Shouldering the Burden of our Debt

The demands made on Germany in the Versailles Treaty were certainly very tough, but it would be more to the point if we considered how much the allies actually managed to collect. Anyway it’s not a precedent that German diplomats are likely to cite in negotiations. As for Ireland’s performance from 1984 to 2007, if we can repeat those growth-rates we’ll be richer than Californians. It’s not going to happen. Rapid growth is much easier to achieve if you start from a low base.

In any case I don’t think Summers is particularly concerned about Ireland. Italy and Spain are the big worries now.

but didnt we get our budget surplus for most of that period by building housing housing housing – ie partly what led us into this mess?

@Brendan Walsh

Quite a reasonable article. The key is in the heading
“Shouldering the Burden”.
There are very few shoulders presenting at the moment.
Either for tax increases or pay reductions. That is the problem.
And as of now the broadest shoulders are bearing the lightest burden.

As each party to the EFSF in turn suffers a lowered credit rating and soaring borrowing costs the burden on the remaining creditworthy sovereigns rises. Spain and Italy rather than being rescuers will have to be rescued. France seems to be next in line since at some point only France and Germany will remain to shoulder the major share of the burden. So who is going to do the rescuing? At what cost?

A new EFSF sized at the GDP of Germany wouldn’t be large enough. Is Europe insolvent? Has Europe finally run out of Other People’s Money?

Of the sixteen sovereigns in the EFSF Ireland, Spain, Italy, Cyprus, Portugal and Greece will definitely need bailouts 1.0, 2.0 or 3.0 with France not far behind.

@Overseas commentator
But of course – the CBs have had a policey of credit creation over and above GDP for half a century at least , the only scenario I can think of that could reverse this trend is if they discover new a Physics under the mountain in Cern and can convert that into applied science.
Even if they do I am sure the CBs can find a way of blowing near infinite energy on infinite derivatives.
The monetory system is absurdly corrupt – its a joke really…..on us peasants.

We ran a primary budget surplus for over 15 years – from 1984 to as recently as 2007. This surplus exceeded 7% of GDP for several years at the turn of the century and helped us reduce our debt/GDP ratio from a peak of 120 per cent in 1986 to less than 25 per cent in 2007.

And what good was it? All that money that could have been spent on improving this country, went off abroad to buy BMWs for unmarried 25 year olds. A waste. 15 years of colossal, unneccessary waste.

How many years can we expect this time around?

From Ivan Yeats article in today’s Examiner

“Central Bank and economic consultants Indecon paint a horror story of personal wealth destruction. 300,000 people have seen their income, assets and net worth halve. €280 billion of wealth has been destroyed.”

Donal de Buitleir needs to add this to the disadvantages column.

My only problem with his article is that he outlines the benefits and disadvantages we have now as opposed to the 1980’s well, but in his conclusion he only seems to focus on the benefits?

The conclusions seem to be at the optimistic end of the realism scale.

@ DOCM

Hi, some commentators (namely Bini-Smaghi)- have suggested the pain endured by Irish taxpayer to recap and pay off bank bonds (~50% of GDP) was appropriate “punishment” for the failure of the electorate to demand national banking regulation.

I was making point that such ha 50% GDP burden is huge vs the 83% that Germany had imposed on it for invading its neighbours, starting a war that killed 16 Million people, sinking 1/3 British merchant fleet, etc.

@OMF

“And what good was it? All that money that could have been spent on improving this country, went off abroad to buy BMWs for unmarried 25 year olds. A waste. 15 years of colossal, unneccessary waste.”

I don’t think the state would have spent that money any better; they didn’t do a top class job spending what they had. Also, had the Gov’t had a bigger expenditure budget, wouldn’t we be in an even bigger hole now, more than likely?

What was German household and private sector debt/income in 1919? I bet a lot lower than Ireland in 2011.

Dork there is no grand strategy. There is no plan. There are only overeducated and underexperienced technocrats sitting at their desks typing random things.

There is no secret army of mutants lying underground, awaiting orders to strike. There is only a legion of high strung trader, wired directly to the moon and billion dollar bank accounts.

Personally, I think that reality is a lot scarier.

While the relative economic scale of our present difficulties could be compared to those endured by Germany after 1918, the nature of the two crises is significantly different.
The proportion of German government expenditure devoted to paying reparations peaked at 35% in 1922 and averaged around 20% throughout the 1920s, a figure not too dissimilar to our projected interest payments for the next decade.*1

Where our predicament differs from the one faced by the Germans is in the way in which our spending is financed, with the hyperinflation of the Weimar government surely doing far more damage to the fundamentals of the economy and the fabric of society than the tax increases and spending cuts required to fund our own debt payments.

The only scenario in which we would find ourselves in an even remotely similar position to the Germany of the 1920s would be if, in the event of our leaving the euro, we then attempted to use a fragile Irish punt to honour debts denominated in euros, and if the government were to engage in enthusiastic monetary financing of its deficits.

Its worth noting that even without Versailles, by 1918 Germany’s economy was already burdened by the costs of waging the war itself, which were about $47 billion.*2 By comparison, German GDP was (I think) about $16 billion in 1914. Most of this war expenditure was financed by effectively printing money, not through taxation. The inflation that went with this compounded the difficulty of meeting reparations payments whose value was set at the reichsmark’s pre-war exchange rate with gold and did much to erode living standards.
Also, the wartime policy of ‘France will pay’ left Germans psychologically unprepared to accept the economic consequences of waging the war itself, let alone of reparations. I suppose a parallel could be drawn between this and the unwillingness of some sections of Irish life to accept that the cost of squandering vast suns of money on overvalued property have to be paid in one way or another.

*1 Niall Ferguson, Paper and Iron: Hamburg Business and German Politics in the Era of Inflation, (1995) p.279.
*2 Gerd Hardach, First World War, (1987) p.153.

@Eoin, All

ECB, what a shambles.

Unicredit suspended again…

Seems to be having some effect on Irish bonds but Spain and Italy are still north of 6%. I see a report somewhere that they are buying in 20-25m orders and this would explain why it is working for Irish and not the big boys. As Grumpy says …its a shambles…and we saw the effect of their previous interventions with yields continuing to rise. You have to wonder how serious they are with the relatively small purchases of 72b to date.

@OMF,

“Dork there is no grand strategy. There is no plan. There are only overeducated and underexperienced technocrats sitting at their desks typing random things.

There is no secret army of mutants lying underground, awaiting orders to strike. There is only a legion of high strung trader, wired directly to the moon and billion dollar bank accounts.”

Couldn’t agree more!

@Jesper
I see a great battle between two very powerful but extremely sick organisations – The US treasuary and its misfits & The BIS & its minions.

This antagonistic relationship goes back to the Last Great depression when the US treasury took the Gold away from the Federal Banks.
The FED asked to become a member of the BIS in the 50s but was politely refused at the time.
During the Clinton administration this policey was overturned and indeed US treasury secretaries worked to undermine the American economy via the perversely named strong dollar policey under Rubin & Summers so that the Euro could become a viable world currency.
(Some very strange activities happened during the mid – late 90s)
But here is a very interesting pro BIS piece that comes in 4 parts I believe.

http://www.youtube.com/watch?v=2ssrcD5GdPQ
Its always been about Dollar Bitches Vs Gold Bitches.

I’m not enormously impressed with Donal’s article. There are two main issues.

One is that a lot of the positive facts he throws up apply equally to the numerator and the denominator. OK, there are more employed now than there were in 1985. That means our GDP is bigger, but it’s made our debt bigger too. It does nothing to make a high debt to GDP ratio any more sustainable. Higher labour force participation by women actually makes the position worse because it limits the scope to grow by putting more people to work.

Etc. Etc.

The second is that the numbers are all expressed in terms of GDP. There’s nothing wrong with that so long as you also quote them in terms of GNP which a great many of us think is a more valid reference point for many purposes – calculations on the sustainabilty of debt included.

Here’s where I run into a little problem. I have not found a nice simple set of debt/GDP and debt/GNP tables. When I take debt data from the NTMA and divide it by national accounts data from the CSO, I find the debt/GDP ratio peaked at 106% in 1987. The peak debt/GNP ratio comes out at 117.6%, which is awfully close to Donal’s 119% for the debt/GDP ratio.

It appears to me that all going well we are heading for a debt/GNP ratio in the region of 140%, which (proceeding on the heroic assumption that I may actually have my numbers right) is 22% higher than the worst we saw in the 1980s.

I would be delighted if someone more authoritative than I could put up some proper debt/GNP and debt/GDP figures.

If, per Donal, the tax to GDP ratio was 34.6% in 1985, that was equivalent to 38.6% of GNP. If we are heading for a tax to GDP ratio of 30.5% in 2011 and the GDP/GNP ratio holds constant at the 2010 figure, we are looking at a tax to GNP ratio of 37.1% in 2011 – not far short of where we were in 1985.

Regardless of whether my numbers are right, Donal’s presentation of the data is unbalanced, and should be challenged.

One other point. In 1985, 56% of our national debt was domestic, which we could presumably have inflated away to our heart’s content. I’m not sure to what extent we did. Now, 100% of it is denominated in what is for all important purposes foreign currency.

@BeeCeeTee /ALL

I was looking at some other data from the article referred to which need more scrutiny.

The CSO Survey on Income and Living Conditions (SILC) 2007 showed that about 80 per cent of households own their homes, while mortgaged households represented only 22 per cent of all households.

Of the 786,000 private residential mortgages in Ireland, just under 80,000 or 10.1 per cent of the total are either in arrears greater than 90 days or have been restructured.

Based on these figures 786,000 represent 20% of all housholds, giving total households in the State of over 3,500,000. Surely not!!!

Of course some of these stats may be contaminated by landlords accounting for a portion of ‘residential mortgages’.

The 786,000 (780K) checks out with Seamus Coffey’s analysis:
http://economic-incentives.blogspot.com/2011/06/further-thoughts-on-mortgages-and-debt.html.
The rest I am not clear on.

While I thought Brendan Walsh’s argument were reasonable, I think the DeBuitleir article is not at all convincing.

Several articles in today’s paper give the lie to any serious approach to solving the nation’s probems.

1. It has taken three years for one of the largest developers to ‘agree’ to sell his private jet.
2. Another developer was enjoying corporate box hospitality at yesterdays horse show.
3. FAS workers still want to hold on to their pre-retirement pay bonus. And it would appear being allowed to do so. And it is a bonus. Not a deal. A bonus.

There is no point in people, well meaning or otherwise, saying that ‘the hay can be saved’, when the horse has been sold to pay the debt, and one is left only with a bad ass to do the mowing.

We need specifics. Who will do the mowing.
One must specify who will bear the burden of adjustment.
Only then we can say if the the exhortations are reasonable.

@Chris

Ireland has the latest average age for marriage in the EU.

Also did you ever wonder why they are unmarried? Simply if a young man can not afford a home, or seem to be able to afford a home in the future his attractiveness as a potential partner falls. The property price fixing that went on not only caused the country financial pain now, it also caused many a possible marriage not to become a reality. Those 25 years olds are the ones suffering the most.

JTO again:

I’m afraid that your claim is false, as is your analysis of the reasons.

Wikipedia (admittedly not always the most reliable source) gives the following figures for the average age of first marriage in most countries. These are the
figures for 16 western European countries and, for comparison 4 eastern European countries:

http://en.wikipedia.org/wiki/Age_at_first_marriage

men:

[01] Sweden 35.1
[02] Denmark 34.8
[03] Norway 33.4
[04] Germany 33.0
[05] Italy 32.8
[06] Finland 32.5
[07] Ireland 32.1 <<<<
[08] Spain 32.0
[09] Greece 31.8
[10] Austria 31.7
[11] France 31.6
[12] Switzerland 31.4
[13] Belgium 30.7
[14] Netherlands 30.7
[15] U. Kingdom 30.7
[16] Albania 27.7
[17] Portugal 27.5
[18] Russia 26.1
[19] Ukraine 25.9
[20] Moldova 25.8

women:

[01] Sweden 32.5
[02] Denmark 32.4
[03] Norway 31.1
[04] Ireland 30.4 <<<<
[05] Finland 30.2
[06] Germany 30.0
[07] Spain 29.8
[08] Italy 29.7
[09] France 29.6
[10] Switzerland 29.1
[11] Greece 28.9
[12] Austria 28.9
[13] Belgium 28.5
[14] U. Kingdom 28.5
[15] Netherlands 28.3
[16] Portugal 25.7
[17] Russia 23.3
[18] Ukraine 23.1
[19] Moldova 23.0
[20] Albania 22.4

So, Ireland was 7th latest for men and 4th latest for women, not ‘latest’ that you claim. Furthermore, your attribution of this phenomenom to the inability of Irish people in their 20s to be able to afford houses does not stand up. Look at the list.

The rich countries are all at the top (ie latest marriage age). Sweden and Denmark have the latest marriage age for both men and women. The figures for Ireland are very close to the rich Nordic countries. The poor countries, like Portugal, Russia, Ukraine, Moldova and Albania, are at the bottom (ie earliest marriage age).

The reason has nothing to do with the affordability of houses. Is it seriously to be suggested that people in their 20s in Sweden, Denmark and Ireland are less able to afford a house than their counterparts in Portugal, Russia, Ukraine, Moldova and Albania.

I think that the reason has much more to do with how women are treated economically. In poor countries, where women have very few good job prospects, they see early marriage as a financial lifeline, and hence will marry the first thing in trousers that comes along, no matter how grotesque. In rich countries, where women have a much better chance of becoming financially independent, they are far more likely to wait for ‘Mr Right’. I think that, if you log on to an internet marriage/dating site tonight, you’ll find that a lot more Russian, Ukranian and Albanian ladies are requesting your company than Swedish, Danish or Irish ladies, and the reason has nothing to do with the first group being better able to afford houses.

@remnant

Thank you for your reference to Ochino et al. This is a fascinating study of how the Germans extracted reparations (!) from Vichy France between 1940 and 1944 which were used to finance Hitler’s wars. The authors point out that the common assumption that reparations don’t work is false. This had already been demonstrated by Eugene White in his 2001 Review of European Economic History study of the reparations imposed on France after the Congress of Vienna. They paid up and regained their place among the Great Powers. White concludes that ‘Reparations are more common that is usually supposed and have a long and varied history.’

All of this runs counter to the maintained hypothesis in Summers’ article that reparations don’t work.

As for the relative burden of the reparations imposed on Germany in the Versailles Treaty, I can see that this is worthy of a Blog in its own right.
My estimate of German GDP in 1919 and later years is taken from Angus Maddison’s generally-accepted ‘The World Economy: Historical Statistics’ OECD, 2003. His estimate of Germany’s GDP in 1919 is 156.6 billion ‘1990 Geary-Khamis dollars’.

There are many estimates of the magnitude of the reparations bill presented to Germany by the Entente Powers. The Inter-Allied Reparations Commission set the amount at around 226 billion Reichsmarks or gold marks (about $600 billion in today’s money). This last figure seems robust and was my reason for claiming that the reparation represented about four times Germany’s GDP.

In 1921, the reparations bill was reduced to 132 billion Reichsmarks and further reductions were negotiated in the course of the 1920s, but it remained enormous relative to Germany’s GDP, tax base and exports.

The bottom line is that the casual orthodoxy that claims that our current burden of indebtedness is comparable to that which the Allies tried to extract from Germany after WWI is erroneous.

And finally, for those who asked, yes Germany did pay up – about one eight of the original claims were paid during the 1920s. The Treaty was repudiated by the Nazi regime, but payments were resumed after WWII and a final payment of GBP 59.5 million was made in 2010.

@Brendan,
I’m not certain I understand you right, but if I don’t can you put me right?

From what you say, reparations were set at 400% of GDP. An eighth of that, or 50% of GDP was paid in the 1920s. That means an average of 5% of GDP per annum over the decade.

In a quick scout for information I don’t see any reference to interest on the reparations bill, other than in the case of some funds relating to Belgium.

I don’t know how much our “taking one for the team” has landed us with in debt, but I’ll guess something of the order of 40% of GDP. Let’s say we pay a weighted average 4% on that for argument’s sake. Then we are talking about 1.6% of GDP per annum to service it and perhaps another 1% to make progress on paying it down.

2.6% ain’t the original German reparations bill of 5% per annum, but it’s not as big a difference as you seem to be suggesting.

@BeeCeeTee

Here’s my last offering on German history!

The original Allied bill to Germany was 269 billion Reichsmarks, about $800 billion in today’s values.

The number I cited (132 billion Reichsmarks) reflects the concessions that were made in 1921.

Since Keynes’ was writing in 1919 the larger number is more appropriate for assessing Larry Summers’ claim that the burdens now placed on Greece, Ireland, and Portugal ‘are comparable to the burdens Keynes warned about in ‘The Economic Consequences of the Peace’. (And we should not forget that in addition to the financial settlement, the Versailles Treaty imposed many non-financial penalties on Germany.)

Again I refer to Eugene White’s article (‘Making the French Pay’ European Review of Economic History, (5), 2001) for an attempt to compare of the burdens of some major reparations agreements.

The Wikipedia entry on the topic is helpful and makes clear that many later historians do not share Keynes’ assessment of the burden of the reparations bill. In fact there seems to be somewhat of a consensus among contemporary historians that Germany could have paid but lacked the political will to do so:
http://en.wikipedia.org/wiki/World_War_I_reparations
I hesitate to draw lessons for the contemporary situation from these revisions to Keynes’ views.

For an update on the post-WWII history of the outstanding claims against Germany see:
http://www.ihr.org/jhr/v17/v17n6p19_reparations.html

An account of how it all ended (and some nice period photos) is available at:
http://www.dailymail.co.uk/news/article-1315869/Germany-end-World-War-One-reparations-92-years-59m-final-payment.html#ixzz1U8mkQOyI

Now back to the Irish situation!