Roubini on the eurozone

Nouriel Roubini’s post is a useful complement to the piece by Wolfgang Münchau that John linked to earlier. In truth, I don’t think anyone really knows what is going to happen to the eurozone, and Wolfgang is admirably frank about the fact that he is just describing one possible scenario. But an increasing number of people are now arguing that eurozone politicians aren’t going to be able to fudge the unfudgeable forever. If that is the case, the Irish people may have some momentous choices to make in the not-too-distant future.

30 thoughts on “Roubini on the eurozone”

  1. Like many, I had dismissed the idea of leaving the euro as unnecessarily expensive. Without debt relief of multiple sorts – bankruptcy reform, refprofiling of sovereign debt (at the least), the other measures required (restoration of competitiveness, slow pace of return to fiscal balance) are not going to work.

    I still think that the cost of leaving the euro outweighs the benefits and that without structural reform the benefits are illusory (given previous time-limitations of past currency devaluations under the punt).

    I am no longer quite so sure, though…

  2. He goes on and on and on about competitiveness on the periphery:

    “The result was a loss of competitiveness on the periphery.”

    “But it will do nothing to restore economic convergence, which requires the restoration of competitiveness convergence.”

    “The euro could fall sharply in value towards – say – parity with the US dollar, to restore competitiveness to the periphery.”

    “So given these three options are unlikely, there is really only one other way to restore competitiveness and growth on the periphery: leave the euro, go back to national currencies and achieve a massive nominal and real depreciation.”

    JTO again;

    He seems unable to distinguish Ireland from the others. His prescribed solution may have some merits for the other peripheral countries (although very unlikely to happen), but none at all for Ireland.

    For the record, Ireland has allready restored its competitiveness.

    Ireland has had by far the lowest inflation in the EU almost every month for almost four years. As a result, exports have increased market share (up 10% last year and forecast similar this year) and the balance-of-payments is moving into surplus. If people don’t want to take my word for it, they can check it out with Dell, Zynga, Teleflex Medical, SouthWestern etc, all of which announced major investments and expansions of both output and jobs last week, and all of whom quoted Ireland’s improving competitiveness as one of the reasons. In contrast, the other peripheral countries have not improved their competitiveness. All of them still have inflation rates well above the EU average and, as far as I know, all of them are still in heavy balance-of-payments deficit.

    That is not to say that everything in Ireland’s economic garden is rosy. Clearly not. There has been and continues to be a massive outflow of capital, which is crippling domestic lending and domestic demand and investment, especially in construction, and which is cancelling out any benefit to the jobs market that is resulting from the export boom. But, this has nothing to do with competitiveness. It is an entirely separate problem, for which Roubini’s prescribed solution (leaving the euro and indulging in a massive devaluation) is completely irrelevant, indeed damaging, as far as Ireland is concerned (whatever its merits for the others).

    I would have thought that if we compare an economist with a doctor, being able to distinguish between different symptoms in a sick patient was an elementary requirement. Prescribing a cure for ‘loss of competitiveness’ for Ireland, when such no longer exists and the real problem is entirely different, is like going to a doctor with a sore leg and he prescribes hair restorer.

  3. @hoganmahew: “I still think that the cost of leaving the euro outweighs the benefits….”

    Titanic situation innit? The deck is still dry and the water is cold. Give it time.

  4. I don’t comment very often on this or other forums but this proposal strikes me as being slightly daft. Look at Greece, Italy and Portugal. These are countries that serially devalued their currencies throughout the 70’s, 80’s and 90’s. Did it make the more competitive? No it didn’t. Why? Because they imported massive amounts of inflation, meaning their unit labour costs are way out of line with the rest of core Europe.

    Put simply, devaluation without debt restructuring is an exercise in futility. It would far better to stay within the euro and restructure debt in a meaningful manner.

    Let me give you a day in the life of the average Irish person.

    Wakes up and turns on his bedroom lamp. The electricity he uses costs 20% more than his European counterparts, why? Because he subscribes to a monopoly where they insist on paying salaries that are massively out of line compared to rest of the universe. Then he puts milk on his cornflakes, again the milk he buys is 20/30% more expensive than elsewhere because Irish farmers have to be paid to do nothing. He then jumps into his car to drive the kids to school, the car he drives is 30% more expensive than the same one in continental europe, why? because of irish government vrt taxation policy. He then gets to work and calls a solicitor about an issue he has been having – the solictor he uses is about 30% more expensive than the equivalent in europe… why? because legal services in Ireland are basically a cosy cartel. After work he has to go to the doctor for a consultation, the consultant charges him 200-250 lids for 5 mins work, why? because the medical profession in Ireland is run as a cartel by consultants for the benefit of consultants at the expense of everyone else.

    Then at the end of this expensive day he goes to drown his sorrows in his local……. need I say more? The point I am making is that these are the real costs in the economy to real people and leaving the euro will not make one jot of difference to this fact. Devaluation or leaving the euro is the path of least resistance, intellectually lazy and ultimately self defeating.

  5. @ Peter

    Well said.

    Larry Summers has an interesting debut article as a returned columnist in the FT today on another apparently intractable problem — the US fiscal train wreck as they term it.

    US-based economists get a bit dodgier when they begin to anlayse Europe and as we saw last week, some of the European ones can be also blinded by their own emotions/prejudices.

    We seem to be like the cargo-cultists awaiting external intervention that will solve our needs.

    Most of the threads related to Ireland are about the external dimension not on what we should be doing ourselves.

  6. @Peter
    Salaries were a small input cost for electrical utilities until they decided to reduce their capital investments to increase profitability with predicable consequences on prices which are now dependent on a very volatile Gas market.
    European Farmers are now paid to do nothing because of the liberalisation of trade in Agricultural commodities.
    If they were not paid now agricultural land around our cities and general hinterland would re wild into Hazel and Birch scrub withen 2-3 decades , this would reduce our ability to produce food in a emergency.
    As for tax on cars – well one of our largest imports is petrol , diesel and cars.
    This dramatically effects our balance of trade.
    When I was growing up we walked to school.
    As for the closeted professions who farm subsidies in a more effecient manner I would agree with you that needs dramatic reformation.

    Devaulation of all debts would solve these problems abeit in a very painfull spasam of default.

  7. @peter,

    Thank you. Your comment is refreshing and insightful. JtO may focus on changes in relative price levels and indices, but, despite some modest relative improvement, the cost of living for Irish households remains almost 20% above the Eurozone average. Your ‘statement of facts’ brings to mind an anecdote attributed to the late, great Roy Geary. Shortly after being appointed as first director of what is now the CSO, his wife requested an increase in her house-keeping allowance ‘because prices had increased’. He advised her that, as the person responsible for the collection of price statistics in Ireland, he had evidence that prices had not increased. His wife’s response allowed no rebuttal: “My good man, I deal in facts, not statistics’.

    What is particularly damaging and unfair, in addition to the unnecessary cost burden on households and the economy, is that these higher prices impact proportionately more on those on low and average incomes than on those on higher incomes.

    (Just one small point. These excessively high electricity prices are due to the ownership, structure, financing and management of the ESB and to the policy and regulatory design of the market structure in which it operates. Staff pay, though the levels, admittedly, may be considered generous, is not the key driver. Even significant reductions in the level of staff pay would have a vanishingly small impact on final prices to households and businesses. It is interesting though that all who bear the main responsibility for the current excessive prices are keen to ensure the focus is on staff pay.)

  8. Having Larry Summers come back as an economic prophet is like the Aztecs wishing for Cotez to return.

  9. @Jake
    A man who was a expert on Gibson’s Paradox – there is a deep suspicion he was involved in a major effort to suppress the Gold price under his strong dollar policey to help facilitate the entry of the euro withen the global monetory system.
    This strong dollar policey artifally reduced interest rates creating a global credit bubble to dwarf them all – and therefore exporting the remaining bits of Americas industrial base to China.
    If you want a conspiracy to beat all conspiracies the talk amongest Gold bugs is that Merkels Hostility towards the ECB is based on their role in selling German Gold via West point to bring the Euro into the system.
    I would not be surprises at anything now.
    We are in unchartered waters – the priesthood is now the Father ,son and Holy Ghost.

  10. @Kevin Donoghue
    “Titanic situation innit? The deck is still dry and the water is cold. Give it time.”
    We’re in the queue for the lifeboat, no guarantee we’ll get on before the first class passengers, though…

  11. It seems more and more likely that Greece will end up leaving the EZ (especially if Dan O’Brien’s piece is anything to go by). It will probably take a generation or more for the Greeks to implement far reaching reforms.

    If the ensuing chaos could be managed, a Greek exit could stand to benefit the remaining members, incl. Ireland.

    How do commentators here see a Greek exit playing out? Does anyone believe the Euro would survive?

  12. @ Michael H

    come on, you can,t bring Summers into the debate. the man has destroyed the dollar and will continue to do so if he gets his way at the end of june. Also he pushed for major de-regulation under the clinton admin and look where that got the world. His History is woeful.

  13. @Peter: Look at Greece, Italy and Portugal. These are countries that serially devalued their currencies throughout the 70’s, 80’s and 90’s. Did it make them more competitive?

    Try looking at what has happened to their competitiveness since (to borrow Harold Macmillan’s apt phrase) they nailed their trousers to the mast of the Eurozone:

    http://stats.oecd.org/Index.aspx?queryname=344&querytype=view

  14. @ Bazza
    The way they are suffering I would not be surprised to see them exit the Euro. Tourist income in the first three months down 21% and car sales down 40%. Now they are to get a dose of further expansionary austerity. There will be nothing left of the economy at this rate. The whole thing is farcical .

  15. @ Kevin O’Donoghue

    I agree with you, look at what happened — they saw interest rates fall to post war lows, giving them a perfect chance to reform and restructure their economies. What happened? A borrowing binge in Spain, usual inaction in Italy, a government borrowing binge in Greece. Look what happened to Germany in the 12 yrs since the adoption of the euro, they had a moderate internal devaluation, they did their work and now they are reaping the fruits of their labour. Other EZ economies could have done this and didn’t. This was not the fault of the euro but the fault of short termism on the part of domestic actors ( banks, politicans etc) who didn’t ‘get’ what the system demanded.

    I don’t wish to repeat myself, but leaving the euro will not change these underlying problems, far from it, you end up importing more and more inflation thus undermining the initial competitiveness gain from devaluation.

  16. @Peter

    If having the option to devalue does nothing much to help competitiveness, losing the option to devalue should not have led to a significant loss of competitiveness. But it did, which is bad news for PPP thinking. Yes it’s quite possible that if, on entering the Eurozone, the Greeks, Italians and Portuguese had started behaving like Germans, they would be a lot more competitive now. But they didn’t; and any policy which relies on them doing so in the future is a dud. Monetary arrangements should be adapted to the economies which they serve, not the other way around.

  17. I had an eye opener today in Kerry during lunch with my thirty something year old female relatives. They are angry at the past and present gov’ts, everything that comes up on this blog is on the tips of their tongues. Laws on white collar crime that are not being enforced, investigations that have not and are not taking place. Quangos continuing untouched with payscales that are exorbitant by any standard. The Taoiseach and Ministers grossly overpaid along with the brueaucracy and gov’t agencies. Silos for legal, medical and other professions. Bankers living high on the hog off ripoffs from the less well off. Politicians being elected to run errands for the voters like get me my passport renewed in five days or less. Nobody taking care of the business of governing the country in a responsible manner.
    A particular bone of contention was the millions wasted on tribunals that accomplish nothing they see as useful. They want to see timely investigations followed by politicans and bankers being arrested and placed in jail. They rattle off a dozen spending announcements made by gov’t in the past week as evidence that the gov’t is malfunctioning. They say, no other people in any country in the world would put up with what we put up with as we continue to whine and complain to each other.

    I hear no complaints about the EU, EuroZone, IMF, these women are well educated and there must be tens of thousands out there with similar viewpoints. When I combine this with the view point of my acquaintances in their fifties and sixties in Dublin it appears highly likely to me that Ireland is headed for a sea-change both economic and politic.

  18. @MickeyHickey

    Did you ask them who they voted for? Somebody must have given “the present crowd” the overwhelming majority they enjoy.

  19. @MickeyHickey

    One of the benefits of the crash is that the average thirty-something man or woman can talk about politics and not just talk nonsense. The electorate took their eye off the ball to an extent. There was certainly a sense of “I’m alright jack” up until everything went pear-shaped.

  20. @ Mickeyhickey

    Are you sure that was not a liquid lunch with the Lilies of Killarney ?
    Kerry is another world, and a fascinating one it is.

    It seems to me that most of the gripes you mention feature regularly in, for example, a certain well known Sunday paper. The media moguls get rich from exploiting human emotions. Indignation sells as well as, and sometimes better than, soft porn and consumer longings. Build people up and then knock em down. It’s all a profitable game. That’s people for you. We can fly to the Moon, but we can’t see when we are having our buttons pushed.

    That frustration you heard is, I suppose, driven by the fact that the recession is hitting rural Ireland very hard now. Able, articulate men and women kicking their heels. Construction jobs gone wallop and no more prospects for selling sites. Deflationary service environment with lots of local businesses barely staying afloat. Easy enough to blame ‘the Dublin setup’ for the mess.

    This is going to be hard grind. If country folk they want to see the country better governed, maybe they need to give a little thought to the sort of politicians they are sending to Dail Eireann. We have seen where cute hoors take us.

    And, for the record, I think Kerry in-laws are the bee’s knees . 🙂

  21. @ Peter

    Your figures are daft. There are plenty of countries in the EU that have more expensive electricity than us. UK, Sweden, Portugal, Netherlands, Italy, France, Finland, Denmark, Belgium

    Despite the border line hate I’ve seen on here for ESB staff. Even if you reduced it’s average wage from cica 70,000 to circa 30,000. Like many on here would love to do. It would only cut a couple of cent off the average bill. Electricity generation is massivily capital intensive. A lot of it goes on buying equipment like transformers from the likes of ABB/Siemens etc

    I agree that wage rates are out of line, especially in a lot of the professional classes. However, lets not overstate how out of line and the benefits of a slash and burn approach to wages.

    Finally, considering the rest of Europe is having relatively higher inflation
    than us which should manifest in higher wages for them in the years to come, it’s worth pointing out that some of the lifting will be done for us.

    By far our biggest problem is all this bloody bank debt.

  22. My apologies the following have mroe expensive electricity (for household):

    Italy,
    Germany,
    Denmark,
    Austria,
    Netherlands,
    Spain

    For industrial (24,000 MWh/year), the following are more expensive:
    Denamrk,
    Germany,
    Greece,
    Hungary,
    Italy,
    Netherlands,
    Poland,
    Solvakia,
    Solvenia,
    UK

    For those interested list in my previous post refers to those that have more expensive unleaded fuel than us.

  23. @Paul Hunt

    Where is the evidence that the gap in electricity prices between Ireland and other EU15 countries is as large as 20 per cent?

    I agree that it was at one time, back in 2008 and 2009. But, the gap has greatly narrowed. The most up-to-date figures that I was able to google were these:

    http://www.decc.gov.uk/en/content/cms/statistics/energy_stats/prices/prices.aspx

    This was published a few weeks ago and gives figures for Dec 2010.

    It gives figures for all the different categories, so the precise difference is hard to work out. But, averaging them all out, it appears to be only around 5 per cent in Dec 2010.

    Part of the gap was due to other countries using nuclear power, which is cheaper. However, some of them, in particular Germany and Italy, are now phasing nuclear power out, so their prices will rise. Other countries will follow. I am not saying that I am against nuclear power myself, merely that other countries phasing it out will increase their electricity prices in the long-term relative to those in Ireland, which never enjoyed the cheaper electricity that nuclear power provided.

    More generally, in the Mercer cost-of-living survey, Dublin fell from 9th most expensive city in the world in 2007, to 16th in 2008, to 25th in 2009, to 42nd in 2010. I expect the 2011 survey to be out soon. Although one never knows, given current inflation rates around the world, it would be surprising if Dublin did not show another big fall in this particular league table.

  24. @ JTO

    Do you mean ’19th’ in 2007? 9th doesnt seem right.

    I’d guess we’ll be in the 50s this year. Hopefully beating a German city.

  25. @JtO,

    I don’t think I suggested that there is a 20% gap. But I did agree with ‘peter’ that prices are much higher than they should be.

    I wonder what economists did before the advent of these reams of comparative international data. I find a lot of this stuff to be nonsense as much of it seeks to abstract from enormous variation in institutional and procedural arrangements. Economics for me is about the efficient allocation of scarce resources to maximise the welfare of individuals – both as individuals and collectively. So I tend to look at doing the best with what we’ve got – and then cast an eye on how we might be faring relative to others. Starting from the outside in could lead to very stupid policy prescriptions – or, even worse, encourage a false sense of superiority.

    Looking at the Irish electricity and gas industries from an economic cost perspective one sees additonal, unjustified costs being imposed on consumers to:

    – finance a share of network investment that should be provided by the owner either via forgoing dividends or injecting new equity;
    – finance the semi-states’ external ambitions;
    – meet the extra costs of failing to structure and ring-fnce the network businesses to secure lower cost, efficient financing;
    – cover the higher costs of electricity generated by more expensive new entrants when the ESB was prevented from investing in new genertaing plant;
    – cover the costs of futile retail competition in a market that is physically too small to support sustainable competition that would benefit consumers;
    – cover the extra costs of stupid gas interconnector investment decisions;
    – finance investment in a totally wrong-headed climate change policy; and
    – cover the costs of quite generous ts & cs of employment.

    Other EU member-states have various combinations of these self-inflicted, consumer-damaging features – and some have devised others, but Ireland has its own combination that is more economcially damaging than most.

  26. Now he may be too busy to have noticed it – or he may be foraging for yet more ‘statistics’, but, whisper it, I think I’ve finally succeeded in responding to JtO and he hasn’t come back to try and have the last word.

    High fives time 🙂

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