland’s own recklessness (and worse) that has caused Ireland’s problems?”
None of these things are mutually exclusive. This contributed to the problem but certainly was not the sole cause.

Hear your pain. I wish I could claim your prescience. I held out for as long as I could – then gave into the general consensus that you needed to get a foot on the ladder and then walked into the bank manager who threw money at me. And I foolishly thought ..”well this guy must know what he’s talking about….”.
Would love to know where Lenny’s party was. I spent the boom commuting along the M50 paying for the mortgage and childcare and struggling to keep up really.
Now all that is gone.
Now talk has moved from Home ownership to what country we can emigrate to.
But where there’s life there’s hope. As JTO and others have pointed out the fundamentals of this economy are good.
Would love to know if you think the risk of leaving the Euro after defaulting outweigh the risks of staying or should we just default snd stay? Or is there any way out of this at all?

Ireland has a lot in common with Italy from the end of WW2 to the time of their entry into the Eurozone. Coalition governments, a culture of fraud and corruption, masturbation definitely a bigger sin than tax evasion (thanks F O’T). Devaluation of the Italian Lira year after year and on a quarterly basis in some years. Devaluation of a currency is as addictive as heroin, virtually impossible to stop. Since they adopted the Euro Italy has been politically stable and their currency rock stable. The lesson is that devaluation leads to hangovers that can only be cured by taking more of the same. The extreme is hyperinflation which leads to debtors chasing down their creditors to give them wads of worthless cash. Now that we have lost religion and poverty is not a virtue could we trust our government to maintain the value of our currency or would they jet propel cash into the economy before our numerous elections. We should be thanking God, Mary and all the saints that Brussels and Frankfurt are watching over us. Do not forget a special prayer to Hildegarde Von Bingen beseeching her to ensure that Frau Doktor Merkel keeps up her resolve to protect the Euro from the chancers all around her. The Irish government had many levers at hand to curb excesses it choose not to use them. We have to stop blaming the whole world for our lack of competence and give serious thought to what we are voting for.

My memory is that – whatever academics may have been writing – there was next to no public debate on this issue. As with the banking crisis the establishment made the decisions in private and the political class and the media went along unquestioningly. There was no public debate whatsoever even on the disciplines that would now be required. Shocking really.

The Central Bank and the ESRI both issued clear warnings about the bubble so not mentioning the government’s role is Bertiesque.

Our own currency is possible but would a major thing for us be imported energy prices and knock on effect on inflation. I’m not sure how/if we could manage that.
Perhaps the better solution is for the peripherals to default collectively and set up their own peripheral currency. It would perhaps be more robust than if we were all to go it alone.

An interesting aspect of the usefulness of economists to the public debate on EMU and other issues has been hinted at here in naming some of the biases of some of the economists involved. I notice that the American Economic Association is considering a code of ethics ( the main aim of which seems to be to provide some transparency on the interests of economists making public comment. Given the general skepticism of public in the current crisis do we need something similar here to raise the creditability of those claiming to provide scholarly commentary on the economy?

re: Code of Ethics

“The proposal (of a code of ethics) , which has not been announced to the public or to the association’s 17,000 members, is partly a response to “Inside Job,” a documentary film released in October that excoriates leading academic economists for their ties to Wall Street as consultants, advisers or corporate directors.”

I cant wait to see this film!

Winston et al:

It hardly matters at this stage, but it is not the case that ‘non-university’ economists, whatever they are, supported euro entry in the late 1990s while wiser and more virtuous university types opposed it. I worked for DKM at that time and wrote in cautionary mode, noting the success of the 1993 to 1998 exchange rate policy. So did Jim O’Leary who was at Davys. If a poll of economists of all vocations had been taken, we would not have joined. There was a well-attended Wake for the Punt in Doheny and Nesbitts which nobody seems to remember.

It is interesting though that those opposed were mainly concerned with optimum currency area arguments and were, in a way, right for the wrong reasons. If the ESRI authors had been told to assume a public spending bubble, a credit bubble, an incompetent Central Bank and a further decade of Bertie, would they have recommended joining?

The flaws in the euro design and the risks of monetary, as distinct from fiscal, incontinence, did not feature greatly in what was written in Ireland on either side of the argument. The Swedish commission report, as I recall, was more prescient – but they had had their banking disaster in the 1990s. The trick is to learn from mistakes without actually making them.

The key point surely is that, irrespective of whatever positions were advanced in public commentary or in the academic sphere prior to Ireland formally joining the Euro, the politcial decision had been made quite some time before that. And like all decisions of this nature it was taken behind closed doors under the influence of who knows what vested interests. And once the decision was taken, the Government spin-machine was cranked up to do a snow job on any contrary opinions that might be advanced in the Dail, in public commentary or from the academic quarter.

This is how we got into this mess. Nothing, absolutely nothing has been learned. All policy and legislation since has emerged from the same process. And it still continues. Witness the Greens’ Climate Change Bill.

Until there is effective scrutiny in the Dail of government policy proposals, with a requirement to present evidence that may be contested, rebutted and counter-rebutted, nothing will change. This change won’t guarantee that stupid policy decisions won’t be made, but it should minimise their incidence and severity.

Joseph Ryan observes quite correctly that Colm McCarthy fails to ascribe a single iota of blame to the Irish Government (in the article, not the post above) in an article about the Irish crisis (not Estonia really). Surely there is enough room in hundreds of words for four or five on this point.

Virtually all business organisations were and still are in favour of Ireland being in the Euro. Among them the Confederation of Irish Industry, IBEC, ISME, the American Chambers of Commerce in Ireland, the IDA, Enterprise Ireland, Bord Failte, the Irish Farmers Association, and a host of others. Is it really surprising that the Government of the day (as would any Government of the day, even of a different complexion) should have paid more attention to them than a bunch of academic economists? I may be in a minority of one here, but personally I don’t find it the least surprising or blameworthy.

Imagine the world reaction if the government of the day had announced back in 1998: “The Confederation of Irish Industry, IBEC, ISME, the American Chambers of Commerce in Ireland, the IDA, Enterprise Ireland, Bord Failte, and the Irish Farmers Association are all advising that Ireland join the Euro. However, a bunch of academic economists at their annual convention in Doheny and Nesbitts pub have just voted against it, so we won’t be going in.”

One of the reasons why virtually all business organisations were/are in favour is as follows. I flew from Belfast to Paris for the New Year weekend. I exchanged my Sterling for Euros in Belfast last Friday morning. I exchanged my remaining Euros for Sterling at the same place yesterday afternoon. For each Euro, I got nearly 20 per cent less yesterday than I paid for it on Friday. Nothing to do with exchange rate fluctuation, just commission, or bare-faced robbery, as I prefer to call it.

As for economic growth since Ireland joined the Euro?

According to CSO figures, notwithstanding the worst global recession since the 1930s, Ireland’s real GDP was 55.9 per cent higher in 2010 Q3 than in 1998 Q4, and the real volume of exports was 108.4 per cent higher in 2010 Q3 than in 1998 Q4. These are the highest rates of growth in the OECD. So, maybe the Confederation of Irish Industry, IBEC, ISME, the American Chambers of Commerce in Ireland, the IDA, Enterprise Ireland, Bord Failte and the Irish Farmers Association, were correct after all and aren’t so much out of touch with reality as most academic economists seem to think.

As for house prices?

Most posters are blaming Ireland’s joining the Euro for this. I suggest that they check their facts. The biggest annual rises in house prices occurred in the mid-1990s, well before Ireland joined the Euro. The annual increase between the 4th quarter of each year are as follows:

94/95 +13.1%
95/96 +16.5%
96/97 +28.8%
97/98 +27.7%
98/99 +17.9%
99/00 +14.0%
00/01 +1.4%
01/02 +19.6%
02/03 +15.3%
03/04 +11.2%
04/05 +13.8%
05/06 +6.8%
06/07 -2.3%
07/08 -11.9%
08/09 -24.3%
09/10 -5.0% (assumed: 2010 Q4 figure not out yet)

Note: These figures are from Department of Environment website and are for second-hand houses. Other houses price indices (DofE new houses, ESRI all houses, ESRI new houses) follow a similar pattern. For brevity, I am not giving them all here.

If, for clarity, we group these into 4-year periods, we get:

94/98 +117.1%
98/02 +62.8%
02/06 +55.8%
06/10 -38.1%

The fact is: by far the largest increases in house prices occurred in the mid-1990s (1994 to 1998), well before Ireland joined the Euro. However, this inconvenient truth is usually overlooked in most academic analyses, not just because of its Euro-related implications, but because the evil FF/Developer government was not in power for most of that period. The house price explosion really took off in Ireland during the period 1994 to 1998 and was reaching its peak in the first half of 1997. However, the FG/Labour government was in power then, so it is most politically-incorrect, indeed criminal, of me to point this out, and I do apologise for so doing and trust that, with a good lawyer, I can avoid a custodial sentence for my crime.

@colm mccarthy

I worked for DKM at that time (late 1990s).

JTO again:

You should really be a bit more cautious about admitting to this, especially on a thread that is about respective groups’ ability to predict the future. As I have pointed out on a few occasions, DKM published a report in 1990 in which they forecast that Ireland’d population would fall from the 3.5m it was then to 3.3m in 2011. They were out to the tune of 1.2m. This report was one of the main causes of the explosion in house prices in the mid-1990s, that I referred to above, because the construction industry, acting on the assumption that the population was falling and would continue to fall throughout the 1990s and 2000s, cut back on the number of new houses it was building. A massive housing shortage then developed when, totally contrary to the DKM forecast, the population exploded from about 1994 on. If you read the various reports published in the mid and late 1990s on the causes of the house price explosion then occurring, it was not disputed that the cause was a shortage of houses, resulting from new house-building failing to keep up with the unprecedented growth in population then occurring.

Professor Brendan Walsh will remember the DKM report, as he wrote an article in the Irish Times at the time analysing its conclusions. To make it absolutely clear, however, he was not in any way involved in preparing the report. He was simply reviewing it for the Irish Times and, if I recall correctly, he was quite (and, as it turned out, justifiably) sceptical about its conclusions. However, the ‘M’ in ‘DKM’ stands for McCarthy. So, Colm McCarthy should tell us if he was involved in the preparation of that report, especially on a thread that is about respective groups’ ability to predict the future.

@Mickey Hickey

If you want to make anti-religion comments, I suggest you go to This site is We don’t discuss theology here.

@ Brendan/Kevin

i (as well as Tull) brought up the issue of ‘disclosure’ from academic economists commenting in public a few months ago with a particularly vocal and public academic economist, who is well known around these parts. I was told, quite firmly, that it was none of my business, but i now see that this particular academic is leading the charge on the issue. Slightly odd change in position.

I agree with JTO, Ireland was right to join the euro and looking back with hindsight at those few who argued for another course is not helpful. The vast majority were in favour of it, anyone who blames the euro now for our predicament is merely trying to deflect some blame to beyond our own shores. Just because we were trusted with a key to the candy store doesnt mean we had to set up camp in there and stuff our faces till we keeled over. We were a sovereign nation then, just about, we had power over our own destiny, we just didnt have the maturity, intelligence or restraint required.

@ Colm McCarthy

Agree with you 100% on the currency thing. Those academic Euroskeptics were focussed on the inappropriateness of a common exchange rate. As it happens, despite the sterling depreciation, we have a current account surplus, so not much problem with the exchange rate.

What was not foreseen was the impact of poor regulation in the context of a vast pool of cheap money and this did contribute somewhat to our banking problems. I agree again that the fact that we have had to bail out the banks a major cause of our current plight. But where I am unsure where you stand is whether you think we could have avoided bailing out the banks. My read is that this has been an absolute requirement of the EU/ECB.

Thus the Euro Project led to the “monetary incontinence”, as you so graphically describe it, and the EU/ECB are insisting that we clean up the mess. The Euro Project is therefore partly to blame IMHO, but the Euroskeptics can take no kudos for predicting this as a possible turn of events – they didn’t.

The economy seems solid and healthy but this burden of debt we have been saddled with isn’t. It seems the first step should be to reopen the debate on default and then address the Euro.
The Euro is flawed. It’s badly done but if there is political will for a proper European Union it could be fixed. Maybe we should fix one thing at a time. Maybe we’ve got to restructure our debt first and worry about the Euro second.
If you’re always looking back at the mistakes you’ve made you can’t properly see what’s coming.

@ Eureka

If we’d taken our head out of the punch bowl for a few seconds and had a look at the mistakes other nations had made, we’d be far better off now. Instead we managed to put their mistakes in the ha’penny place.

@Colm McCarthy
Is there a sense that the banking problems are less related to the euro and more related to MIFID? Do MIFID and the euro go hand-in-hand or does the euro enable MIFID?

As BWII points out, we do not have a particular problem with exchange rates from an export point of view (and we so rarely agree!). That domestic wage rates spiked uncontrollably was and is likely to be for the forseeable future within the gift of national governments. (Exchange rates as a competitiveness restoration measure are primarily a domestic default mechanism – reduce import capacity for consumption, increase international wage competitiveness, reduce costs of domestic currency denominated debts by increasing inflation – a short-term fix at best).

If capital flows had remained restricted, would this have reduced the push side of the bubble?

So we had the creation of a single market in financial services without the creation of a regulator for that market, a fairly fundamental flaw, but one which is not necessarily related to the currency area.

slow day in the office there Eoin?
Why not call it as it is : you asked me. And, far from leading the charge, im suggesting that we consider the way the AEA are doing it.
And yeah, when theres a general rule that people disclose professional activities that may influence their academic activities, im for that. Am I going to do it solo? Nope
Now, it would of course be also nice to see the professional activities of anonymous internet posters… but that would obviate their ability to hurl on the ditch wouldnt it.

All this stuff about the increase in house prices in Ireland being caused by capital inflows, whether related or unrelated to the Euro, or being the product of a binge of borrowing from abroad, or ‘monetary incontinence’, is simply not borne out by the facts. It is one of these superstitions that media economists thrive on, as they are interested only in sensationalism and expounding theories that fit their political point of view (or, in some cases, their proprieter’s point of view), without the necessity for anything so base as checking the facts.

Another such superstition that was being spouted daily by these same media economists not too long ago was that Ireland’s exports had priced themselves out of the market. On the basis of this, they all forecast that Ireland’s export volumes would fall in coming years. I was one of the few to challenge this view in the early days of this site. Now, it is no longer a matter of dispute, as exports, having been predicted to fall in volume by these media economists, continue to record double-digit year-on-year rises.

As I pointed out in my earlier post above, the largest rises in house prices in Ireland occurred between 1994 and 1998. There were then smaller rises between 1998 and 2002 and between 2002 and 2006, before falling between 2006 and 2010. Yet, for most of that period of rising house prices (from around 1994 until around 2004), the current account of Ireland’s balance-of-payments was in surplus, meaning that Ireland was a net capital exporter. No matter what figures anyone bandies about for capital inflows in that period, the capital outflows (by definition of the balance-of-payments) must have been greater. In addition, during this period (mid-90s) of the fastest rises in house prices, overall consumer price inflation was at record lows. Consumer prices were rising only by 1% or 2% a year in the mid-90s, at the time when house prices were rising by 20% to 30%. How come the ‘capital inflows’, ‘borrowing binge’, ‘monetary incontinence’ (all terms used by other posters on this thread to explain the rise in house prices) didn’t produce more general price inflation?

The ups and downs in house prices in Ireland have little to do with the factors mentioned in most posts on this thread. They are the result of the oldest Law in economics, the Law of Supply and Demand, the same Law which determines the price of all commodities, from houses, to oil, to ice-cream, to Premiership footballers. One would think that, on an economics website, more people would have heard of it.

Briefly, this Law worked as follows in relation to house prces in Ireland.

(a) For about 150 years up until the early 1990s (with the exception of the 1970s), Ireland experienced very low levels of population growth and new house-building (in fact, negative population growth for most of that time). As the population was falling or flat, house-builders had little incentive to build new houses. The consequence was that, by the 70s, 80s and early 90s, Ireland’s housing-stock was the oldest in the EU and of poor quality. A UCD report published in 2001 found that Ireland’s excess winter mortality rate (directly related to housing conditions) over the decade 1987 to 1997 was the second highest in the EU. (it has since fallen dramatically).

(b) From the early 1990s onwars, on the back of the economic boom and high birth rate and high return of emigrants, the population took off, but new house-building lagged behind.

(c) As a result, a housing shortage quickly developed. And, in accordance with the Law of Supply and Demand, prices rocketed. This fact (housing shortage) was not disputed in media reports at the time. It became an issue in the 1997 general election, with all parties publishing polices designed to greatly increase the supply of new houses.

(d) FF won the election and introduced a raft of policies designed to greatly increase the supply of new houses.

(e) The supply of new houses greatly increased. But, so did population growth, as immigration soared (in those days, the immigration was mainly returning Irish emigrants). So, the housing shortage persisted and prices continued to rise. At the 2002 election, FF was attacked by the Opposition parties and by media commentators like Vincent Browne and Fintan O’Toole for not building enough houses, even though it had greatly increased the number built since 1997.

(f) In those days, (as can be easily checked by googling the term ‘housing crisis in Ireland’), the term ‘housing crisis’ meant a shortage of houses, driving prices up. The Bacon Reports (link below) were all about how to increase the supply of new houses.

(g) Following the 2002 election, the supply of new houses continued to increase. Eventually, the shortage was replaced by a modest surplus. And, in accordance with the Law of Supply and Demand, prices started to fall. This was highly desirable. But, the trend was greatly exaggerated by two factors: (a) population growth fell dramatically, as immigrants stopped arriving (for now), and about 10 per cent of those, who had arrived up to 2007, went home, and (b) various media economists began making wildly exaggerated estimates of the surplus and of the likely fall in house prices (a surplus of 300k and falls of up to 80 per cent, they claimed), resulting in a complete freezing of the housing market, with virtually no one being brave enough to purchase something that, according to these media economists, was destined to fall in price by another 50 to 60 per cent from even its rock bottom 2010 level.

(h) From 2007 on, the situation was the polar opposite of that up to 2002. The construction industry kept ramping down the number of new houses it was building, so the supply of new houses kept falling, but falling population growth (note: ‘falling population growth’, not ‘falling population’) meant that demand also fell even faster, so prices kept falling.

(i) In late 2010, the situation seems to have reached some sort of equilibrium. The fall in prices has slowed down very sharply. Rents were virtually flat in 2010, according to both the CSO and Daft. The number of new houses built rose slightly in the third and fourth quarters, the first time this has happened since 2007. The Department of Environment survey found that the claims of a 300k surplus of empties, made by some media economists, was a complete fraud.

That is my explanation for house price trends in Ireland since the early 1990s. I realise it is controversial and unlikely to be accepted by more than one or two posters here. Its only merit is that it fits in with the facts.

As for the future?

I haven’t a clue about the future trend in house prices. I will make only one prediction. The future trend will be determined by the Law of Supply and Demand, just as it always has been. And that will be largely determined by how fast the economy grows. Assuming FF get voted out of office, the future price trend will largely be determined by how successful the new FG/Lab government is in continuing economic growth. Let’s be charitable and assume that they are very successful, as in 1994 to 1997. If so, the result in terms of house price trends will be exactly the same. Emigration will be replaced by immigration and, allied to a very high rate of natural population growth, the population will also grow rapidly. Since the ‘300k surplus’ is a myth, and since the current output of new houses is exceptionally low, a housing shortage will develop and prices will soar until such time as supply is increased again. Note that I am not predicting that this is what will definitely occur. I am saying that this is what will occur if the incoming FG/Labour government are successful at continuing economic growth. Ironically, the more succesful they are, the more discredited will become the idea that the housing market in Ireland in the late 1990s and 2000s was some sort of private FF/Developer scam. It was simply the Law of Supply and Demand at work, as it always has done and always will do, regardless of who is in government.

“All this stuff about the increase in house prices in Ireland being caused by capital inflows, whether related or unrelated to the Euro, or being the product of a binge of borrowing from abroad, or ‘monetary incontinence’, is simply not borne out by the facts.”
What facts would those be? BOP?

Ah yes, you come to that:
“the current account of Ireland’s balance-of-payments was in surplus, meaning that Ireland was a net capital exporter.”
Year Current Account
1998 627
1999 226
2000 -379
2001 -757
2002 -1295
2003 -2
2004 -867
2005 -5690
2006 -6304
2007 -10124
2008 -10169
2009 -4853

I will repeat it with more conviction this time. You don’t know what you are talking about. Trade figures are not the sum total of BOP.

“As I pointed out in my earlier post above, the largest rises in house prices in Ireland occurred between 1994 and 1998.”
This is spintastically rubbish. Your numbers for the three periods of rise are:
1. 117%
2. 63%
3. 56%

Say houses were 100 at start of 1.
By the end of 1 they have risen to 217, a rise of 117
By the end of 2 they have risen to 353, a rise of 136
by the end of 3 they have risen to 550, a rise of 197

Now my understand of sums is a bit deficient, but I think my understanding of language is reasonable. The biggest of those three numbers happened in the third period.

I suppose you think the law of supply and demand doesn’t apply to credit availability?

Why am I wasting my time?!


So the biggest property price crash and largest banking crisis in the history of…well, everything, was simply the law of supply and demand at work.
Ok, honestly, I reckon you could make a square peg fit into a round hole if you were given enough room to write about it.

@ JtO

Supply & Demand yes. But short run demand for housing is less determined by demographic factors than, as Hog hints, by credit availability and also by the speculative motive. I know people who would explain to me how easy it all was. They would argue that the rent would cover the mortgage and you were left with a windfall capital gain – no brainer. The number of appartments they would buy was constrained only by how much their bank manager would lend them and that was not much of a constraint. I kept feeling more and more the fool for missing out on this party.

@ Brian

yes Brian it was you. As i said, at the time you seemed aghast that i would even ask about it, but now you’re quite in favour of advancing the discussion. Maybe if was my little push which got you thinking about it. Hopefully. At the time i believe i only suggested that you put a disclaimer after your commentaries, simply stating that you also provided consultancy services. You could take a stand and go solo, or stay in the safety of the pack until there is a code or practice and what not. No dishonour in either stance, but change doesn’t happen by itself.

re “the professional activities of anonymous posters” – here we go again…

Just as an example of why it actually makes sense for me to be anonymous – remember that time when i posted that DoF FAQ explaining something or other (i can’t even remember what, was it NAMA? or the promissory notes? I dunno, i believe it was reasonably important anyway, and Karl gave me some brownie points as a result). Do you think i could have as easily posted that here if i was posting with my real name? Reckon the information might not be as forthcoming to me next time? Use your brain, you’re a reasonably intelligent guy, but for some reason you keep going on about this. And i’d again point out that if anyone is actually worried about my motives, i have repeatedly said i’d provide any background information deemed necessary to either Philip or Karl.

“to my knowledge every university economist who has commented on the matter has expressed grave reservations about our joining EMU if sterling does not.”

Let’s not kid ourselves that the Sterling opt out changed the outcome for Ireland.

eoin 2
yes Owen, your selfless in what you provide for us under the blanket of anonymity… What you provide is sometimes very useful, I’ll give you that. But I do actually think that on it blog such as this it would simply be more professional for people to actually provide their full contact details. I’m actually all for openness and transparency: but I am not going to be the first mover. I would point out however that I have made it very clear and number of occasions that I do have shares in Anglo Irish bank. This hasn’t stopped me suggesting that the shares should have been wiped out much earlier than they actually were. It would be much much easier to take your pronouncements on face value if we knew whether or not you, clearly somebody working in the financial services industry in Ireland, had a position in any of the assets likely to be affected by the move that you are proposing or otherwise. Willie Slattery posts here, quite openly,as does John Bruton. Without wishing to offend you I suspect that your position is somewhat more lowly than those
reaching back on the commentary in relation to the issue to which you refer I think it would be quite clear to the reader that there was an implication, not terribly well hidden, then in some way I was “talking down “Irish government securities as a consequence of having taken a position in them this is similar to the nonsense which was posted in a number of fora which suggested that the only reason that people such as Constantine, Deeter , myself, and others were proposing some form of mortgage debt relief was because we had hocked ourselves Up to the eyeballs and were in massive negative equity. when you, and the authors of this blog, and the initiators of posts on this blog provide full disclaimers as to any financial interest which you may have in any of the issues being discussed, I am perfectly happy to do the same.

perhaps we can now get back to the very issues of the blog post here, namely whether or not there was a consensus, and if so where, in relation to Ireland joining the euro or not.

@ Brian

actually, i’d make a rather large distinction between posts on this blog, and opinion pieces in the Irish Times or The Indo, which are very public forums read the length and breadth of the country. Moreover, while you could still argue that people starting a thread on here should provide background info/disclaimers, its seems less of an issue for commenters to do so – the original poster is instigating a discussion or opinion, whereas the most i can do is comment on it. I sincerely doubt that i am ‘forming’ opinion to anyway near the same extent as those writing original articles either on here or in the papers. And this is before going into the professional problems i would potentially face if i had to use my real name. It’s quite likely i would have to stop posting here, so its really a question of the anonymous posts being more or less valuable than no posts at all.

I believe my point back when we had this discussion was not that you should say if you had financial interests in the discussed assets, but simply a one liner pointing out that you also provide a consultancy service on top of your headline job as a Professor. At the bottom of the opinion piece it says “Brian Lucey, Professor of Finance TCD”. I simply suggested that it include a line on the consultancy services as well.

Further, I have no issue with you “talking down” the economy per se, simply that it may not be a purely virtuous deed you are undertaking to inform the common man, or at the very least that there could be a monetary reward (directly or indirectly) to you from your opinions becoming reality. For instance, the much used defence of Morgan Kelly is that there is no upside to him being “right” about the housing market and banking collapse, when quite clearly he will be (is?) a man in demand in terms of consultancy/advisory services for the next few years.

For instance, i know of some academic economists, ones who are granted access to the opinion pages of the IT and Indo, who were giving talks to hedge funds and banks around Europe in Sept/Oct stating how AIB was bankrupt and how its bonds and shares were massive sells.

Now i have absolutely no issue with people earning a buck on the basis of their knowledge and expertise being right, but when their day job, and perhaps much of their research hours, are taxpayer funded, when they are given absolutely massive time on the airwaves and broadsheets to profer their “independent and uninvolved” opinion, i think its a fair enough suggestion that they at least tell the listening and reading taxpayer that they are also potentially being paid by hedge funds and banks for these services as well. They are not an uninterested bystander, even if they never went long or short a security in their lives.

@Brian Lucey
“Without wishing to offend you I suspect that your position is somewhat more lowly than those”
And therein lies the problem. Who’s going to sack the CEO of State Street Ireland? Or the Ambassador to the US? G. Gurgiev has not posted on this blog as himself. Mr. Deeter is largely self-employed.

Or are you saying the cream rises to the top and it is only senior management and tenured academics who are allowed opinions in the open? It sounds suspiciously like the “it takes expertise to think these deep thoughts” argument to me again.

It’s a blog, people should be entitled to anonymity here, it’s only a pool of opinions really, the sources of such should not be a major factor. Although I guess it does give the anonymous voices an advantage over those who have declared their identities, in that they can very often be locked and loaded with public knowledge should an argument break out.

Also, if some paper wishes to pay an academic for his opinion…and then some group of hedge fund managers decides to pay the same academic for the same opinions, well then more power to him/her. I dont see why they would need to declare such things so long as their opinions were constant to both.

“dont see why they would need to declare such things so long as their opinions were constant to both.”
yes, that i think is a major issue. I SUSPECT with absolutely no evidence that there is a view that these dastardly academics are “mouths for hire” and will say anything for money/publicity/notereity. Sure clearly now Morgan is only in it for the money – that explains why hes never off the air – and he probably doesnt even believe half what he wrote.
If I (and I imagine that this goes for the Whelans, Kellys Kinsellas, Gurdgivs etc of the world) were to take every opportunity that was thrust to us we would be working 29h per day. And, one thing people cant accuse “us” of is inconstancy, other than then normal changes of mind induced by facts or realisation of inexactitude.
that will not however placate the more suspicious minds, but then…. Its always easy to hurl on the ditch, we have all done it. Its more difficult to come onto the pitch. Some cant, others wont, and others shouldnt.
Anyhow…back to marking exams…

Please allow me to wish a Happy,Healthy, and Prosperous New year to all contributors, posters and readers. Regardless of our different views I am sure everyone of us benefits from most of the postings, articles and comments on this excellent site.

Colmś article (about Estonia) was “picked up” by Estonian media and unfortunately in at least one broadsheet was used as an example of how Estonia is being “mocked” for joining EuroLand at this time.

If anyone is interested I have posted a comment on Philip Lanes posting of December 31st 2010 dealing with the political reasons behind the change-over in Estonia.

@Bond and Brian re: “anonymous posters”.
IMHO sources are very important and so is the personal privacy/peace of mind of people expressing opinions and making comments. We are part of a continent which does not always instintively share (for very understandable historical reasons) the healthy attitude to public debate that we enjoy in Ireland.

This is the reason why (from harsh experience) I also choose to post anonymously. I am always happy to provide any background information deemed necessary to modrators although having said that I am sure most of us are able to distinguish between outright spin and informed opinions.


Ah yes, you come to that:
“the current account of Ireland’s balance-of-payments was in surplus, meaning that Ireland was a net capital exporter.”
Year Current Account
1998 627
1999 226
2000 -379
2001 -757
2002 -1295
2003 -2
2004 -867
2005 -5690
2006 -6304
2007 -10124
2008 -10169
2009 -4853

JTO again:

Hoganmahew, you have cynically, deliberately and maliciously altered what I said in order to try and prove it wrong. As a Northerner, I intend that as a compliment to you and I congratulate you on your efforts. In the tribal atmosphere of the North, we specialise in lowdown tricks to try and discredit the opposition. Many’s the time I did it myself, as a campaign worker long ago in Queen’s University elections, to discredit our man’s opponents. Nice try.

What I actually said in relation to the balance-of-payments surplus was:

“Yet, for most of that period of rising house prices (from around 1994 until around 2004), the current account of Ireland’s balance-of-payments was in surplus,…”

A key word you omitted: “most”

A key phrase you omitted: “from around 1994 until around 2004”.

Then, you gave only figures for 1998 on.

So, I will complete the table by giving figures for 1994, 1995, 1996 and 1997:

1994: b-o-p surplus: 1,349 bn
1995: b-o-p surplus: 1,450 bn
1996: b-o-p surplus: 1,769 bn
1997: b-o-p surplus: 1,912 bn

adding in your figures:

1998: b-o-p surplus: 627 bn
1999: b-o-p surplus: 226 bn
2000: b-o-p deficit: 379 bn
2001: b-o-p deficit: 757 bn
2002: b-o-p deficit: 1,295 bn
2003: b-o-p deficit: 2 bn
2004: b-o-p deficit: 867 bn

So, from 1994 to 2004:

6 years of b-o-p surplus
5 years of b-o-p deficit

But, the surpluses were mostly greater than the deficits. So, adding them up gives an overall b-o-p surplus of 4,033 bn from 1994 to 2004. Which rather tallies with my statement: “Yet, for most of that period of rising house prices (from around 1994 until around 2004), the current account of Ireland’s balance-of-payments was in surplus,…”. And, these are figures for the balance-of-payments current account, which is more than trade flows. It includes services, profits repatriation, transfers etc etc.

Bottom-line is: the largest increases in house prices occurred (in the 90s) when the balance-of-payments current account was in SURPLUS. Hence, the theory that it was all caused by bingeing on foreign capital from abroad makes no sense.

With regard to media commentators declaring their financial interest, I would suggest that all media commentators be obliged to declare where they have their money invested. Not necessarily the amounts, as one could argue that that is private, but say the percentages. So, if some media commentator tells us that 50pc of his money is in UK bonds or property, then we know that he stands to benefit if Ireland exits the Euro and devalues by 50pc. So, if he is actually using his media column to advocate that, then we know why.

I wouldn’t suggest that posters on this site be obliged to do the same, as it is a private blog and events are not influenced by what people post here. But, maybe some would volunteer to do it, just for fun. I am quite happy to do so. Apart from the house I own in N. Ireland, and a holiday house I have a part share of in Donegal, almost all my modest wealth is in Irish Government bonds. If people wish to believe that that influences what I post here, so be it. I couldn’t care less. But, let them be equally informative about where they have put their money. My investment in Irish Government bonds is currently racking up a whopping real rate of interest. I don’t know exactly how much, as I’m no financial expert – I leave the technicalities of all that to my Orangeman bank manager in Belfast. Salt of the earth he is. As honest as the day is long. But one who, out of exaggerated reverence for both King Billy and Morgan Kelly, thought I was quite mad and advised me against it, when I told him back in 2007 that that was where I wanted my money put. “Eire is going down the plughole”, he gleefully informed me in early 2007, “stick with a solid country like the United Kingdom for your investments, John”. It is now 2011, and I’m sitting on a whopping currency appreciation on top of the whopping real rate of interest. Said Orangeman bank manager, in contrast, is sitting on a whopping currency depreciation and receiving something close to zero nominal interest rate on his investments, with, for good measure, a UK inflation rate of close to 4 per cent. I’d love to think that Morgan Kelly is in the same boat as him in relation to where he’s put his money.

@ JtO

Not trying to engage in tribalism here but do you really mean all those Billions, I mean they are actually Trillions?


Careful now. The last guy to resort to lowliness or status wrt a poster here was the arguably failed central bank board member David Begg, having a pop at Hennington.

This disclosure thing might actually be worthy of a thread of its own (but then who is going to want to be blamed for stirring that up), as its a bit of a distraction here.

I’ve little doubt that Eoin is engaged in one of the most highly regulated activities on the planet, doing what he can to keep his clients prosperous. He might be vulnerable to accusations of offering advice that could be construed as investment advice – by sharing his thoughts on bonds for example. That can cause problems for your compliance dept., get you sued or leave you liable to prosecution because there are all sorts of hoops to be jumped through before anyone can be offered “advice”. (contrast the situation surrounding the taking of highy geared real estate investments for clueless retail investors, which has for some unfathomable reason been deemed effectively risk free)

Journalists and academics can, comparatively, just spout off. There is effectively a regulatory assumption that nobody would take much notice of them – something that is clearly anomalous.

Anyway, Eoin might have a professional connection to someone who wouldn’t appreciate his frank public utterances – which to lowly me, seem to be generally careful, detailed and thought provoking.

I think there really is a problem in that the gulf of understanding between the public at large (who hold the real power through their votes, in theory anyway) and those that they see as experts commenting on markets, is so large that most have no idea of how to temper their willingness to absorb the view of any particular contributor – whether on the telly or on a blog.

I’ve been around long enough to not be surprised that the head of macro-economic research at IBM is always introduced as a simply a university lecturer when appearing as an apparently right of centre economic pundit, or that some talented academics can talk little sense about likely market reaction to policy options. Here – “Its always easy to hurl on the ditch, we have all done it. Its more difficult to come onto the pitch. Some cant, others wont, and others shouldn’t” – cuts both ways as that pitch can be equally taken to be actually managing investments. I get the impression Eoin is regularly on that pitch, others less so. You don’t need to be George Sorros to assume he might have personal or client investments in senior rather than sub Irish bank bonds, and to have someone arguing why that might be rational has been useful even though I personally take a different view.

I think there is too much naivety among the public about the potential business connections, consultancy roles and personal and connected persons financial interests of guys the media present as experts. Its a bit more obvious, but to most only a bit, if it as a guy who woks for some irish stockbroker, but rather less so if if is a guy who works for a publicly funded irish university. Don’t know what the answer is, but think it is worthy of discussion. Down with that sort of thing.

Does any monetary system work all the time for everyone? During the years Ireland was in the ‘Punt-zone’ I vaguely remember hoards of Irish fleeing Ireland. Clearly something was not working for some people. I suspect the regional clashes between rural and city and ect were going on just like in the euro-zone, only on a smaller scale, and the people who were most injured where mostly unheard, or where silent.

You did indeed say from 1994 to 2004, attempting to make it look as though FF didn’t blow the boom immediately. Sadly, it took them only two years (1998 and 1999) to wee it down the toilet. So the correct years for you to use were 1994 to 1999.

You then do a frankly bizarre bit of sums to subtract later capital outflows from earlier capital inflows, as if we had that capital sitting around in a constituency office somewhere.

“Bottom-line is: the largest increases in house prices occurred (in the 90s) when the balance-of-payments current account was in SURPLUS.”
Eh, no. Read the second bit of my post again. Hang on, I’ll repost it for you:
“Your numbers for the three periods of rise are:
1. 117%
2. 63%
3. 56%

Say houses were 100 at start of 1.
By the end of 1 they have risen to 217, a rise of 117
By the end of 2 they have risen to 353, a rise of 136
by the end of 3 they have risen to 550, a rise of 197”

The largest rise in price happened at the end of the boom. It may not have been the largest percentage rise, but it was the largest absolute rise.

“09/10 -5.0% (assumed: 2010 Q4 figure not out yet)”

Irish Times
“Prices fell 3.2 per cent in the fourth quarter of 2010, bringing the fall for the year to 13.1 per cent according to the latest Property Barometer issued by property website”

George Says:

Does any monetary system work all the time for everyone?

No, is the short answer. And you surely do not want the lecture!

Apropos the original comment at the top.

The papers cited are useful for understanding the predicament that the EU has created – or more correctly, what the politicians permitted to be created. Its all about power over!

A much more salient document is The Constitution of the United States: Section 10 – Powers prohibited of States. The document is available as a print download.

Now the comparisons between the US and EU are somewhat iffy, but the principle is plain. You constitutionally prevent states (US type) or states (EU style) – that is, the legislators of said states, the power to emit credit on the Good Faith and Credit of the central authority. Try selling this to our about-to-be leaders!

KO’R suggested that the Jonung + Drea paper might be suitable undergrad reading. I dissent. Try Mundell’s original 1961 paper and Meade’s of 1957 (cited by Mundell). My principle critique of all these papers is that none specifically mention the underlying economic model they are constructing their arguments upon. This is unacceptable.

Mundell and Meade are particularly interested in the level of employment (or un-employment) and the effect of this on fiscal and monetary stability. Why?



During the ’90s when house prices increased hugely, irish interest rates fell over those years close to parity with german/eu rates in preparation for joining the euro. These lower rates along with a growing population would’ve increased demand.
I could be wrong in this but feel free to correct me.

Basically the “Irish Regime”, although it seems just a tad unfair to make us repay all of ours, and THEN let everyone else default…


LONDON, Jan 5 (Reuters) – All bondholders should be forced to take losses in an ailing bank under draft European Union proposals which aim to avoid taxpayers again having to fund bailouts in the next crisis.

The EU’s executive Commission is due to publish the consultation paper as soon as this week to shape its crisis management legislative proposals later in the year.

The paper obtained by Reuters said writing down a bank’s stock and subordinated debt may not be enough at times and that national resolution authorities will need “additional writeoff” powers.

The EU executive proposes a tiered model beginning with writedowns of equity and subordinated debt, with senior debt next in line.

“Building on the minimum powers above, the first ‘comprehensive’ approach aims to make a broad range of senior creditors face the real risk associated with bank failure,” the draft paper says

@A McGrath

Fair point. The DofE figures and ESRI figures show much smaller falls in house prices in 2010 than Myhome. So, I put in a figure that is roughly the average of what has been published so far for 2010. However, it is unimportant, as my earlier posts were about explaining the cause of the house price rises in the 1990s, not predicting the size of any house price falls in 2010.


Price inflation is nearly always described in percentage terms. We don’t say the price of cars rose/fell by X Euros last year. We say it rose/fell by X per cent. UK National Rail announced a few days ago that rail fares there were increasing by 6 per cent, not by an average of £2.40. That is how inflation is neatly always described. In percentage terms, it is indisputable that house price increases were much greater in the 1990s when the balance-of-payments was in surplus than in the 2000s, which is my point (namely that demographic factors drove house prices up, rather than Euro-related capital inflows).

The actual figures (DofE figures for second hand house prices in Q4):

Dec 1994 68,198
Dec 2000 198,915
Dec 2006 375,577

change between Dec 1994 and Dec 2000: increase of 191.7 per cent
change between Dec 2000 and Dec 2006: increase of 88.8 per cent

Now, if you want to say that we shouldn’t use percentage increases, but absolute increases, we get:

change between Dec 1994 and Dec 2000: increase of 130,717 euros
change between Dec 2000 and Dec 2006: increase of 176,662 euros

However, if you are going to do that, you should really adjust the figures for general inflation between the two periods to get the real increases, as each euro was worth less in general purchasing power termws in 2000 to 2006 than in 1994 to 2000.


As an engaged reader of this blog with no vested interest – one of the silent majority I expect – I’m inclined to agree with Eoin with regard to anonymity.

It’s not a perfect world, and I am very well aware that views should be taken with pinch of salt, but what matters to me is informed opinion and debate. I like the entries best that put out coherent arguments backed by credible evidence, which allows for robust discussion such as is happening between JtO and HoganMahew on this thread – and even that is getting a little shouty. Play the ball not the player.

And thanks all for the valuable insights.

@ JtO, HoG

I see merits in both arguments as to whether it is absolutes or realatives we should be comparing. Normally of course it is relatives e.g. in the case of CPI. However, in the case of house price increases of the types we witnessed the more relevant metric is probably the ratio of house prices to average incomes and this points to a quasi absolute comparison.

@ JtO

I have to repeat my disagreement with you that demographic forces are the dominant factor in the short run demand for houses. Houses, almost uniquely, satisfy two types of demand – demand for its utility value and demand for its value as a financial asset. I agree that demographic factors dominate the former and whilst they should in the long run inform the latter they very clearly were swamped by short run speculative motivation fuelled by cheap and easy access to liquidity.

Eoin Bond:

‘The EU executive proposes a tiered model beginning with writedowns of equity and subordinated debt, with senior debt next in line.’

What an absolutely brilliant idea! Who else would have thought of it, and so quickly too!


I see some people have thier tongues firmly planted in thier cheeks. I suppose we’ll have to wait to find out about the timimg and mechanics. If it’s for bonds issued after some point in the future (similar to the post 2013 EFSF-related proposals for sovereign bonds) it’ll be of no use as the sovereign bond market ramps up the pressure in the near term.

Can’t upload a graph here but when you plot JTO’s figures on a graph it is easy to postulate that there were two phases to the house price bubble:
A real increase based on demographics and a non-construction based boom in the economy up to 2000 and
A false increase secondary to joining the Euro.

Would be interesting to see how house price rise related to
1 GDP growth minus the construction sector over that time
2 Inflation
3 Population
4 Interest rates
5 Number of empty houses at any one time
6 Bank Profits in any given year
7 Labour costs in the building sector over that time

The Law of Supply and Demand states that the Price acts as the clearing mechanism to attain equilibrium.

I contend that the nominal price of a house is not the clearing mechanism in that context. Instead it is more likely to be the annual mortgage repayments. Mortgage rates fell from 13.99% in 1993 to 3.49% in 2005. For a 20 year mortgage, repayment per mil nominal in 2003 was 214% that in 2005.

Therefore even if, as JtO contends, demographic influences are the main factor in demand the clearing mechanism would have required a 214% increase in nominal prices, all else being equal.

@Brian Woods II

What proportion of people buy houses purely as a financial asset, ie not to live in or rent, but just as speculation, ie to sit there and increase in value, like it was a lump of gold? I may not mix in the right circles. But, of my 100 close friends and 500 close enemies, I don’t know one that has purchased a house just for speculation. Nearly all live in the house they purchased. A couple rent out the house they purchased. But, that too is demographically-driven since they couldn’t rent the house out unless there were people wanting to rent to live in it. I do not dispute that access to credit, mortgage rates, real incomes, good jobs etc play a part in facilitating people’s wish to purchase a house to live in. But, the demand for houses ultimately comes from people wanting somewhere to live, whether in a house they purchase themselves or in a house they rent from someone else who has purchased a house as a business investment.

Anyway, seek and ye shall find. I seeked and I found this ESRI report from September 2001. The bit on housing is near the end.

Housing (published by ESRI in September 2001)

Because of the rapidly growing population in its twenties there is likely to be a CONTINUING SHORTAGE OF HOUSING OVER THE DECADE. This will remain an IMPORTANT CONSTRAINT ON ECONOMIC DEVELOPMENT. Considerable effort has to be given to IDENTIFYING THE OBSTACLES TO ACCELERATING INVESTMENT IN HOUSING. While major investment in environmental services is under way, there still remain significant obstacles to development in the major urban areas.

Which is exactly my point.

Among the authors mentioned are:

John Fitz Gerald
David Duffy
Edgar Morgenroth

all of whom post here occasionally. Perhaps they could post here again clarifying the situation at the time that prompted ESRI to include the above paragraph in their report.

I should make clear that I am not disagreeing with what they wrote at the time. In fact, I’m agreeing. It is exactly what I’ve been posting. Namely up until the early to mid 2000s, certainly well past the 2002 election, all the media and opposition criticism of FF and the developers was that they were not building enough houses. The rise in house prices was blamed on evil FF/developers who were supposedly deliberately not building enough houses in order to keep prices up. Then, sometime around 2004 (I can’t pinpoint exactly), this suddenly changed to evil FF/developers building too many houses.

@ Brian Woods II Says:

“The Law of Supply and Demand states that the Price acts as the clearing mechanism to attain equilibrium.”

Remember that in the Dublin area the supply of building land was controlled by a cartel with strong links to the governing party – there was no clearing mechanism to attain equilibrium as the boom got boomier. Instead mortgage lending parameters changed . I remember the joy in the Irish Times when the first 100% mortgage came along. Low paid PS workers were granted 40 year mortgages instead of being refused loans.
The housing market was rigged. The newspapers joined in the hysteria. Sure you had to buy a house now in Killeshandra before the price rises pushed you up to Malin Head.

You jump to extremes. For most people buying a house is a function of necessity and a little amateur speculation. House prices are determined by the multiple of the income that a banker is willing to lend to buy the house.

@ JtO

There was very extensive BTL activity, this can be defined as speculative in the sense that when people worked out that the rent would cover the mortgage, the certain capital gains came as a freebie.

But even people who buy to occupy have a speculative motivation in the sense that they are desperate to get on the ladder. Ignoring sentimental considerations the main reason to own rather than rent is speculative, though perhaps I could find a better term for this financial calculation.

BTL always reminds me of Bacon Tomato Lettuce or, failing that, Bisexual Transgender Lesbian.

3 people A,B and C want to buy a house. All earn 50k. A’s bank manager is willing to lend him 100k, B’s bank manager is willing to lend him 150k and C’s bank manager was willing to lend him 200k. So the house price is now 200k.
But C’s bank manager could only lend that money if he had been given it by somebody else. And roll on your feeding frenzy caused by no regulation of credit.

@ JoB

It is worth debating whether you are I (or is it me?). I would tend towards a negative as I do not recall the thread you linked to, but I am getting a bit older and the memory can play trix. I do proudly admit to being a sockpuppet. If Prof Lucey can produce evidence that sockpuppetry is a unique attribute that would point to me (or is it I?) being you.

So residential property prices (not values) are on the decline? Yep. Just wait until mortgage interest rates have to be adjusted upwards! Opps! Bottom will be ? 2015?

Your domestic res is where you live and raise your kids. Its never meant to be an investment. The Iron Law of Mortgages applies: 20%:28%:32%. Look it up.


@ JoB

Concrete evidence that you are not I. I can’t do links. Anyone who cares to do so can inspect the many posts that I have made in this blog – and I can assure them that they will not find a link. Surely even a sockpuppet would not cultivate such an elaborate alibi so as to post under an alias.

I note that Prof Lucey, thinking John O’Brien was me, called me a plank and a sockpucket. What makes me think that if I had similarly insulted him that my posts would be deleted and I would possibly be banned.

I have e-mailed Prof Lucey, at his request, explaining that if he just admitted to his monumental blunder, we could move on and forget about it. He has refused to do so and his latest attack on me releases me to forever remind readers of this blog of just how monumentally, incredibly, unbelievably, grotesquely, bizzarrely was his recommendation all those months ago.

For the uninitiated what he said was that Anglo should transfer their deposit liabilities of 28Bn to another bank in return for a receipt of 21Bn assets – a 49Bn windfall.

He refuses to admit this blunder, but I will continue to remind him.


no no, you need to contact him in private, and then he’ll explain, alongside the third secret of Fatima, what he really meant! Sockpuppets ahoy!

@ B_E_B

In a recent thread I agreed with some eminent academics’ description of David McWilliams’ interpretation of a current account surplus as “daft”. Prof Lucey seized on this to compare my criticism of DMcW with what he described as a dispute with him over the “make up of bank balance sheets”. That is how he is now portraying his “deposit selling moment” as Karl Whelan dubbed it.

It’s a bit rich of him to accuse you of using anonymity and then when someone does post under their own name he accuses them of using an alias, and in really unacceptable language.

Reading through blog slowly so apologies if this has already been asked.

Now we all know the risks of joining the Euro (and the errors in its design).

However, once the project was going ahead what would have been the affect on FDI if Ireland had of opted out?

One of the main attractions for FDI is that Ireland is more pro-EU than its main English speaking competitor.


“However, once the project was going ahead what would have been the affect on FDI if Ireland had of opted out?”

You will learn, as I have, not to dream of asking for comparative costings of policy alternatives here.

The three costs estimates for alternate policy directions on the Irish economy remain:

Dangerously difficult to estimate – eg: The reputational cost of defaulting on the banks’ senior debt while it was easy to do so

Wastefully difficult to estimate – eg: The opportunity costs of not joining the Euro.

Boringly difficult to estimate – eg: The effects of lowering the minimum wage on consumption.

Numbers are for accountants.

Two points…one on the Euro and one on the JtO/Hogan discussion.

First, joining the euro may have been a contributing factor, but it wasn’t a sufficient condition any may not even have been a necessary condition for much of the bubble. Iceland, after all, wasn’t in the Euro and look what happened to them. A quick look at gives lie to the idea that Euro membership was necessary, or that a sterling link would have saved us.

Second, you can make arguments that house price growth should be expressed in % or in €. Either may be valid, depending on what you want to express. However once the price has been set and paid people don’t owe % or pay % each month. They pay €. Their debt is in €. The depth of the hole we’re in is measured in €.

Ta Hugh, point well made.

To look at it another way, the decline in house prices will be x% from the top of the market, from the amount paid then. The losses won’t be on the capital appreciation from 1994 to 1998… not until the capital appreciation from 1998 to 2006 has been wiped out anyway…

Cheery, isn’t it?

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