Comparing Iceland and Ireland

Dan O’Brien completes his excellent two-part comparison of the Irish and Icelandic economic crises in the Business section of today’s Irish Times.   Today’s instalment is available here; last week’s here.

Update: Paul Krugman responds here.

Some conclusions (it is important to read the articles for full context):

The first conclusion is that the size of the bubbles in the two economies – rather than anything that happened when or after they burst – was the main determinant in explaining the magnitude of the two calamities.

. . .

The second stand-out fact from a comprehensive comparison between the two economies – in this case since the bursting of the bubbles – has been the role of exports in contributing to recovery. . . . [T]here has not been a significant difference in export performance between Ireland and Iceland.

This is not at all what one would have expected. While being part of the euro protected Ireland from even greater instability during the worst of the crisis, the downside of being locked in to a single currency is that devaluation is unavailable as an option to rapidly regain competitiveness and make adjustment to the shock easier to deal with.

Iceland suffered all the downside of having its own currency, but far less of the upside. Iceland’s export performance has been nowhere near as strong as one would have expected following a 50 per cent devaluation, while Ireland’s has been better than could even have been hoped for.

And the absence of an export boost from exchange rate depreciation has not been confined to Iceland alone. Another neighbour has been similarly disappointed, as the chart illustrates. Despite the weakening of sterling, British exports remain below pre-crisis levels.

No currency regime is perfect and all have positives and negatives. Although things may very well change, at this juncture the benefits for Ireland of being part of a much larger single currency have been considerably greater than the benefits to Iceland of having its own currency.

But the most important policy lesson from all this, it would seem, is that policy actors must be far more willing to make calls on whether bubbles exist and to take measures to deflate them if they conclude that they exist. Of course, this is not easy as there is no way of knowing for sure whether growth is sustainable or mere froth. But given all that has happened, the case for pre-emptive pricking of suspected bubbles appears incontestable.


72 thoughts on “Comparing Iceland and Ireland”

  1. Iceland’s export performance has been nowhere near as strong as one would have expected following a 50 per cent devaluation, while Ireland’s has been better than could even have been hoped for.

    The devaluationists invariably look at devaluation through the prism of commodity markets.

    Having improved competitiveness is fine but new markets do not arrive like manna from heaven.

    It takes a hard slog to develop export sales.

    The one caveat I would make is that Iceland’s own resource fish accounts for almost 60% of its merchandise exports similar to pharma/medical devices for Ireland.

    Exports from the mainly foreign-owned Irish sector sector rose 38% in the period 2004/2010 but direct employment stayed in the low 40’000s.

    So the fish may have provided more valued-added for Iceland.

  2. You’ll attract the wrath of JtO for highighting the offerings of a ‘mere journo’ with whom he has taken issue previously – unless he has already left for the French Alps 🙂

    The British manufacturing and export base has been hollowed out so completely that a joke going the rounds suggests that the only economic activities that draw on domestic enterprise and resources are car boot sales, night-clubbing, tattooing, prostitution and the consumption of beer. And the BRICs simply sneer (and quite justifiably) at any export service offerings from the West that are related, however tenuously, to the Financial, Insurance, Real Estate economy.

    Pricking bubbles is easy in theory, but devilishly difficult in practice. Keynes’s ‘animal spirits’ will fuel the upsurge and there is no limit to the number of vested interests determined to keep the party going – all of whom will be able to exercise influence on policy-making.

    Along the lines of my comment in the previous thread I think governments should focus on a sustainable and accommodating fiscal stance and on maintaining internal and external balance.

    Paying down net sovereign debt (or accumulating surpluses) when the ‘animal spirits’ are in full voice will provide the fiscal space to shore up activity when these spirits are exhausted and gloom decends upon the private sectors.

  3. Surely the most important aspect of the comparison is where Ireland V Iceland is with regard to its future prospects and how much of the dept overhang has been dealt with.

    Iceland allowed most of the private wealth take the hit and the hit to their sovereign and future debt repayments have or are being minimised as much as possible no no small part due to their president.

    In 2014 our interest repayments (No premium) are likely to be 12 billion.
    From that year we are also supposed to pay back 10billion of the 67BillionIMF/EU deal.
    If we cannot get back into the markets by then and roll it over.
    So our debt payments for 2014 could be as high as 60-70%, and rising, of our income tax.
    What is Icelands outlook?

    Sorry if i have some figure’s wrong but if anyone has better numbers to give a clearer out look and comparison with Iceland that would help.

  4. As Mr. Hennigan and Mr. Hunt point out, you have to have something to export for a devaluation to be effective. On top of that, you have to be able to export more of it and for there to be a market for more of it. In a globalised world, it is not clear that price alone is a driver of exports, otherwise we would be making nothing in this part of the world. So we have to look at export capacity (where Iceland falls down – there are a limited number of fish that can be sustainably caught) and ready markets – who is currently not buying simply because the price is not right?

  5. I thought that Dan O Brien article very poorly researched. For example, he has Iceland unemployment rates running at 1 in 10 job loss, compared to Ireland’s 1 in 7. Last good figures for Iceland
    http://www.tradingeconomics.com/Economics/Unemployment-Rate.aspx?Symbol=ISK use a better index, unemployment rate, I could see was for August 2010 down to 7.5% in Iceland, whereas, Ireland is almost double that at 14.3%. Its a pity his article didn’t delve further into this, to factor in rates of emigration and the numbers involved in both countries and how they effect these figures, though he does give weight to the 155000 thousand jobs lost in construction in Ireland.

    But the piece above is sublime compared to O’Briens analysis of Iceland’s response to its debt crisis. For example, http://news.bbc.co.uk/2/hi/business/8441312.stm President Olafur Ragnar Grimsson on the IceSave deal is demanding the matter be put to a referendum. The deal already negotiated down the Icesave 5+% debt repayment compensation to UK and Netherlands of a €5bn repayment scheme with an extended out timespan

    http://bit.ly/fGIcnM

    The most objectionable aspect of O’Brien’s analytic comparison of the effects of the crash on Iceland and Ireland, is that he chooses to ignore the differences in how both countries have responded to the crisis.

    At a base level, it appears Iceland is tackling the bondholders while Ireland
    through commentators like O Brien is telling us all, hey, we’re doing better than Iceland.

    He chooses to ignore the fact we’re in this game for the long haul and right now we’re heading towards an even bigger crash than the one we’ve already had. The message is,

    Meanwhile Iceland at half our unemployment rates is tackling bank bondholders and looks like its economy is on the verge of a return to growth, ours is ready to fall off a cliff because we are turning a blind eye to doing the same as Iceland.

  6. Above, Iceland already negotiated deal down to 3.2% from 5+%

    And..correction above… The message is, we are doing fine and can ignore our debt repayment obligations completely…wow, this blind man’s buff is a recipe for disaster!

  7. @Crikketers & otherwise indisposed Barmy Army

    Bangladesh dismissed for 205 by Ireland, 49.2 overs: Game really on.

  8. Did anyone else notice that Dan O’Brien is wearing an open shirt and cardigan in his profile photograph? I think if you suggested that could happen even a year ago you would have been ridiculed.

    I think you can trace any change from at least this Vincent Browne panel on Nov 6th last (1:20 in).

    That said, I don’t think Dan O’Brien is in the “default” camp. He’s wary of calling the ECB’s bluff or, as the article suggests, leaving the Euro, do I don’t he’d favour burning bondholders.

    Still, he’s not wearing a tie or jacket anymore, and Ireland is bankrupt. I think anything’s on the table at this stage.

  9. Interestingly, the each article starts with the conclusion. While the data and arguments are wielded skillfully, they are incomplete as hoganmayhew points out.

    The point about exports would seem to be an ambitious target for two short articles covering a tiny sample. How about comparing Malaysia with Indonesia, the Phillipines etc in the 1997- period? How about Poland, which would permit completely different conclusions to be drawn? In the blue corner, then, we have Dan O’Brien and in the red corner the law of supply and demand, the defending champion.

    Numerous other points suggest the conclusion given without any qualification at the start is, to be polite about it, not so definite as suggested. As the article points out, the Icelandic banking collapse was instantaneous and total; Ireland’s was deferred at the expense of the future. Iceland has been subject to blood curdling threats from Holland and the UK, Ireland has mortgaged itself at the ECB and is caught between inducements and equally powerful implicit threats.

    Now if Trichet had the powers of Bernanke I don’t doubt things would be a lot better, but he doesn’t. A lot of sensible measures he might take are illegal.

    My expertise in this area is humble but I suggest €150Bn in liquidity, contingent upon the state taking on gargantuan private obligations, may have skewed the figures a tad. The vast pile of cash the ECB has handed over must be paid back.

    Everything in the lead up to the crisis and since has lead me to suspect that economics is as frequently used to generate rationales for preferred policies as it is to predict which policy is best, and that the two approaches are furthermore difficult to tell apart. Placing the conclusion in bold at the beginning of each article, a creative intellectual manoeuvre, undermines O’Brien’s case.

  10. Small fact: Currently there are three flights a day from Iceland bringing fresh white fish to the main Irish cities – cod, lemon sole, haddock, etc.

  11. Those fish are solid, you can weigh, measure, size em.

    But our GDP figures are reliant on certain worrisome indefinables such as the following:

    For example, the contribution to GDP of Corporation Tax from some of the multinationals, eg double irish, dutch sandwich below:

    “Corporation tax brought in 10pc of total revenues, so no one can say that the low 12.5pc rate damages revenues. In fact, the Europeans’ dislike of the rate is because they believe some of that €2bn is rightfully their revenue.”

    above from brendan keenan here,

    http://www.independent.ie/opinion/analysis/corporation-tax-saved-us-so-hands-off-brussels-2364540.html

    But if you look at how the CT process works above, you might sympathise with the annoyance of eu leaders and worry how long the rate can be maintained.

    http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

  12. UK GDP data tody shows that the deficit in net trade increased to £10.2 billion in 2010 quarter four from £9.3 billion in 2010 quarter three, as imports rose faster than exports.

    @ Adrian Kelleher

    How about Poland, which would permit completely different conclusions to be drawn?

    Maybe or maybe not!

    Trading relationahips are most intense betweeen close neighbours.

    So Poland is gaining from Germany’s export surge.

    Besides Poland has a population of 38m; Iceland has 320,000. so how relevant would a comparison be?

    The demand for Iceland’s fish maybe further afield as all the neighbours are maritime nations.

    Nevertheless, the lesson from Iceland is that a modern country in peril depends on the indulgence of neighbours and when it comes to meeting the €4bn Icesave obligations, the country is alone.

    @ All

    In regard to comparisons, pub-stool economists pick what suits them in using international comparisons.

    So the failure of sterling to boost exports is ignored as it is what could be termed an inconvenient truth.

    The failure of advocates of unilateral default to consider a worst case scenario shows that life on the or in the ditch is easier than being in the arena.

  13. @ ObsessiveMathsFreak

    On Dan O’Brien’s sartorial appearance…

    Modern life is full of pundits over-analyisng nothing.

    Maybe it’s just that the folks at the Economist Intelligence Unit were more stuffed shirts than at the Irish Times!

    It’s hardly as revolutionary as a blusshirt amidst Japanese salarymen.

  14. @Michael Hennigan

    Besides Poland has a population of 38m; Iceland has 320,000. so how relevant would a comparison be?

    How relevant is Iceland to Ireland, then, which has a population ~18 times as large?

    Ceteris paribus, O’Brien’s comparison would be fine but ceteris is anything but paribus in this case. Iceland has dusted herself down, signed in to a rehab clinic and is about to settle down with a nice boyfriend. Conversely, Ireland has moved from coke to crack and now the jitters have set in and she’s falling prey to all kinds of crazy ideas. We’re trying to borrow our way out of a debt crisis.

    By picking the right cases to study it’s possible to reach any desired conclusion with this kind of analysis and this is the scourge of all economics. I’ve no reason to doubt O’Brien’s motives but his conclusions are not reliable. Like he says, there are pros and cons, but his conclusion omits the pros and is pretty insubstantial in the face of criticism.

  15. @ Colm Brazil
    Actually there is a good chance the Icelandic people will also reject the 3.2% over 30 years offer from The British and Dutch.
    The parliament wanted to accept. The people pet a petition together and the President vetoed the bill.
    @ Michael Hennigan
    “The failure of advocates of unilateral default to consider a worst case scenario shows that life on the or in the ditch is easier than being in the arena.”
    I think that statement is untrue for many of the people advocating unilateral default.

    Some are honest enough to say that default will mean having to close the income expenditure gap within a year regardless of the pain. Which would be massive.
    If you want to paint what you think would be the worst case scenario though I would genuinely be interested in how bad you think things would get.
    Adrian’s brilliant analogy is getting at the same thing i was getting at.
    Its not a good comparison because The Icelanders are off the cool-aide.

    The shinanigans going on at the banks over the last few days shows they at least are not ready for a detox session.

  16. All comparisons are odious; but the main conclusion seems to be valid and have universal application – if possible prick bubbles or, failing that, ensure fiscal policy is counter-cyclical to avoid fuelling the bubble and to provide the necessary fiscal support when the bubble, inevitably, bursts. But we should have known this already – expect that “This time it’s different”.

    Is it our perpetual desire for novelty that encourages us to ignore the well-documented lessons bitterly learned by our distant – and not so distant – forbears?

  17. @ Adrian Kelleher

    It’s good to be sceptical but in this case the overall comparison appears to be valid.

    Some people blame membership of the euro for Ireland’s woes and again Iceland provides a scenario where a high interest rate, a politicised central bank and the carry trade, that suggests Ireland would be in a similar stew outside the euro.

    @ Eamonn Moran

    It is reasonable to expect that people who advocate default should explain what is the worst case scenario outcome of their proposal.

    I say that as a victim with many others of Ahern/McCreevy/Cowen/Harney and their cronies.

    I do understand emotion and anger from people who stood up to this gang before there were mass Damascene conversions, when it was already too late.

    But have we not learned that consequential decision making is not punditry?

  18. Dan O’ Brien has done us a service by answering all of those who have been hankering (and still hanker) for the alleged policy autonomy (and even more alleged benefits of such autonomy) of our northern and eastern cousins.

    Hopefully, the focus can now shift fully to the reality of the heavy lifting we are still facing and away from the fantasy of the search for painless ‘solutions’, which has characterised so much of the ‘debate’ over the last couple of years – a good job Dan.

  19. Nobody suggests alternatives will be painless.

    A second factor not mentioned by O’Brien, powerful in its implications, is the prospect of future currency and political crises in the eurozone. Add in the very real fear of political turmoil domestically later, hardly unlikely given we’re on the brink of electing a Taoiseach with negative approval ratings even before he takes office, and a more complete but non-quantifiable picture emerges.

    Credible, reasonable steps to insulate the country from adverse political outcomes over the coming months and years, such as preliminary administrative preparations for a new currency, will be necessary to strengthen the country’s negotiating position. As the Anatole Kaletsky piece posted elsewhere outlines, the country has substantial bargaining power even now. It would be wise to employ it with firmness but also restraint, taking less than it might grab and offering more than it might need.

  20. @Michael Hennigan

    A nice piece on Iceland’s foreign trade is here.

    Here’s an exerpt:

    Further, ask yourself the question: What would happen if no one turned up to the next bond auction in Iceland? Would the government immediately stop spending – close its public services down, force unsafe hospital procedures, turn off all the lights, sack the police force? Answer: unless they were completely stupid – no! If this became a chronic inability to float public debt they would soon enough change the rules that they had voluntarily put into place in the first place.

    In that sense, they probably allow the central bank to buy all or significant portions of the debt but then they would realise that all that was happening was that the fiscal spending was adding to bank reserves whatever accompanying arrangements were put in place and they could always deal with the interest rate effects (the downward pressure) arising from excess reserves by instructing the central bank to pay a support rate on overnight reserves held by the commercial banks with the central bank.

    So would they ever have to seek foreign funding in any guise? Answer: never. A sovereign government can never run out of money and never needs to issue public debt as a matter of necessity. The public debt issuance is entirely voluntary and such voluntary actions have a habit of being quickly changed if they present too many “political” problems.

    I hope this addresses your ‘worst case’ worries. An extreme form of the phenomenon described was common in the middle ages. Heavily indebted sovereigns who couldn’t lay their hands on cash would simply issue paper IOUs marked as good for the payment of taxes at face value. This stipulation guaranteed the would posess residual value regardless of circumstances as, just as today, the sovereign reserved the right to employ as much compulsion as necessary in order to extract taxation and the IOUs were good as a substitute.

    Note that these are literal worst case scenarios. I don’t believe consequences remotely as severe would occur in actuality.

    So over to you: Where’s the evidence underpinning the nightmare scenario? I can think of plenty applying to the current course, like the prospect of the dwindling tax base rebelling in 10 or 15 years against repayments of private debts for which they don’t feel any obligation. Such an event would likely be triggered by the trough of another global downturn, and its implications for the EU could be severe.

  21. @Adrian Kelleher

    You presumably continue wrt the extreme exposure that Ireland has to hard currency denominated oil prices and make sure voters fully understand the stagflationary effects likely from the devaluation. Don’t get me wrong I am not anti this route, I just think there is zero chance of public support and therefore political action, unless it is fully and openly debated and then gets a buy-in from the electorate.

    Some way to go there I think.

  22. @ grumpy

    We are told that the monks of Skellig Michil used to jump into barrels of freezing water, to enhance their chastity and powers of concentration. Whatever the merits of the first objective, we certainly need to eliminate flabby thinking.

  23. Hats off to President Olafur Grimsson referendum just announced for April 9 on €5 bn Icesave bill to UK and Netherlands.

    Could we have a referendum on April 9 and include all options, default, leave EZ, join sterling, etc, or support the deal:

    The deal will be hammered out at the euro summit and could include bond buyback for countries such as Ireland though Germany is set against this. Expansion for the EFRF is to be considered.

    OK, let our leaders negotiate above plus a haircut of the EU/IMF bailout, bring it back, lay it on the table for the electorate.

    We can debate it in the media and inform the electorate.

    As we don’t have a Bo Lundgren, or Olafur the Great, its not likely with our democratic deficit, this will happen.

    More likely, us vassals will be put in our place, be told to mind our own business, shut up and pay up!

  24. “But the most important policy lesson from all this, it would seem, is that policy actors must be far more willing to make calls on whether bubbles exist and to take measures to deflate them if they conclude that they exist. Of course, this is not easy as there is no way of knowing for sure whether growth is sustainable or mere froth. But given all that has happened, the case for pre-emptive pricking of suspected bubbles appears incontestable”

    Talk about stating the bleedin obvious.

  25. @Colm Brazel

    “Hats off to President Olafur Grimsson referendum just announced for April 9 on €5 bn Icesave bill to UK and Netherlands.

    Could we have a referendum on April 9 and include all options, default, leave EZ, join sterling, etc, or support the deal:”

    And one on the Croke Park deal too?

    Competitiveness and the minimum came to mind today as I cast my vote. Those folk who sit for ten hours or more handing out ballot papers, a goodly proportion of whom are public service retirees and employees, earn €37 per hour for this arduous responsibility. In one day, one of these fold takes home more than someone on the minimum wage (revised or not) could make in a week. Ireland, don’t you just love it.

  26. @ AK: “We’re trying to borrow our way out of a debt crisis.”

    Just now and again someone hits the bulls-eye! If the price of crude does not fall back to $80/bl – and it very well may not, then all growth bets are scratched. That will be fun.

    BpW

  27. @bpw

    … it certainly ain’t coming down any time soon …. waiting for Sa_aud_ie

    the 4-yr plan; the five point plan: North, South, East, West & down, down, down, down, down … ain’t lookin good … but young Ward looked dynamite vs the classic ten-timer Kenny Egan – must add young Ward to the team for Brussels, headed by Katie Tailor of course …. young Dockrell bowled brill today as well ….. anyone over 25 is out …. it’s their future we are playing with – let them play – and I’ll take Willie Big Bang Casey over the other limerick-willie anyday …

  28. @ Colm Brazil

    As we don’t have a Bo Lundgren, or Olafur the Great, its not likely with our democratic deficit, this will happen.

    If Icelandic voters approve the UK/Dutch settlement, would you call them idiots?

    Most of the Icesave debt is expected to be recovered from the winding up of Landsbanki.

    As for ‘Olafur the Great,’ if Bertie Ahern was to become an anti-banker crusader, would you be as admiring?

    Apparently, before the financial crisis, your hero was a cheerleader for his country’s bubble banking sector and its “young entrepreneurial Vikings” who, he once remarked, were “ready to take on the world.”

    @ Adrian Kelleher

    I will say it again: anyone who advocates unilateral debt default should have the cojones to say what in their view is the worst case scenario outcome.

    You paste from a blog post on Iceland and say: “So over to you: Where’s the evidence underpinning the nightmare scenario?

    I said nothing about a nightmare.

    You might Google for something on Mr. Bob’s paradise in Zimbabwe.

  29. @ Colm Brazel

    Could we have a referendum on April 9 and include all options, default, leave EZ, join sterling, etc, or support the deal:

    You forgot to mention abortion, a military draft and participating in resource wars in Africa!

    This multiple choice question would really suggest that we are getting serious about the economy.

    Why not add tax also, as was done in California.

    As in California we would vote for lower tax, default and maybe lower public spending as long as it only impacted other people.

  30. @ The Alchemist

    I have said many times that the culture is one of grabbing as much as possible from the public purse, while the going is good.

    It’s more exciting then to get Johnny Foreigner to pay up when the till is empty.

    People investigatiing corruption were overpaid €1m because of a clerical error and the money wasn’t paid back.

    The Oireachtas Public Accounts Committee published a report the day the GE was called and it shows that public bodies are the largest procurers of legal services in the State with an estimated spend of anything up to €500m.

    The Committee said it heard evidence to suggest that the cost of legal services in Ireland is amongst the highest in the developed world and it has been suggested that the State itself is one of the primary drivers of high legal costs.

    Overall, the report stated that the likely cost to the State of three public tribunals based on the pattern of costs experienced to date is estimated to be in the range of €336m to €366m.

    The Committee also reported that five of the barristers working for the Mahon (Planning) and Moriarty tribunals earned in excess of €5m, with two of them earning almost €10m.

    The Committee referred to “three senior counsel at the Moriarty Tribunal being paid €2,500 a day for an extraordinary 304 days in 2008. The Moriarty Tribunal sat in public session for an average of 20 days in each of the past three years. The report advised that there were no specific attendance records for the legal teams maintained at the Morris and Mahon Tribunals. The Moriarty Tribunal records attendance of tribunal legal team members but does not take account of arrival and departure times.”

    The Committee “was exercised to learn that at the Moriarty Tribunal, an extra €1m has been paid to counsel because of an error in the Department of the Taoiseach, where counsel have been paid a per diem rate of €2,500 instead of €2,250 and where the matter was allowed continue without rectification.”

  31. As so often with Krugman, he’s not making any obscure technical point here. When you look at the increase in net exports as a percentage of GDP it’s rather obvious that Iceland has benefited substantially from having its own currency. There really is a lot to be said for taking bog-standard Keynesian textbook theory seriously. Sadly, journalists like Dan O’Brien seem to fear that they will look unsophisticated if they deploy the lessons they learned as undergraduates, so it’s left to a Nobel prize-winner to state the obvious.

  32. Paul Krugman makes some important points.

    But his final point is curious. He says that Iceland has a “very open economy” (fuller quote below). This is true; but, of course, Ireland has a significantly more open economy. According to OECD data(Globalisation; Macro Trade Indicators, Total Trade as % of GDP), total trade (exports plus imports) is 97 percent of GDP in Iceland and 165 percent of GDP in Ireland. Paul usefully shows that the swing in net exports as a percentage of GDP was almost twice as large in Iceland. With exports showing similar overall percentage changes (and starting from a higher base in Ireland), this points to the importance of the squeeze on imports. Now the big reduction in imports in Iceland must be partly related to the exchange rate depreciation — not least as a result of the squeeze in real wealth as a result of the currency collapse that Dan points to; but the more severe collapse in domestic demand in Iceland must have played a significant part.

    Maybe most importantly from my point of view, comparing export growth — which looks similar in the two cases — is misleading, because Iceland is a very open economy. This has two implications. First, it’s harder to achieve a given percentage increase in exports once you’re already exporting a large share of output. Second, if what you’re interested in is supporting demand for domestic goods, a given percentage change in exports matters more.

  33. True John, but if there has to be a squeeze on imports it’s obviously preferable to have the exchange rate take some of the burden of adjustment rather than have to do it via a larger fall in demand — it’s ye olde story of expediture-switching and expenditure-reducing policies.

  34. About the currency/devaluation:

    Exports would probably increase for Ireland as well in some industries, in others there wouldn’t even be anything detectable for all the noise.

    FDI would benefit from lower costs, however, would that result in lower prices & increased sales? Pharmaceuticals etc? More likely it would just improve profits on existing sales.

    The tourist industry would surely benefit as the cheap pound/expensive euro makes the UK more attractive than Ireland. Still, would the increase in tourism be worth more than the loss in value of the spillover from FDI?

    Could be looked into as a nice theoretical exercise, but as Ireland can’t devalue it is only of academic interest.

  35. @Kevin Donoghue
    “but if there has to be a squeeze on imports it’s obviously preferable to have the exchange rate take some of the burden of adjustment rather than have to do it via a larger fall in demand”
    😕
    I understand the theoretical difference in nominal figures, practically, I don’t see a difference in consumption in real figures – a constant foreign currency. A devaluation means people get poorer…

  36. From the first article:
    “One reason for Iceland’s consumption collapse was the huge decline in real wages as a result of the inflationary shock of the króna going into freefall. While the price level was 1 per cent lower in Ireland in December 2010 compared to January 2008, it was 38 per cent higher in Iceland over the same period”

    Isn´t it a bit strange that O´Brian did not mention irish wage cuts anywhere in relation to this? Haven´t many irish wages been cut 20%+ ?
    This comparison is unfair if that is not mentioned, is it not?

  37. @JMcH, K-Man

    I also find that “point 4” very unclear – and Paul is usually an extremely clear writer. Don’t like the graph much either since “net exports as % of GDP is bound to flatter the economy that had the larger drop in GDP – Iceland.

  38. @Michael Hennigan

    Did I not already give a worst case scenario? Now you want to know “what in [my] view is the worst case scenario outcome”? This is a different request.

    I had a reply half written but hit reset with my heel, so it went up in smoke. Obviously there would be an inflationary impact but also a boost to employment. Price stability is important but it’s not the be all and end all of economic governance. I don’t see how the medium term outlook could be any worse than the current course.

    An absolute worst case scenario has already been outlined. Certainly the unqualified conclusion reached by Dan O’Brien can’t be supported by a short-timeframe analysis (two years!), when literally dozens of alternative cases have been ignored, of just two countries which are hardly otherwise comparable.

    Anyway, the kind of negotiating plan I’d endorse has been outlined in some detail over the last week. It wouldn’t involve planning to launch a currency but it would involve preparations to do so as a contingency measure.

    Insufficient emphasis has been placed on political risks over the coming decade. Sometime in the next few years, there’s going to be another global downturn, albeit more modest than the last. Current (very modest) concerns about Libyan oil show it might not be that far off. Reposessions and the like will rise, while people get to admire bankrupts’ helicopters whizzing back and forth across the country. Maybe things will pan out peacefully, or maybe we’ll find ourselves in a Brixton ’81 style scenario. Employment counts as much as raw output figures.

    @grumpy

    You’re correct about political preparation. Such preparation should form part of contingency planning.

    In the end, we elect governments to govern. If the last lot can underwrite 400Bn and conclude a wide-ranging agreement with the EFSF/IMF, the new lot can float a currency.

    @Jesper

    It’s not just theoretical.

    @hoganmayhew

    I don’t understand how a constant foreign currency (what’s that?) is any more real than a domestic currency. Currency depreciation obviously has disadvantages also but he way some people are presenting it, you’d think having a trade surplus or consumption being switched from newly expensive imports to domestically sourced goods is bad somehow.

  39. grumpy: “Don’t like the graph much either since ‘net exports as % of GDP’ is bound to flatter the economy that had the larger drop in GDP – Iceland.”

    Okay, create a series for Potential GDP using your preferred method. (If you don’t have a preferred method Google can help you choose.) Then express net exports as a percentage of Potential GDP. I’ll be surprised if the result undermines Krugman’s argument.

  40. @Ari from Iceland

    Outsiders will find the wage deflation reality a bit odd. There was a cut to public sector wages announced in December 2009 – when most thought there was a little local, temporary difficulty. Basically that reversed the froth from the peak of the boom only. That was then turned into perma-negotiations about efficiency gains under the “Croke Park Agreement” in March 2010.

    This agreement was subject to the clause that it would not apply should there be “any unforeseen budgetary deterioration”. However the looming election meant every politician had to studiously ignore the fact that there was a whopper of a budgetary deterioration, the IMF arrived and many mainstream analysts consider the state insolvent.

    Some figures here from a bloke who works for IBM:

    http://trueeconomics.blogspot.com/2011/02/13022011-public-sector-earnings-need.html

    All this has left the private sector, student nurses, carers and the disabled as the most economically and politically vulnerable to take the brunt of the income reductions. So you have skewed deflation – skewed away from that part of the wages bill that is a draw on state borrowing, so you get the deflationary spiral but keep the big deficits that shut you out of the bond market.

    There are therefore a lot of people in Ireland in state or semi-state jobs which are among the highest paid in the Western World, who have very low interest rates on mortgages – many with trackers which are very very low – who are actually economically better off than they were a few years ago as their purchasing power goes up.

    Many, probably most Irish people assume this is sustainable under Euro membership and this is why the country in in such a weak position to “renegotiate” with the EU and IMF. They will not jeopardize this, they will have to actually see it demonstrated to be unsustainable.

    Personally I’m with the Keynesians on this generally, but Ireland has such a perverse economy that what would normally be the “left” actually ends up sticking up for overpaid inefficient, entrenched, stifling semi-elites that are actually some of the most privileged in the country. This is probably something an American would find hard to imagine.

    I think default and / or/ devaluation would be exactly what Ireland’s insiders would want – so they could continue, business as usual.

  41. @Adrian Kelleher
    “I don’t understand how a constant foreign currency (what’s that?) is any more real than a domestic currency. Currency depreciation obviously has disadvantages also but he way some people are presenting it, you’d think having a trade surplus or consumption being switched from newly expensive imports to domestically sourced goods is bad somehow.”
    Eh, because that’s what you pay for it in? Like, say, oil, clothing, schools, most books, CDs, electronic goods, cars, imported electricity and gas, a large proportion of food, medicines, equipment for schools and hospitals, coal…

    Tell me how with a depreciated currency you buy the same amount of that stuff as an individual paid the same numeric amount in the new currency?

  42. @Kevin Donoghue

    When you’ve read as much analysis as I have (maybe you have) you get used to trying to spot something that makes you suspicious that it might not tell you quite what it seems to. I could find you analysis that tells you almost anything you want.

    The step change on the graph and the difference in GDP flag up that there may be at least an overstatement of the case there.

    If you have time and energy to look at the data in different ways to tease it out – go ahead. Not sure what else, for example, an enthusiastic economics postgrad would be doing in the current climate, frankly.

  43. @hoganmayhew

    Tell me how you export as much with a non-depreciated currency as a depreciated one? I didn’t make the claim implied by your rhetorical question (though if supply and demand can be waved away, maybe arithmetic can be suspended as well). Import price inflation caused by devaluation doesn’t hurt the exporting economy, however, especially MNCs, as losses on imports are balanced out by export gains.

  44. Iceland’s total export value is split about 40% each between marine products and the aluminum industry, linked to its geothermal resources.

    The biggest annual changes in exports in recent years have been in 2008.
    The banking system collapsed early in Q4 2008.

    In 2008, marine product exports jumped 33% in value on a volume rise of 13%. This was against a backdrop of global food prices rising to record levels.

    Aluminum exports jumped 127% in 2008 and volume increased 71%. US giant, Alcoa, opened a new smelter in East Iceland in mid 2007.

    Fish export volume fell 4% in 2009 but the export value jumped 22%; aluminum export volume rose 6% in 2009 but the value of exports fell 6%.

    Fish export volume fell 5% in 2010 and the export value rose 5%; aluminum export volume rose 1% in 2010 and the value of exports jumped 30% – – the average aluminum price on the London Metal Exchange in 2010 rose 24%.

    As for marine products in 2010, the movement of large shoals of mackerel north to cooler waters off Iceland and the Faroe Islands prompted both countries to unilaterally hike their catch quotas.

    Iceland raised its 2010 quota from 2,000 tonnes to 130,000 tonnes and to 147,000 tonnes in 2011.

    Without the mackerel windfall, the volume of its fish exports would have fallen more than 5% in 2010.

    So the big export volume and value changes happened before the currency collapsed; the price of aluminum fell 40% in Q4 2008.

    Paul Krugman identified six ‘supertrading’ economies as existing in 1990 – – Belgium, Hong Kong, Ireland, Malaysia, the Netherlands and Singapore and the OECD added six more in 2000.

    These economies are dependent on the “slicing up of the value added chain” on an international basis.

    US multinationals based in Ireland mainly export to their units in other European countries, Exports to Asia are insignificant and short-term exchange rate movements would not impact supply decisions.

    Iceland has an unemployment rate of 7% — almost half the Irish level – – and about 9,000 are employed directly in the fishing and aluminum industries.

    This is only 5% of the total workforce.

    The equivalent Irish ratio for the internationally tradeable goods and services sectors is almost 13%.

  45. @Adrian
    “Tell me how you export as much with a non-depreciated currency as a depreciated one?”
    Because you are not selling in new punts.

    You get lower relative labour costs and domestic fixed costs by depreciating. That is it. The people who work for you have a lower standard of living. Your other inputs likely increase in price, as being import dependent. You put less ‘real’ money into the economy.

    Unless you can identify an export market that is price sensitive to the product you want to produce with your cheap labour, you will not export anything more.

    There is no difference between an external devaluation and an internal one from the point of view of exports.

  46. @hoganmayhew

    Oh come on now… First off, this ‘internal devaluation’ is just a phrase and nothing more. Just like ‘soft landing’, the idea is underpinned by hope rather than economic theory. Common sense dictates that this ‘internal devaluation’ will be characterised by destructive wage conflicts — those that possess the power to hang on to their gains will, but this power may be derived from political or economic power (i.e. gatekeeper status in MNCs) rather than productivity. I presume you’re full of enthusiasm for Croke Park if you’re enthusiastic about the ‘internal devaluation’ idea?

    You’re talking about ‘real’ money again, but it’s the national government that defines legal tender within its jurisdiction.

    “Unless you can identify an export market that is price sensitive to the product you want to produce with your cheap labour, you will not export anything more.”

    Everything everywhere is price sensitive.

    Competitiveness is the number one focus of economic debate in this country. To argue that floating a currency would raise inflation is commonsensical. On the other hand, to argue it would do nothing to help competitiveness is just baffling. Just as it did during the depression, a strong currency will prove disastrous.

  47. @Adrian
    “Common sense dictates that this ‘internal devaluation’ will be characterised by destructive wage conflicts — those that possess the power to hang on to their gains will, but this power may be derived from political or economic power ”
    And this is different to an external devaluation, how? I’ve been in countries where that has happened, I’ve seen who loses out. It isn’t people with political or economic power. Where’s your experience from?

    “You’re talking about ‘real’ money again, but it’s the national government that defines legal tender within its jurisdiction. ”
    Good luck buying oil with your neo punts without converting them into a ‘real’ currency. Again, I’ve been in countries with soft currencies. They have the effect of impoverishing those who don’t have access to hard currency.

    “Everything everywhere is price sensitive.”
    No, no I don’t accept that. If that was the case, there would be no business in Ireland.

    “To argue that floating a currency would raise inflation is commonsensical.”
    Well, no. Not unless you consider the effects of that inflation. Does labour have any ability to increase wages to counter inflation? Er, no, that would defeat the purpose. The purpose of inflation by devaluation is to reduce standards of living and for those who have no ability to counter it either by leaving or raising their prices.

  48. @ Adrian Kelleher

    Competitiveness is the number one focus of economic debate in this country. To argue that floating a currency would raise inflation is commonsensical. On the other hand, to argue it would do nothing to help competitiveness is just baffling.

    Competitiveness can matter in the long-term but it’s also crucial as to what you have to sell.

    Germany with its industrial giants like Siemens, BASF and Volkswagen, has products in demand elsewhere.

    Crucially, its Mittelstand family firms of small and medium-sized enterprises, have niche products and a long-established reputation for quality. They do not have to compete against the cheapest

    More than 90% of Irish tradeable goods/services exports are made by mainly US-owned firms.

    Such firms operating in global markets would not change their supply systems because of short term currency movements.

    They are in Ireland to mainly service European markets – – not markets elsewhere. So membership of the EMU is likely seem as positive.

    Price is not the only issue in selling overseas.

  49. @hoganmayhew

    Devaluation, combined with redenomination of debts in the new currency, removes both the incentive and the wherewithal to resist readjustment. Unlike for wage cuts, sectoral strikes would hold out no prospect of reversing a devaluation.

    “The purpose of inflation by devaluation is to reduce standards of living and for those who have no ability to counter it either by leaving or raising their prices.”

    Well the purpose is to restore employment and growth — I really don’t see how anyone could claim the purpose is to reduce living standards as an end in itself. The means is by across the board reduction in incomes, but crucially only as denominated in foreign currency. The difference between this and an ‘internal devaluation’ (i.e. ‘economic disaster’ as it’s more traditionally known) is that while both lead to falls in output, devaluation results in more even distribution of the burden and less unemployment… and those more competitive sectors of the economy can resume their upward wage trajectory immediately but without sucking the life from the rest of the economy.

    Contrary to your assertions, foreign currency is no more real than domestic currency and people’s ability to lay their hands on foreign currency would be in proportion to their incomes, exactly as was the case previously. There would be no discrimination against the poor that didn’t already exist.

    No, no I don’t accept that [everything everywhere is price sensitive]. If that was the case, there would be no business in Ireland.

    This is an extraordinary statement. By your reckoning, there is no economics and businesses’ and individuals’ decisions are senseless. Ireland has an economy because it has 65,000 engineers and scientists and because, just like everywhere else, an equilibrium exists between productivity, investment and wage levels.

    The utility of this exchange is questionable. This is exactly the same debate as occurred during the early years of the depression and history has already passed its verdict on it. I’ve repeatedly acknowledged the disadvantages as well as the advantages of devaluation but this has not been reciprocated.

    Apparently even the law of supply and demand is only situationally correct. My remark above about economics as a language for formulating rationales instead of a scientific method of investigating human behaviour is relevant here.

  50. @all – on other ‘movers’

    Blind Biddy (via Twitter from Kingstown): The X-Minister’s methods were strange – they caused us real surprise – to make us see the light – she threw bleed1n dust in all our eyes. Bye-Bye!

  51. @Adrian

    “Devaluation, combined with redenomination of debts in the new currency, removes both the incentive and the wherewithal to resist readjustment. Unlike for wage cuts, sectoral strikes would hold out no prospect of reversing a devaluation.”

    This is the case if you devalue without delay. It is different otherwise.

    Imagine the Irish internal devaluation holdouts waiting until every last pip has been squeezed out of the vulnerable groups – then when it is clear it has to be their turn, suddenly converting to the devaluation camp to cement their comparative gains.

    How would you prevent that?

    Is that where the public sector and protected professions are heading?

  52. @Adrian
    “Devaluation, combined with redenomination of debts in the new currency”
    🙄
    That’s a completely different scenario.

    In that case, why not just default on the debts and renegotiate a lower payback in euro?

    When you’ve balanced the budget and decided how you’re going to stiff the ECB and the ICB, bank bondholders, overseas depositors, the EU and the IMF, sovereign bond holders and native savers and bondholders (Post Office, NTMA etc.)…

    “devaluation results in more even distribution of the burden and less unemployment”
    I don’t accept that at all. Those on fixed incomes – social welfare, pensions, anything from the state, suffer most. Those in the traded domestic economy – retail and domestic services – suffer next. Those who earn income from abroad or who have pricing power to leave suffer least.

    With an internal devaluation it is up to the government in power to allot the changes in income as far as they are able (either through tax or benefit policy). They are less hamstrung, I believe in their ability to do this as they do not have currency concerns to worry about.

    “Contrary to your assertions, foreign currency is no more real than domestic currency and people’s ability to lay their hands on foreign currency would be in proportion to their incomes, exactly as was the case previously. ”
    Tell me how you buy oil, food and goods with devalued punts without affecting anyone’s standard of living? Particularly those who spend a greater proportion of their income on necessities?

    You’ve really never been in a country with capital controls, have you? And capital controls would be required in a change of currency to a new punt. People would be searching down the back of the sofa for euro and sterling coins as a dual currency system would quickly develop. Without an immediate reason to have confidence in the new currency, it would be a soft currency useful only in Ireland.

    “Apparently even the law of supply and demand is only situationally correct.”
    Absolutely that is the case. Supply and demand only works where there is a market. Markets are determined by more than price. Substitution as an iron law just doesn’t work and neither does price sensitivity. It is a marginal effect, not a primary one. If it was, I wouldn’t be doing software development in Asia – there are plenty of cheaper people there. As you say:
    “Ireland has an economy because it has 65,000 engineers and scientists and because, just like everywhere else, an equilibrium exists between productivity, investment and wage levels.”
    That is entirely correct. It is not because we are cheaper, but because we offer more for the price. Would being cheaper make the existing products and services more attractive? Probably not since they are not benchmarked in Ireland, but internationally. Comparing the cost of Irish labour internationally is something that companies do all the time. Cheapening the cost of Irish internationally traded labour would be shooting ourselves in the foot as it would mean less income for probably no more work. The risk does not cover the benefit.

    If, however, you want to set up more labour intensive industries, then adjusting fixed costs of labour in euro would be more helpful. Universal pensions, universal health, flexible working practices (some class of kurzarbeit) would do far more to reduce total labour costs, I believe.

  53. @ Iceland-Ireland Again – NYTimes.com [aka Paul Krugman]

    The incoming gov appear to be set to follow the outgoing gov’s lunatic banking policy – and to ‘slow-burn Irish citizens’ in preference to realistic approach to addressing insolvent banks and their bondholders. And the ECB is apparently quite prepared to provide sufficient liquid parafin/kerosene to ensure that the Irish citizenry burns for quite some time so as to protect the Core banking system from disclosing its massive aporias – or black holes – to use the vernacular.

    Most surprising, the citizenry appears to show no interest in taking over the ELA refinery, which would appear to be the logical thing to do – €150 bill would be ample compensation for ‘saving the Euro’ ….. methinks.

  54. @all

    Realism from the Outside:

    http://www.guardian.co.uk/commentisfree/2011/feb/27/editrial-ireland-eu-election-debt?CMP=twt_iph

    Patricia the Irish Sovereign_still_in_Exile concurs.

    p.s.
    Blind Biddy is snoring ever so sweetly and contentedly ….

    … glad to relate that the white bazooka is now safely under her bed … but apparently it is still armed … think she has got a taste for the hustings … so don’t be thinkin now that she has gone away …..

    I’m off for a fling with 7_of_9 ….. badly in need of an alternative universe for a while …..

  55. One other thought between Ireland and Iceland. There have been referendums in Iceland on various elements of their banking bailout and referendums have been proposed in Ireland too.

    However, might a legal challenge on the guarantee itself have some legs? Is it possibly unconstitutional under Article 43? I can’t see it being easy to defend the guarantee as promoting justice or being for the promotion of the common good.

    The government may have asserted that the guarantee was needed, but that’s a long way from a legal determination that it is actually in aid of social justice or the common good.

    Besides, retroactively declaring that we don’t like the guarantee may be less interesting to the German population than a legal challenge that the arrangement was illegal in the first place. They do have a rather assertive constitutional court themselves, after all.

  56. Constantin Gurdgiev weighs in with a post which is definitely worth a look. For me the most telling point was this (but the whole post is worth reading):

    … more likely than not, stronger Irish performance in GDP growth terms above is really driven by the MNCs and their transfer pricing, rather than real economic activity at the domestic economy. Lest I be accused of voicing anti-MNC sentiments – we do live in a society where saying factual things can get us labeled anything totally unrelated to the factual evidence presented – MNCs activities are great. All I am suggesting is that counting on them to carry us out of our real economy collapse (unemployment, shrinking employment, declining real disposable incomes etc) might be a bit naive.

    I was quite startled by the picture of Iceland’s current account. I don’t know what to make of it.

  57. About the internal devaluation, an anecdote:

    Last Friday I got a call from an Irish recruiter wanting to discuss if I’d consider moving back to Ireland. Not sure if I’d move for the job she called about but as it was Friday afternoon we had some time to chat and she mentioned what another client wanted: A part-qualified accountant with three years of experience to prepare a full set of accounts and do payroll. For this the client was willing to pay 22k. No takers so far, lowest anyone would consider was 28k. ACCA & CIMA used to have some figures about salaries on their website, I couldn’t find any but my guess would be that this salary would be a drop of 40-50% from the bubble years. Inexperienced graduates wouldn’t touch jobs with that wage a couple of years ago….

    To compare with this drop I had a quick look on Daft for apartments in the area where I used to live. Lots of new apartments in the area, all of them are in NAMA but almost no ads on Daft. Either all are occupied, which due to the number of apartments I find unlikely, or the apartments are held empty and off the market to allow the owner to pretend the values have stopped falling. Is there any reliable data available or is all property-related data to be found from websites like Daft?

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