Roubini on the eurozone

My previous comment applies:

http://www.irisheconomy.ie/index.php/2011/06/11/patrick-honohan-on-vincent-browne/#comment-151998

@ All

The attached link to a recent House of Lords report on the future of economic governance in the euro area will be of interest in the context of the overall debate on this blog.

http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeucom/124/12402.htm

Appendix 6 on the PPP adjusted GDP of euro area countries is worthy of particular attention.

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.

@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.

@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.)

@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.

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?

@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

@ 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.

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.

@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.

@ 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.

@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.

@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.

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 🙂