Currency (Mis)Pricing: An appreciation

The pre-2007 Irishman abroad in Europe had a little swagger to him. He thought his economy was a Tiger. When abroad in Europe, he spent like crazy, and generally annoyed his European counterparts with his brash ways. (Of course I’m not thinking of anyone in particular). The reverse is happening at the moment. We’re humble little chappies. My French and German friends are sending me emails with pictures of the Book of Kells saying ‘please take care of our investment’ and ‘are you enjoying your bailout?’ and ‘we’re still waiting for the thank you card’.

They’ll be waiting a while longer. When I say our European friends should be thanking us, they assume it’s a throwback to the hubris of pre-2007 Ireland or something to do with keeping eyes off the balance sheets of German and French banks. It’s not, and here’s just one reason why.

Imagine there are two countries trading with one another, with different cost structures and different currencies. Exchange rates then become important because they affect the relative price of domestic and foreign goods. So for example the dollar price of German goods to an American is determined by the interaction of two factors: the price of German goods in euros and the euro/dollar exchange rate.

When a country’s currency appreciates (meaning it rises in value relative to other currencies), then the country’s goods abroad become more expensive and foreign goods in that country become cheaper (if we are holding domestic prices constant in the two countries). By the same token, when a country’s currency depreciates, its goods abroad become cheaper and foreign goods in that country become more expensive.

So far, so boring. Simple economics would hold that in the more expensive country, a rise in a country’s price level (relative to the foreign price level) will just cause its currency to depreciate, thus hammering demand for its exports, until competition brings the price level down, and off we go again. The exchange rate is allowing price levels to equilibrate without deflating the domestic economy too much, and things are put back on an even keel.

What’s not normally acknowledged in this story is that, while the expensive country is returning to equilibrium, exporting firms in the less expensive country are making out like bandits because they are so much more competitive than firms in the more expensive country.

Now let’s put our two countries into a monetary union, but leave the cost imbalances. Let’s consider just Germany and Ireland, trading between one another with two currencies, Irish Euros and German Euros, that just happen to trade at 1:1, independent of the supply and demand forces acting on the currency. Relative to their cost structures, the currency of one nation–Germany–is relatively undervalued, generating increases in exports for the Germany and resultant GDP growth, while the Irish-Euro is overvalued, leaving that Ireland with only one option: a hard internal devaluation through the wage channel. This leaves aside all discussion of competitiveness, it’s just looking at the currencies in a different way.

We can see this reflected in changes in the real effective exchange rates for Ireland and Germany over the past decade. The effective exchange rate is a trade share weighted average of a basket of foreign currencies. The real effective exchange rate adjusts for difference in price levels in those different countries. It can be viewed as a rough measure of the country’s external competitiveness.

Plot the data for Ireland, Germany and the European Union of 27 countries over a 15-year period from 1994 to 2009 (all data from Eurostat, axis starts at 80, and this is the latest data available). What do you see? You see the deterioration of Ireland’s competitiveness relative to the Eurozone average, but importantly, to Germany.

Real effective exchange rates, 1994-2009, Ireland, Germany, Euro-27. Source: Eurostat

What does this all mean? Say in 2009 I bought a Mercedes from Germany. I bought it using my overvalued Irish Euros. My German friend accepted these overvalued euros and proceeded to use the funds from the sale of the car to buy another Mercedes in Germany in Germany. When he bought that second Mercedes, he was hoovering up the 30% price difference in 2009 euros between Ireland and Germany. There’s an implicit wealth transfer going on.

Now think about the competitiveness challenge Ireland has. Ireland must (and will) return to the Eurozone average at least, by accepting lower wages and deflating the economy. But will it ever really get close to Germany’s level of competitiveness? Probably not, because a lot of that is being driven (and hidden) by the relative valuations of the currency on their domestic and international assets, and while Ireland continues its internal devaluation, German firms will soak up the transfer.

So: the next time you hear a core country complaining about a peripheral nation, remember the favour you’re doing them by buying their goods and services. (German exports, by the way, registered a 10.9 billion Euros trade surplus this month). Of course lots of sensible Germans (and other Europeans) recognize the great deal they are getting from Eurozone membership, but this doesn’t get reflected in most of the commentary we see today.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

67 replies on “Currency (Mis)Pricing: An appreciation”

While we and Portugal etc perform virtual devaluations, no doubt the Germans will be doing their bit and having a virtual revaluation, an obvious requirement of being in a currency union. Two chances, I would have thought.

Er, at the point the exchange rate was fixed (2000), the Irish and German ‘currencies’ were equal. Germany improved its competitiveness, we let ours go to pot.

I have to argue a little with your:
“Simple economics would hold that in the more expensive country, a rise in a country’s price level (relative to the foreign price level) will just cause its currency to depreciate, thus hammering demand for its exports, until competition brings the price level down, and off we go again.”
This doesn’t seem to be the case with Switzerland or Norway. Instead, they are seen as safe haven currencies and capital is flowing into them. It is capital flows (demand for a currency) that determines a currency’s relative value. These are related to economic conditions, but not determined by them. See, for example, Iceland! Iceland! Iceland! No?

The internationally traded sectors in economies seem likely to pay internationally competitive salaries. The average salary is calculated based on the average of all wages (domestic and internationally traded). The average salary is then used to compare competitiveness?

Is it at all possible that wages in a domestic sector could rise beyond sustainable? (possibly helped by pro-cyclical fiscal policies) If it is possible, and if it is deemed to have happened, what should then be done?

One solution could be to do the transfer union. Take money from the core, give it to the periphery which the periphery could then use to pay for goods and services from the core. What is the difference between this and having the core provide goods and services for free to the periphery?

Another solution could be to allow wages that can’t be sustained to fall to sustainable levels. Do the domestic costs really have to be so high?

I do not think these comments are very fair to Germany.It is true that the Germans now enjoy a confortable position in terms of growth and commercial balance surplus ,but they have paid a very heavy price for it. The efforts to balance their budget have been very painful in terms of cuts to the social programs.They have made conscious effort to limit the salaries ,with the explicit agreement of the trade unions.Ten years ago the German cost of labour was way more than the French,now it is less .In essence they applied to themselves the internal devaluation that is asked now from the peripherals .Was it worth it? I do not think so,but at least they achieved a very low rate of unemployment.

Overseas commentator Says:

“They have made conscious effort to limit the salaries ,with the explicit agreement of the trade unions.”

Was this not a result of the country’s reunification which resulted in increase of the labour supply against a limited capital stock consequently depressing the wages which are a function of labour / capital supply?

Saving is no more virtuous than spending. There is a risk in saving – you make your neighbours poor.
There is no moral supremacy in not spending money.
We have got to get out of this notion that saving is good and spending is bad. Both are equal and neither should be guaranteed a return

Eureka Says:

“We have got to get out of this notion that saving is good and spending is bad.”

If you examine the condition most of the Western economies are in, I am sure you will find that the notion that spending is good is in rude health in most places. Some of those spendthrift societies are in fact being now financed by those who ‘make their neighbours poor’.

@Dom K
The first effect of the reunification was terribly inflationary because of the decision to give the East Mark parity with the Deutsh Mark.
To speak of a labour surplus in a country with a constantly declining population in spite of a massive immigration is a little bit ironical.
It realy was a deliberate policy ,accepted by the public except for “Die Linke”.Germans,I believe, are very differnt from the French or the Irish.

Its been a longish week but am I missing something:

“Simple economics would hold that in the more expensive country, a rise in a country’s price level (relative to the foreign price level) will just cause its currency to depreciate, thus hammering demand for its exports, until competition brings the price level down, and off we go again. ”

I don’t think it does. Presuming you are referring to a rise in domestic costs and pay rates, the loss of competitiveness and short term increase in the tendency to buy imports would lead to a devaluation of the currency that would prevent its exports from being hammered.

“There’s an implicit wealth transfer going on.”

Or a wealth reversal. The lack of complaints from Ireland as it paid everyone ever more and more than Germans as a result of its largely politically motivated decision to weld itself to economies it was miles out of synch with, was noted by many.

If it is possible for Irish economists to agree that deflation is inevitable, maybe it is about time some more effort went into an attempt to guide the country into a more equitable and less economically distorting deflation than that which has resulted so far and seems set to continue.

Interesting, prior to currency union each Euro member country had a flexible currency compensating for the sins of the state. Devaluations and so on, I dont remember Germany undergoing many devaluations in the past 30 years. We now Ireland was familar with using this tool to compensate for mismanagement.

Now that tool is no longer available. Germany greeted the Euro and rose responsibly to the challenge through wage restraint and low inflation producing a competitive model. Of course Ireland didn’t

So in summary, the Germans should be grateful for our lack of moderation because it makes them more competitive – this may be a secondary effect but the primary reason they receive this benefit is because they planned and managed their economy for the challenge of the Euro. Ireland didn’t

As the saying goes you make your own luck

I’m not sure I buy the narrative here. As yogan says, the Euros were the same. The alternative view is that people in Ireland became prepared to overpay for everything because the economy was so loony.

If I was a Germany company or an Irish company I’d be mighty tempted to overcharge any group of people that were consistently prepared to over pay, and there is lots of anecdote that this is exactly what happened…right down to people talking of the local price, the tourist price and the Irish price when it came to property near Ryanair destinations.

Now, I’m not sure this phenomenon counts as an “implicit wealth transfer” from the periphery to the core. It could be described as suckers getting fleeced, but then it wouldn’t matter whether the company doing the fleecing was Irish or German.

@ Overseas Commentator

I agree! We paid ourselves too much, taxed too little and allowed a public sector to develop that we can no longer afford. That we now have to painfully reverse engines without having the luxury of devaluing is hardly the fault of Germany. We decided to join the euro. Nobody forced us to do so.

However, I cannot accept the benign version of the decisions taken by the German government with regard to recovering competitiveness, a point which we have debated before.

The major fault lies with the Hartz IV reforms introduced by Schroeder which resulted in a completely skewed German labour market. The saving grace is that the German electorate has woken up to what happened. Merkel is also carrying the can, having endorsed the approach of Schroeder and participated in a grand coalition to continue the implementation of the reforms introduced by him. These have a number of very curious elements, to say the least. A decision of the Constitutional Court has forced some corrections but these corrections have, if anything, made the situation worse and created a legal and bureaucratic mess. The ensuing debate can be followed in the German press.

This would be a matter for Germany alone were it not for the exceptionally disruptive impact on the European economy of the pursuit by certain sectors of an export-led growth while ignoring everything else. Of course, it makes certain entrepreneurs extremely rich and guarantees a very good wage for those who happen to be in skilled, organised and working in export industries.

very very interesting points and quite original also! nice to see an alternative way of looking at things, more of the same pls.

@ Hogan

I don’t think the normal rules of currencies apply to the Swiss Franc at the moment. There is so much demand for safe assets and so little supply that the poor Stutz has gone through the roof. The Swiss national bank has bought 100bn Euro to stop the rise but achieved nothing.
In a normal situation Switz would raise interest rates to stop its housing bubble from inflating but it can’t because that would just be a come on to all those anxious foreign investors. There are cranes all over the country and it’s all a response to the chaos over the border. Massive misallocations of capital.

The news had a report on a factory in Valais that has increased the working week from 41 to 43 hours to try to cope with the strength of the currency.

It’s all going to end up in a mess.

Not sure about your analysis of ills.

Mercedes in Italy are 30% cheaper than in Ireland. I think the same applies in Germany but I am open to correction. I don’t agree that euros were/are the problem. Property prices in Ireland, in both residential and farmland, began to climb from 1996/97 onwards. Farmland in 1988/89 coudl be bought for £1500/acre. The same land climbed to £2000 and more by 94/95 and then began to take off as interest rares came down. Houses rose between 89 and 96/97 by how much again?

“And lo, Jesus said to them: “Let he, who is without a functioning banking system, cast the first aspersion.”

And Paddy replied: “Wisha, I’ll not be doing you any more favours, buying you goods and services like, if you don’t keep the ELA flowing Fritz!””

Let’s face it, the real reason driving EMU was the hope it would cause political union, perhaps aided by increased alignment of the real economies

As such the argument was normative/ ideological – which was perhaps fair enough as experimentation on such a scale is not feasible. However the experiment has happened, so to my mind we need more empirical work, especially doing the detailed sums on such as tthe above post.

Such would be very useful, especially as changes to nature and direction of monetary policy/union are firmly on the agenda

@Stephen Kinsella

We’re humble little chappies.

JTO again:

Speak for yourself or, at most, your southern compatriots. I have never met anyone from north of the artificial border who could be described as humble or who even recognises the concept. All the more reason to get rid of it and move the capital north asap. But, I digress!

Regarding your main theme, which is about the comparative level of prices issue, the points you make are correct in relation to the theory of the whole business, but, in relation to current actuality, you don’t seem to be taking account of the most recent figures, which were published by Eurostat only this week. These show that the process of narrowing the gap in the comparative price level between Ireland and the Eurozone countries is now very close to completion. The Eurostat figures showed an approximately 10 per cent fall, between 2008 and 2010, in price levels in Ireland relative to the Eurozone average (when measured across the whole economy – the fall was greater for investment prices than for consumption prices, but only the latter were reported in the media). France’s comparative price level actually worsened relative to the Eurozone average in that time. If those trends have continued in 2011, as they most likely have, the comparative price level in Ireland will now be lower than in France and very close to that of Germany and the Eurozone average. If current trends continue, it should go below them all by next year. I am on a train and unable to post a link to the figures, but they are in the Eurostat website.

Regarding the harassment that you are receiving from your German and French ‘friends’, I suggest that you send them a copy of the latest CSO census report, which has stunned media commentators and academic economists across the world (although JTO largely predicted it). The contrast with Germany, in particular, is stark. Germany has a rapidly falling and rapidly ageing population. By 2030, its population will be 10 per cent lower than today and one-third of that population will be over 65. In Ireland, the population is growing rapidly, up by 8.0% between 2006 and 2011, and it is scarcely ageing at all. With those demographics, anyone who thinks that the long-term outlook for economic growth, construction and property in particular, is better in Germany than in Ireland needs to see a psychiatrist. France’s demographics are not as disastrous as German’s, but still very poor compared with Ireland’s. Also following the latest census, you could ask them why far more east Europeans are still emigrating to Ireland (and the UK) than to Germany and France, when Germany and France are much closer. Lots of them must be passing through Germany and France to get to Ireland (and the UK).

Regarding the long-term economic performance of Germany and France, this is greatly exaggerated. Both have now had a few years (since 2008, 2009, 2010 and possibly 2011) in which their economies grew faster than Ireland’s. Big deal! Ireland’s economy grew much faster than their’s for the preceding 21 years and, according to IMF forecasts, will be growing faster than their’s again from 2012 on. The German economy averaged 1% annual growth from the late 1990s until 2007, and since 2007 it has averaged 0% annual growth. What exactly is so great about that? Ireland’s trade surplus per capita is ten times that of the figure you give for Germany. Even if we deduct profit repatriation from that, Ireland is still now in balance-of-payments surplus, while France continues in balance-of-payments deficit. Ireland, of course, does currently have a higher budget deficit than France, but, prior to that, Ireland had many years of budget surpluses, whereas, the last time France
had a budget surplus, De Gaulle was President and Brigitte Bardot was an attractive woman, which will tell you how just how long ago that was. So, your ‘friends’ actually have very little basis on which to be harassing you in the manner that you describe.

The Alchemist is correct on car prices; new car prices in Ireland are about 30% higher than the Eurozone average.

Standard & Poor’s reported in 2009 that in 2007, the average age of cars registered in EU-15 countries was 8.2 years, up from 5.8 years a decade earlier. This increase was in part because of the improved overall quality of cars. In Ireland in 2007, a driver of an 8-year old ‘banger’ would have been viewed as a loser.

Cars were the biggest export sector for Germany at 16% in 2010; the majority of German cars were built outside Germany in 2010 — which was a boost for the German car parts industry.

Of the €10.9bn goods surplus in April, €1.5bn related to the Eurozone. In 2010, imports from the then other 15 EZ countries grew 4% faster than exports.

Germany became a net exporter of food and drink in 2008 for the first time since the Federal republic was founded; the arrival of Aldi and Lidl in Ireland has been a gain as Tesco now faces serious competition.

Common claims that exports have risen because of competitiveness should not be taken at face value in Germany or Ireland.

German companies were best placed to respond to demands from rapidly expanding emerging economies; the output of both big firms such as Siemens, Volkswagen and BASF and smaller family-run firms with a tradition of making quality machine tools, was in demand.

For several years, the Irish business economy total labour cost per hour has been a few percent below the German level and 30% below Denmark’s. Irish employer social security costs are low as there has been no obligation to provide pension cover.

The influx of migrants kept labour costs lower than they would otherwise have been during the boom and also enabled companies like Google to centralise localisation services in Ireland.

There is no evidence that overall competitiveness has impacted exports from the FDI sector. The closure of Dell’s Limerick plant was a special case as the PC manufacturing sector travelled the same road as the TV set industry.

Big electricity users have got low rates and while the indigenous food sector was hit by the fall in sterling, it is now benefiting from the resumption of a food commodity boom.

Excessive costs in the non-tradeable sector do of course impact the potential for economic development.

Stephen asked:

Now think about the competitiveness challenge Ireland has. Ireland must (and will) return to the Eurozone average at least, by accepting lower wages and deflating the economy. But will it ever really get close to Germany’s level of competitiveness?

In 1991, when Ireland’s interest on the national debt took 28% of tax revenues, German financed structural grants more than offset that burden and typical building site costs were 10% of the cost of a house. Site costs jumped to as much as 50% and the land rezoning system remains unreformed.

Public staff pension costs jumped 14% in the year to March and the litany could go on…legal costs have risen 12% since 2006 despite the crash and deflation.

A speech by the ECB’s Jürgen Stark on Mar 17, 2008 has a table of unit labour costs total economy – – (not to be confused with labour costs per hour in the business economy) for EZ economies 1999-2007.

It shows a rise of 33.3% for Ireland compared with 2.9% for Germany.

German labour reforms, including flexibility during downturns in collective agreements, proved their worth in the recession.

Prof. Hans-Werner Sinn had a book published in 2003:Ist Deutschland noch zu retten? (Can Germany Be Saved?) – – Its blurb read:“Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels. Germany is outperformed by its neighbours. Its growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe.“

@ JtO & Michael Hennigan

As it is a lovely summer morning and we’re starting off on a positice note, did you note this article and report from the Irish Times?

“Surge in agri-food exports leads to revised targets for vibrant sector”

Which included such eye-opening sentences as:

“He [Min. Simon Coveney] predicted growth of more than €600 million for the second consecutive year and said the programme put in place to increase exports, the 2020 Food Harvest Report, was already ahead of target in some areas.”


“Currently, Ireland produces enough food to feed 36 million people. By 2020, it wants to be in a position to provide enough food for 50 million people.”

Accurate summary or rose tinted glasses?

I agree with your historical account,but right now the German see themselves as people that have suffered in the 1997-2007 period in order to enjoy their present relative prosperity and have little sympathy for others that they see as profligate spenders (anybody else but themselves and maybe the Austrians and the Scandinavians).
The budget deficit addiction of France will probably get worse in 2012 because of the presidential elections,but because of the Greeks and Portuguese the French public opinion is getting conscious of the risk involved and most people accept the fact that some belt-tightening is unavoidable.
The French demographic situation is actually pretty good in spite of its stupid anti-immigrant policy,the birth rate is second in Europe,well behind Ireland but high enough for the population to grow rather rapidly.

I pity Dr Kinsella launching himself onto the waters of the Irish Economy 🙂
Meanwhile, back from Spain, what I notice here this last week is that there seems to be a slight bit more optimism that “something will turn up”. That in a week when the government caved further to the subordinated bondholders and where it became clear back in the other place that the Caxa mess will be anglo-like in its impact. But, Spain being a real country, it will be saved at less cost per taxpayer than paripheral states

From Stephen Kinsella:

“Relative to their cost structures, the currency of one nation–Germany–is relatively undervalued, generating increases in exports for the Germany and resultant GDP growth, while the Irish-Euro is overvalued, leaving that Ireland with only one option: a hard internal devaluation through the wage channel.”

“The real effective exchange rate adjusts for difference in price levels in those different countries. It can be viewed as a rough measure of the country’s external competitiveness.”

Overseas Commentator is right when he says that: “…they have paid a very heavy price for it. The efforts to balance their budget have been very painful in terms of cuts to the social programs.”

A large component of the problem is an imbalance that was built up in Germany by the constant supply side policies of the last twenty years. I remember them being egged on to do precisely this. As a consequence Germany has built up a demand problem, one which until now, it could export to the periphery.

Seems the narrative is that no matter the problem, the response is to slash wages and social conditions. Doesn’t matter if it’s here, or in Germany. The more you slash, the leaner and fitter you become, the more prudent and responsible.

Makes me wonder if Marx didn’t have a point after all!!!

@ Michael Hennigan

Of course, what you say about the divergence between the cost structure in Germany and Ireland is true but the question that also has to be posed is whether Germany tightened too much while Ireland loosened too much.

The answer is an unequivocal yes. The result of the mistaken policy of restricting free movement of labour, for example, to placate the misplaced concerns of German unions, combined with the maintenance of a rigid set of employment rules, is plain to see in the estimated labour shortgae of 400,000 skilled workers against the background of a very poor, not to say disastrous, demographic situation, as underlined by JTO.

The issue is of vital importance as the pomposity of Merkel in inviting other countries to model their development on Germany has to be nailed. During her recent visit to Spain, it is clear that the idea that Germany also needs to change simply does not occur to her.,,15181071,00.html

@Overseas Commentator

I hope France doesn’t go too far on the austerity bandwagon. The world can’t afford to have all of its large economies go into deficit cutting mode.

“It’s all going to end up in a mess.”
Yes it is. My point is not that the CHF isn’t massively overvalued and damaging the Swiss economy, but that currency moves independently to economic conditions/price levels, to some degree. In the case of the CHF to a very large degree, as it was with the ISK a few years ago – blast you WGU and your biblical speechifying.


Firstly, you will note that population growth is not something to be proud of merely a consequence of inflated expectations and pay on the back of economic mismanagement. The Irish are as deficient in family planning as they are in every other field from waht I can see

Secondly, comparing putative growth is pointless, time will tell, our previous growth was evidenced to be built on pillars of sand. Future growth in excess of Germany is more paddywackery economics. At present the German economic model is more sustainable vs our model – dont forget the German economic miracle began in the 50’s and still remains today unlike our flash in the pan, debt driven stupidity. You are comparing sheffield utd to man united

Why not face the facts, unpalatable as they are. Ireland unaccustomed to success after being three quarters of a century mired in poverty cast logic to the winds and flogged our unassailable one trick, low tax pony to death.

We are now a sovereign state with the freedom to manoeuvre our way through the economic shoals in a competent fashion as Germany does. We chose to roll the dice on what we perceived to be a dead cert in horse racing parlance and we came in trailing the field.

Let us now stop casting around for scapegoats and pick up whats left of our dignity and wealth and get on with rebuilding our country. Instead we contort logic as we sit paralysed unable to restore competitiveness and unwilling to balance our budgets. We now rely on the European Commission, ECB, IMF and others to impose order in the candy shop on Kildare Street.

Poor Patrick Pearse is spinning in his grave as St. Patrick looks on in a state of shock.

Eureka Says:

@ Dom K
It’s a high interest loan – not a donation

My point was – they have money and we don’t. They saved and we didn’t.

Talking of Irish men abroad, I was just looking at some quotes related to a French man abroad. James Cox, law professor at Duke University, said:
“You cannot have a chambermaid bringing allegations against an aristocrat like Strauss-Kahn…”


Overseas commentator Says:

@Dom K
The first effect of the reunification was terribly inflationary because of the decision to give the East Mark parity with the Deutsh Mark.
To speak of a labour surplus in a country with a constantly declining population in spite of a massive immigration is a little bit ironical.
It realy was a deliberate policy ,accepted by the public except for “Die Linke”.Germans,I believe, are very differnt from the French or the Irish.

I don’t think there is any doubt that reunification depressed real wages in Germany. This is simply becuase lots of East German labour was added without the equivalent increase in the availabilty of capital in the country. The same has been happening on the global scale since globalisation kicked off and labour from the East started attracting capital from the West. I do not think Germans are that much different and I do not see evidence of any conscious policy designed to increase the competitiveness of the country. Before the reunification Germany was expensive and a lot less competitive. They simply went through a cycle of correction amplified by the reunification.

@ Stephen

I didn’t follow the parable of the Mercs, where is the wealth transfer?

Consider the following simple model. There are only three countries in this model, two large countries A and B and a small country C. A and B have their own currencies a and b. C trades with both A and B and has chosen b for its currency. C itself is too small to have any influence on the exchange rate between a and b. Over time b appreciates against a, it always has and always will. Let us presume that this exchange rate movement is merely adjusting for the price levels in A and B. C has a problem. It has chosen currency b but what is its correct price level? Unfortunately, because internal devaluations are so difficult, its price level is closely aligned to B, and this creates a competitive problem vis a vis A. I’m starting to ramble, don’t know where I am heading, but I don’t see any wealth transfers in sight…

@ Dom K
….but that’s kind of the point.
They saved – they didn’t trade.
That lead to an imbalance. But the imbalance was compounded by the fact that they lent their savings to us so that we could by some more stuff.
That was their choice and their strategy. Crazy stuff


You call the German decision in 2004 to restrict entry of workers from the Eastern European countries as ‘mistaken’ but in Feb 2005, unemployment hit a post-war high of over 5m. In Jan 2006, the total was still above 5m.

It’s easy to pick holes but the US with its broad unemployment rate above 16%, would love to have only to deal with skills issues.

Germany’s short-time working scheme worked well during the recession and 1.5m workers were included at its peak.

@ JohnTheOptimist

We are in 2011 not 2006 – – a bankrupt country dependent on US companies for most of our exports.

They locate in Ireland to primarily service markets in Germany, France and the UK not the fast-growing BRIC markets.

Bragging about growth that included the soufflé period isn’t very clever.

@ Mickey Hickey


@ Eureka

Germany should have saved us from ourselves!

It’s funny that there were no complaints about Germany financing of over €40bn in aid even in the bubble years.


From where I am standing this imbalance we are in seems to be more of our own making.

@ Overseas commentator

I read the short document and scanned throught the other one. It does not come across from either that wage restraint was an important element of German economic policy. In fact, I could not even find a mention of wage restraint in Welfen’s article. I would offer that wage restriant was a by-product of sluggish economy of 90’s and reunification.

“They saved – they didn’t trade.
That lead to an imbalance. But the imbalance was compounded by the fact that they lent their savings to us so that we could by some more stuff.
That was their choice and their strategy. Crazy stuff”
Well, they loaned us the money. They didn’t invest it, as such. Did they loan us their savings so we could buy stuff from them? I don’t think so. They did what depositors all over the world do – put money in banks offerring good rates of return.

That the banks loaned it out for property speculation rather than productive investment, for consumer spending (“ching, ching”) without apparent limit and that people borrowed on those bases is a local problem.

That so much money should have been permitted to flow into a small economy is a eurozone structural problem, but not the result of a choice or strategy of German savings.

@ hoganmahew @Michael Hennigan
…but every time money is deposited in a bank the banker must invest it somewhere in order to make a return. The more that is saved – the more that must be invested.
That money went into buying government bonds as they were seen as a safe bet in the Eurozone. Also went into funding bubbles.
Savers should be guaranteed their principle back but not interest. Nothing in life is risk free. Why should anybody be guaranteed a return on savings?

@Gavin K

I confess to not knowing what is happening in agri policy thinking in Ireland. A few years back I attended the launch of a report predicting such changes in the physical agri landscape due to climate change that wine would be produced in Cork, wheat would be grown west of the Shannon, and a great deal of the east coast under water and the rest parched. Get out of Temple Bar while you can 🙂

In this ‘new initiative’ I wonder how many ingredients (.e.g. cheese, chicken, etc) will be produced abroad and then repackaged/processed as Irish? The margins in food processing are quite small – its not software on CDs – and even small turbulence in world markets can have major impacts. Very cautiously optimistic that projections will pan out.

@ All

Many thanks for another wideranging set of arguments and data

@ Mickeyhickey
+ 1

‘Ireland unaccustomed to success after being three quarters of a century mired in poverty cast logic to the winds and flogged our unassailable one trick, low tax pony to death’

There was plenty of logic about, but it was mediocre, self serving logic. It includes the 1960s illusion that ‘technology’ was the key to economic progress. Joe Lee covers that era nicely in Ireland 1912-85 pp 638 ff.

We moved on to the 70s notion that tax-driven technology transplants would seed out into the rest of the economy. What happened, and was was always going to happen, was that the FDI sector remained an enclave, and the gap with the domestic economy widened, as the industries matured.

The export activities of the enclave sector allowed the Irish state to present itself as more economically advanced than it was, with the result that the embarrassing state of the domestic production economy was hidden from view. Agricultural subsidisation is a story in itself.

The corporate taxation system was distorted to attract the MNCs. It was further distorted in the 90s to facilitate the global financial industry in the IFSC. In keeping with US/UK trends, finance, and propety, rather than technology, came in the Noughties to be seen as the key to wealth. Our bankers gambled at the top table.

The flaws in the domestic economy were concealed by an expansion oin public sector employment and a consumer boom. This was in turn financed by short term tax windfalls from a property bubble, which was eventually revealed as a mechanism for transferring capital, and development opportunities, away from the Irish state and people.

As the cash was flowing freely, and the aspirations were mighty, no one felt a thing at the time. Our political, business, professional and acdemic leadership bought the dream, even though we should have known better. I guess the personal gains were just too tempting at the top.

This was a Ponzi which involved a respected and respectable subversion of our own state. Many good things were done, but future generations are going to take a harsh view of the Old Sod(s). Dealing with the debt legacy without major social disturbance will not be a simple task.

@ paul quigley

Musing a bit here. I happened to be around the lads who developed and grew IONA technologies (out of TCD) and had a part in Baltimore.

Back in the day I shared a flat with an undergraduate programmer who used to stay up all night programming when the computers were free and kip when he should have been at his lectures.

The problems came not so much when then went from start-up to commercial, but when they went global.

It’s this shift that seems to be a problem for Irish industries (no Nokia for Ireland). The ambition seems to be largely to make something profitable that can be sold on to a bigger international company.

I wonder how (and are) Irish companies with ambitions to be international players supported in making that transition.

“Savers should be guaranteed their principle back but not interest. Nothing in life is risk free. Why should anybody be guaranteed a return on savings?”
Erm, because that is the price of financial stability? Because the alternative is rolling banking collapses a la 1930? Because the result of the alternative is that money will really be hoarded – put into hard commodities that can be easily stored and transported – benefitting no-one?

Perhaps the same thing would result from just guaranteeing pricipal, but I suspect that if the danger was that you would end up with no interest, the incentive to shift deposits at the first sign of danger would increase.

PS I don’t agree with the idea that deposits are ‘sticky’ in the modern world. Bondholders are more important as a source of stable capital, I reckon, since they are in for a fixed term and cannot escape that. A European bond-insurance system might be an idea, but it would have to have the teeth to close down and resolve banks that are mismanaged.

I understand your anger, but blaming others for political and banking failures in Ireland is a waste of time. Why have we had no trials? That is what I want to know. How far do they need to go down the pecking order?

@Gavin Kostick

It’s this shift that seems to be a problem for Irish industries (no Nokia for Ireland). The ambition seems to be largely to make something profitable that can be sold on to a bigger international company.

It is as if the old King James insult following the battle of the Boyne that the Irish were ‘a mob of cowstealers’ resonates down through history to this generation:

“Richard Hamilton ordered a body of foot to fall on the French refugees, who were still deep in water. He led the way, and, accompanied by several courageous gentlemen, advanced, sword in hand, into the river. But neither his commands nor his example could infuse courage into that mob of cowstealers…..

Like all quotes it was far from the truth. The truth being a lot more complex. The principal failure as always being in the leadership and abysmal lack of preparation and attention to detail.
That certainly has not changed.

@ Gavin Kostick

“Surge in agri-food exports leads to revised targets for food sector. Accurate summary or rose tinted glasses?”

It is, indeed, great to hear that Irish agri-food sector exports are on the rise again after falling off considerably in 2009 and here’s hoping it’s sustainable. As to accuracy, the report is careful in stating that the export performance is already ahead of target “in some areas.”

We should not lose sight of the fact that the Food Harvest 2020 report is a statement of vision and aspirations.

The emphasis on the consumer in the document is laudable but should not blind us to the current reality of a sector that exports primarily ingredients and retailer brand products (Jamesons and Baileys apart) overwhelmingly to the UK market.

It would be great if the industry were capable of putting recognisably “Irish”/indigenous sector food and drinks on supermarket shelves and in restaurants around the world at meaningful scale.

However, the document itself, while recognising structural and scale challenges, does not outline a strategy, or address the enormous investments required, to get us from where we are now to a “brand-centred, consumer-focused future”.

It may well be that we can achieve a sustained growth “surge” in coming years ( ingedients and own brand) but it would be wise/more truthful to be cautious about our ability to rival consumer goods brand strategies that cost € hundreds of millions over many decades.

It may even be the case that, in order to achieve sustained global scale in ingredients and consumer brands, strategic alliances with existing global players may be required. Realistically, the chances that these players would be “Irish” are quite slim.

Thanks for that. I think I’m probably just rehashing the argument that banking should be divided into two:
1: Boring banking looking after deposits and only guaranteeing the principal and
2: More high risk stuff
Those in charge of 1 can’t do anything with it – no investment – nothing. People going for option 2 can do whatever the hell they like but if they lose they lose.

The current system isn’t working (for 95% of people). Even in terms of pensions – it’s not working. There must be a better way of running the world than have one part running up huge savings and the other running up huge debt. Savings are a part of the problem too.

@ hoganmahew

“Beware of false prophets which come to you in green jerseys, but inwardly they are bondholders.

Ye shall know them by their biblical speechifying. Do men speak of hard work or default?”

@ Michael Hennigan

The problem stems not from the fact that Germany (with Austria) – demonstrably the two biggest beneficiaries from enlargement – blocked free movement of labour but that the other member states did not. In previous enlargements, various derogations were agreed for applicant countries but the idea that they should be agreed for member countries was a fatal error of political judgement. It has added to the problems of Germany and the EU in general. Migrants in Ireland, as the recent census shows, are not going anywhere. The same holds true for the UK. It is these anomalies that have to be addressed with no special arrangements for any country and least of all for one to hold itself up as an example for others.

@ Gavin Kostick

Agri-food and drink exports account for 5% of the annual total. Nevertheless, the sector has a lot of potential that is unlikely to be realised.

The welfare mentality is strong and data over the past decade shows that Sweden has produced as much cheese annually, as Ireland.

Fonterra, a New Zealand cooperative, is responsible for more than one-third of the international dairy products market.

As for startups and growing internationally in the high tech sector, the people in charge of policy and the related vested interests, would be very rich indeed if they could monetise bullshit.

Bruton/Sherlock appear to be using the O’Keeffe/Lenihan scriptwriter and the rest of the politicians are afraid to say boo to their perceived intellectual superiors in the universities.

The science/ tech journalists also appear to be captured.

Last week, the OECD published a report on entrepreneurship and the lack of some key data on Ireland was no surprise to me.

Several public sector reports are published each year on the breakdown of the €2.5bn annual science budget; don’t waste time looking for credible data on outcomes.

The OECD report reveals that while the taxpayer makes significant contributions directly and indirectly to every high tech startup, we have no mortality/survival data on firms and no longitudinal studies are commissioned to track how companies which are initially seen as having high potential, actually grow.

Enterprise Ireland told me last year that its supported research spinout companies over a decade, had a 90% survival rate. This suggests that the claim is either bullshit or most of the firms remain as tiny micro ones.

US and Israeli experience shows that high tech startups have a 30% chance of reaching their 7th birthday.

So wonder why the aspiration of the Innovation Taskforce of creating up to 235,000 jobs in a decade, is a fairytale!

The market didn’t count for these delusionists.

@ Michael Hennigan
@ Gavin Kostick

“The (agri-food) sector has a lot of potential that is unlikely to be realised”.

While broadly in agreement with your take take on agri-food exports, Michael, I am interested in a little more detail on the “potential” you feel is not being realised. And realistic strategies ( not visions, aspirations, targets, slogans or promotional ” Irish image” tactics) that might be defined and executed.

Unless I’m mistaken, the “ingredients” companies are realising export potential through supply of milk to “Irish” brands like Baileys that are marketed around the world by global multinationals as well as through the sale of their, in some cases, relatively high-tech, high-value, “industrial” (B2B) ingredients.

One or two of these companies are beginning to achieve global scale by establishing or acquiring in-market subsidiaries in, e.g. the US, albeit processing local supplies for sale in those markets. ( a bit like Toyota assembling cars in-market.

This is a valid and pragmatic and sustainable strategy and should help their sales “surge” .

In mentioning New Zealand’s Fonterra, the global “milk” market leader, you will be aware that, in an era of continuing market concentration ( Lactalis of France has just acquired Parmalat of Italy), Fonterra is on the look-out for a “European” supplier/partner on the basis that its future global growth will imply proportionately LESS New Zealand milk.

Sticking with my question about the nature of the unrealised potential you identify, I wonder if you are are talking about “potential” for identifiably “Irish” branded food products that global consumers would consistently find on the shelves of their major “local” retail outlets and restaurants?

This is certainly what the Harvest 2020 “vision” document seems to be on about.

In this context, over fifty years of Irish private and semi-state investment and promotion seem to have resulted in one brand of butter claiming about 10% of the small IMPORTED segment of the category in one “developed” market ( Germany).

So, the “ingredients” companies, by adopting real, pragmatic strategies that will increasingly use proportionately diminishing quantities of “Irish” product seem to be achieving hopefully sustainable success ( hats off to them!) while our “branding” “strategies (Jameson and Baileys aside) have gone nowhere.

This realistic strategic approach ( ingredients and, in the case of meat, retailer brand sales) is behind the recent “surge” in agri-food exports but may use proportionately less “Irish” production in future.

And we nowhere appear to be realistically assessing the massive cost/investment over time required for a true, global “branded” approach.

( Most successful food company brands are over 100 years old and involved billions to get where there are, survive and thrive).

A final question on where you see the “potential”, realised or not.

How many successful global companies, in what sectors, particularly in consumer products, are adopting marketing strategies based on the “nationality” of their products ( Germany with cars, France with luxury goods but the brands have “equity” far beyond the country of “origin”) and how valid, really, is this approach for Ireland given our track record over the last 50 years?

@ Stephen

When you bought your Merc in 2009 you paid the exact same for it as a German or anybody else. Mercs are tradable. Of course, you paid a lot more in transportation and distribution costs plus VRT, but these do not constitute a wealth transfer from Ireland to Germany. Unless I am totally missing something.

@ Richard Fedigan

Briefly, consolidation of the Irish dairy industry has often been proposed and until recent times, EU intervention was the reliable albeit low-profit cash cow.

Glanbia, the biggest processor tried to get rid of its Irish milk unit last year. Making cheese in the US is more profitable.

Baileys is a good example and I have argued that State funding of commercial-related research should be geared towards food rather than biotech.

A large number of Irish farmers are inactive and turnover of agricultural land was at 0.4% in 2010 – much lower than the French level.

@Richard Fedigan

There are pork and bacon products on Irish shelves that would be hard put to find supermarket space outside of the British Isles. Culture, taste, tradition, cost, whatever, but quality?

Dried blood is imported into Ireland from Spain. It is not a high tech process (spray blood on heated spinning drum), and I have no idea why the abattoirs haven’t tackled it as an add-on to the line.

Hides go out by the ark load as inputs to overseas shoe, clothes production, etc. The days of Winstanley are behind us. The focus on Smart Economy initiatives implies that official policy is to do down any dirty manual work revival. We are all professional elites now it seems. Sigh.

The ‘nutriceutical’ end of the food production seems like a reasonable growth path bet for the foreseeable future. One of the major Irish dairy players is expanding into the sport protein/supplement arena which was to be good news.

The Car Industry in Ireland was found fixing prices before, all of the reps for the car companies, renault, toyota etc caught in a hotel fixing minimum prices for a certain type of car.
So I could say cars are not a good example of overvalued Euros in Ireland and better costs in Germany, rather of collusion in Ireland.
On the other hand I would say that it highlights a very good example of a real and under reported problem in Ireland -Collusion.
Collusion in the property industry is still on-going.
Collusion is a massive problem in Ireland and one predicited by experts in EU integration such as Richard Baldwin as a result of single market forces.

@ The Alchemist, etc

“There are pork and bacon products on Irish shelves that would be hard put to find supermarket space outside of the British Isles. Culture, taste, tradition, cost, whatever, but quality?”

And yet whilst I thoroughly enjoyed buying in Normandy butchers this summer, I think Irish meats in independent Irish butchers stand up well – quality and value. Supermarket meats are a whole other thing.

@ Michael Hennigan

I clicked your link, but don’t quite get it. 94% of farmers income comes from subsidy, yet the farmers and putting out 100s of millions worth of farm produce. How is that happening?

@Michael Hennigan
@The Alchemist

Thanks, Michael. But “Baileys is a good example”. Of what, exactly?

I’m not familiar with the Baileys’ background – something about a brain-storming liquid lunch in a London pub, Irish Distillers & Vintners/IDV becoming part of Grand Met., which became Diageo.

Are you suggesting the State fund ” food” research for an “Irish” company to invent another Baileys ot two so that the company can court a take-over from another Diageo with global consumer marketing clout and we proceed from there?

Wouldn’t we find again ourselves in a position, like the Glanbia case you quote, where we continue to supply whatever the raw material is for the new product/brand until it becomes more profitable to source the raw material elsewhere?

I’m afraid I’m still asking you which “Irish” company(s) have the investment wherewithal for this “food” research-to-global consumer brand distribution strategy.? The State would have to invest in a good deal more than the research and I’m not at all convinced that this is an appropriate role for the Irish state in current, or indeed, other economic circumstances.

Like me, The Alchemist seems to “get” the “neutriceutical” research and B2B marketing strategy ( more “biotech” than “food”) as a reasonable path for growth in “food production” in the forseeable future as he puts it.

We’re still miles away from “Irish” food products being present at scale on global retail shelves.

Maybe this is not the right forum for this discussion but I’m not aware, leaving aside “visions” and targets, of serious strategic marketing thinking taking place in Ireland on this topic and can’t avoid the conclusion that there is considerable ambiguity, confusion and lack of rigour in the use of terminology like “Irish, brands, consumer, natural, image” and so on, as least as far as real consumer perception from out here in the market(s) is concerned.

On topic, inflation-adjusted average hourly earnings are up 30% in Germany in past 25 years compared with 6% in US.

@ Gavin Kostick

The 94% is an average.

A small number are responsible for a big slice of the output.

@ Richard Fedigan

Nestlé, the world’s biggest food company has about 5,000 working in R&D; Ireland has about 6,000 full-time equivalents on the public payroll.

Back to tennis!

Has Colm McC been captured?

“The Government has been busily tying its hands in both of these areas. There has been a categorical commitment not to cut rates of payment in the social welfare system and the Croke Park agreement on public service pay, inherited from the last government, rules out any further cuts in pay rates.

This restrictive agreement, widely seen as a victory for the public service unions, has been embraced by Fine Gael and Labour.”

I happen to know that he used to know precisely what is wrong with that first paragraph.

They say if you repeat something often enough it makes it true. Has Colm joined in?


Apparently the REER is a really messy beast, even more dangerous to play with in statistics than changes in unit labour costs.

Since 1990 the German share in total Irish imports has been around 7% to 9% irrespective of the Euro, while the Irish share in total German imports has gone up from under 1% to more than 2% (export performance). So the Tiger years have not led to more mercs or beamers relative to other nice things from elsewhere.

Incidentally, Germany has been running a huge trade deficit of 10 bn against Ireland for years, second only to China. And Ireland’s trade surplus relative to GNP or GDP pre 2008 was twice as large as Germany’s (now of course it is even a lot larger).

That is due of course to Ireland’s vibrant export sector, chiefly pharmaceutical products and other zero weight specialty chemicals being transferred around the world. The problem appears to be non-tradables (public sector services) and the domestic price level in general. And that grossly distorts REER in the case of Ireland.

So for a wealth transfer you’ll have to look elsewhere.

@Michael Hennigan

A parting shot ( after your “back to tennis”!).

Just so I understand your point about the state investing in “food” research (as opposed to “biotech”), when you say “Nestlé.. has about 5,000 working in R&D; Ireland has about 6,000 full-time equivalents on the public payroll.”, are you saying that the Irish State is already financing this number of R&D experts ( I didn’t know this) and therefore we ( Ireland Inc.) are, or should be, in a position to churn out (and market) roughly the same volume and value of fast moving consumer food SKUs for global retail shelves as Nestlé ( with an annual sales figure getting up towards the €100 billion.

Maybe I’ve got the wrong end of your stick but is that what you mean when you refer to “unrealised potential”?

@ HH

That is my read – there is no wealth transfer here. I look forward to Stephen’s response to your dismissal of his argument.

Unfortunately you’re stuck between the definitions of NEER and REER I think, details of their various constructions here. They aren’t that messy to deal with.

Another way to think about the difference (and wealth transfer) is to imagine the difference between NEER and REER for the Mercedes example if the car was bought between two regions of the same country (say Laois and Dublin) with Dublin experiencing a much greater increase in its price level.

@ Stephen

Thanks for engaging. I still can’t see the wealth transfer. The main difference between NEER and REER is that the former only covers the tradable sector whereas the latter includes the non-tradable sector.

I think Mercs are a bad example. A Merc is a tradable, its value in Laois and Dublin can’t differ very much no matter what the non tradable price levels are between the two regions. Let us consider a non-tradable. Let’s say a Big Mac in Dublin costs twice as much as a Big Mac in Laois. There would only be wealth transfer if, when in Laois, the Jackeen pays Dublin prices even though the menu prices are half that level.

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