Krugman on internal devaluations

To Paul Krugman’s recent posts on Ireland and the Baltics, I would add two points.

1. Ireland’s quarterly GDP data are notoriously volatile.

2. Ireland is a small, open economy, and it is by common consent a relatively flexible economy. It is also an economy in which labour is both inwardly and outwardly mobile. And yet unemployment here is now running at 14.5%. So do we really think that the Irish experience can be used to argue that the austerity/internal devaluation medicine is appropriate for countries like Greece or Italy?

71 thoughts on “Krugman on internal devaluations”

  1. K O’ R writes,

    It is also an economy in which labour is both inwardly and outwardly mobile.

    Not so.

    Ireland is a country that abuses non-public sector labour wholesale, and always has done so. The idea that a country has an escape type hatch for its labour resources which it deems are surplus to it’s requirements – is not the same thing at all – as saying that a country such as Ireland, is an economy in which labour is inwardly and outwardly mobile.

    Labour in Ireland is inwardly or outwardly mobile in Ireland, provided, you are moving inwardly and outwardly from the public sector, sheltered part of the Irish economy. Because that is the only part of the Irish economy, that is considered to be a real economy. The non-public portion of the Irish economy, is a part, that is viewed the same as the ‘informal’ economy in other parts of the world, like India. That is, some huge proportion of actual economic activity in India is comprised of activity that happens off-the-grid, in mega cities such as Mumbai.

    The non-public workforce is mobile in Ireland, that is for sure. But it is not so mobile inwardly and outwardly of the economy in Ireland. Rather it is stuck within the same, pretty much in a captive state, and requested to accept a second class type of status within many of our largest urban settlements such as Dublin. I would refer to it, in the way that ERSI economist John Fitzgerald wrote about it in the Sunday Tribune some time back (the website is no longer in existence, so I cannot link back to Fitzgerald’s article). What Fitzgerald described is the un-disciplined fashion in which labour is bided for in Ireland. Labour as a valuable resource was coaxed away from it’s more stable industrial based home during the boom, and shifted into construction oriented applications by means of excessive wages.

    I witnessed an entire generation of young people in Ireland, who found themselves ending up in trade schools, learning skills that are centuries old, to try and serve an over-heated, credit fuelled, construction oriented domestic Irish demand – at a critical time in Ireland, when we were starting to emerge as an industrial-based economy (and society). I think Dan O’Brien probably put it best when he said simply, We need to stop training builders.

    I do welcome the energy that members of the current government such as Ruairi Quinn have brought to such departments as Education in this country. But I have to ask the question, in what sense, are the vast army of trained bricklayers, chippies and plasterers that were produced in Ireland during the last decade or so, mobile inwardly or outwardly, out of anything, other than a big long dole queue? We are only blowing smoke at our own ego’s, if we try to fool ourselves into believing this is the best we can achieve. The reason, this isn’t even discussed, as I mention, is because the PUBLIC based employed sector of Irish economy, treats the PRIVATE sector, the same way as the INFORMAL sector is treated in other third world nations.

    That is the fundamental problem that exists in Ireland – or as an assistant museum curator from Dublin city once said to me after too many drinks in a pub – at least, I have a real job. It was no fun on that evening, being treated like an invisible man. It is no fun in 2011 either. BOH.

  2. @KO’R

    Transcript of IMF Press Conference ( tonight) on Europe, Antonio Borges, head of the IMF European Department (to parallel Krugman …)

    Now a couple of quick words on the program countries. We are relatively reassured about Ireland. The Irish Government has been remarkable in its performance, and of course, the battle is far from won, but things are moving exactly in the right direction. The economy is doing better than what was planned in the program, slightly better, and confidence is restored, interest rates are beginning to come down, foreign investors are interested in investing in Ireland. Economic growth is surprisingly strong, according to the latest figures, and we expect that the Irish economy, very much export driven and very much focused on efficiency and competitiveness, will be on the right track very soon.

    […]

    There is still a long way to go. We are not there yet. There is still very high unemployment. But the path right now is excellent, and I think we can argue that the program was the right program, and the Latvians were extremely competent at putting it in place.

    http://www.imf.org/external/np/tr/2011/tr092311a

    No comment!

    Greece will default within EZ shortly
    Portugal will default within EZ as soon as the IMF figure out the figures

    Ireland will … remain as supine and sub-servient as it ever was, same as it ever was – unless we win the World Cup or IrishEconomy.ie wins the Nobel Prize for Literature for the ground-breaking Notes on The Promissory Notes & The Greatest Bank Heist in World History

    Spain will have its banking sector taken over by EFSF … and the Catalans and the Basques will be looking at opportunites

    …. and Europe will survive.

  3. @all

    Lets observe how all The Great Silent Irish MPs vote on this one: next week … Blind Biddy is sharpening her pencils

    No to the undemocratic six-pack of prolonged austerity
    The six legislative acts on ‘economic governance’ will make citizens pay for the excesses of banks and other corporations; they will most likely prolong the crisis, curtail social rights, and exert an additional blow to democracy. A new response to the crisis is needed.

    On Wednesday 28th of September, the European Parliament will vote on the infamous and controversial ’six-pack’, six legislative acts that are to be a cornerstone in a new model of ‘economic governance’ and in the EU response to the economic crisis.

    We believe the policies of austerity that these proposals will strengthen and enforce, are a recipe for disaster. They will force crisis-ridden member states to stick to cuts in social expenditure, and to attack labour and social rights for many years to come. As in the thirties, cuts and attacks on wages will most likely lead to a prolonged recession.

    http://www.irishleftreview.org/2011/09/23/undemocratic-sixpack-prolonged-austerity/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+irishleftreview%2Ffeed+%28Irish+Left+Review%29

  4. @David
    The left in the main will pretend to love Arabs as they suck up their oil – any consumption austerity to build real capital is a alien concept to them – they are the sleeping partners of the CBs – useful whores to the system , nothing more.
    This ship of state is sinking – its holed below the water line – no dogma will save it.
    Only the physicality of reality will infuse the corpse with life.

  5. “So do we really think that the Irish experience can be used to argue that the austerity/internal devaluation medicine is appropriate for countries like Greece or Italy?”

    Isn’t Krugman’s entire point this except with USA substituted for Greece and Italy?

    I’ve argued for a long time that Krugman’s analysis of Ireland is unhelpful to the point of being damaging to our internal debate. Every time he talks about Ireland/Iceland/Latvia, it’s to fit his view that the US shouldn’t trim down its budget. We’re unfortunate enough to be one of the countries caught in the crossfire of his ideological battle with right-wing US economists.

  6. Meh

    Squinting at my phone I do my party piece: The ‘crisis’ has masked a fundamental change in the labour market. People who are ‘low skilled’ will not get jobs again in Ireland, Welfare will beat this. Indeed in general, income inequality will rise globally

    …..now I need to stop squinting at my phone…and try to sleep

  7. It’s foolish to argue that cuts in public spending against the backdrop of a faltering recovery in developed countries, would boost economic activity in the short-term.

    However, what should a country that is dependent on foreigners for most of its borrowing do?

    Irish professional economists appear to be as lost for credible answers as the general public, four years after the onset of the global credit crunch.

    Is there any research being done in this area?

    The ESRI will likely publish material on the issue in years to come but expect nothing in the short term.

    The issue of austerity reminds me of Harry Truman’s answer to a question on the difference between a recession and depression.

    Politicians, senior civil servants and academics face personal conflicts of interest on the issue and in this recession, for the first time, trade unions have effectively abandoned advocacy on behalf of individuals in the unprotected private sector who are experiencing most of the pain.

    The issue of mortgage debt forgiveness did briefly provide a glimpse of the plight of people who are generally invisible. It was also interesting that BlackRock Solutions, an American fund manager, was seen as providing an ostensibly painless solution.

    So what does austerity encompass?

    Greece has apparently thousands more teachers than classrooms; the well-off who generally evade taxes pay more in private tuition than the combined primary and secondary school budgets?

    Would it be austerity for Ireland, a bankrupt country, to clawback the big payouts for politicians and public sector staff?

    Not alone is there an Irish state guarantee of employment in the public sector and surplus staff are today being paid for doing no work, almost four decades after equal pay for women became an issue, it’s planned to have new permanent staff in the civil service on worse conditions than existing staff doing the same work – – all because politicians are afraid of upsetting the existing applecart and there is silence from others who choose less risky topics du jour.

    Anglo Bank plans to cut its payroll to 900 but who believes that the defunct bank has work for all of them?; the citizens of a failed entity that becomes a ward of the State have exalted status compared with compatriots who are dumped on the street every week.

    So ESRI, time for you folks to get ahead of the curve and try a bit of radicalism.

    Finally, when should failed systems be reformed? – – when an economy is showing signs of recovery or flat on its back?

    My answer is the latter, if it can happen at all.

    Japan, Italy, Greece, Ireland…

  8. Michael h
    “Would it be austerity for Ireland, a bankrupt country, to clawback the big payouts for politicians and public sector staff?”
    It would be for them. To what levels would you claw back? 2007? 2002? What do you think this would do to the already depressed domestic demand? No, I’m not saying its palatable, or easy, but it’s not clear we can cut our way out of this.
    Are you saying keep (by your reading surplus) staff numbers and cut wages, cut staff and keep wages, or cut both?
    Your posts generally seem to concentrate on bewailing everything. As Karl Whelan has pointed out times innumerable, simply cutting public sector wages will not, in and of itself, solve this horror. I suspect that that is not the whole of your argument but it’s the whole here.
    Do you think perhaps some cutting of cozy private sector cartels might be a tad useful?
    Your comments are frankly incoherent, not meaning to be offensive. Perhaps if you asked the site moderators for a guest post to outline the Michael Hennigan road to recovery it might help us all to understand

  9. @Tonicforthetroops
    Clicking on Michael Hennigan’s name (in blue) will take you to his website, where he publishes his own views and much else besides.

  10. [I posted this twice already but it didn’t show up; hopefully it won’t appear three times.]

    @Dave
    I’d be delighted to hear that Krugman’s analysis of Ireland is having a big impact on the Irish debate, if only I could convince myself that it’s true. Sadly, the likes of Dan O’Brien and Stephen Collins have many more local readers than he does. I’ve never seen anyone reading Currencies and Crises on the DART, or even The Return of Depression Economics.

    Of course Krugman’s two main points about Ireland’s fiscal contraction are (1) it’s a slow and painful way of restoring competitiveness; and (2) even to the extent that it works, it doesn’t scale to larger, more closed economies.

    It is very much in Ireland’s interest that people get Krugman’s message. Austerity in the UK, the EZ and the US does harm to our chances of recovery. If our austerity is to have a chance of working we definitely do not want everyone else copying us. That’s as bad for them as it is for us.

  11. @Kevin Donoghue
    Absolutely – though I’d challenge anyone to seriously read The Return of Depression Economics on a commuter train, an easy read though it is.

    “(1) it’s a slow and painful way of restoring competitiveness”
    Yes, yes it is. Two things, though:
    1. The choice was made to do it slowly – Latvia and Iceland did it quickly; one with a currency peg and no default, the other without and with.
    2. What are the alternatives? Are they more or less palateable.

    Mr. Krugman started out the crisis by saying that Ireland had to do austerity, there wasn’t a cheaper alternative. He then seemed to flip flop on this and used us as a poster-boy for the failure of austerity (as he used Latvia). Now that we (and Latvia) appear to be making a go of it, we don’t count any more.

    “(2) even to the extent that it works, it doesn’t scale to larger, more closed economies.”
    Yes, this is also true. The larger economies (in which I’d include the EU as a whole) have some serious thinking to do about their terms of trade. Their espousal of free trade in the parts they thought they could dominate (or at least survive) has rebounded on them.

    “It is very much in Ireland’s interest that people get Krugman’s message. Austerity in the UK, the EZ and the US does harm to our chances of recovery. If our austerity is to have a chance of working we definitely do not want everyone else copying us. That’s as bad for them as it is for us.”

    The problem with this is also twofold:
    1. The person giving the message has not been consistent in it – sometimes austerity is inevitable, sometimes it is always wrong.
    2. There is a large body of evidence (and indeed theory!) that says that even the larger economies will struggle with excessive debt loads. Some of the larger economies have the opportunity to generate more revenue for themselves, but even so, that is not the same as pursuing expansionary fiscal policies. The bind that balance sheet recessions present is that they are a punishment for past mistakes – failing to pay down debt in the good times to allow for spending in the bad. Without the room for large-scale borrowing, even large economies are simply kicking the can more feebly down the road.

  12. @ All

    from US mutual fund giant Franklin Templeton’s latest investor newsletter update, Ireland now represents their biggest eurozone exposure:

    “Eurozone Exposure: We have been increasingly encouraged by the commitment of the Irish authorities toward achieving fiscal sustainability, as well as the combination of political and popular support for the difficult measures necessary to bring Ireland’s economy out of crisis and into recovery. Based on improving economic fundamentals and what we regarded as an attractive valuation, we recently built an exposure to the sovereign debt of Ireland, a member country of the eurozone. Through the course of our analysis we felt that the valuation did not adequately reflect the improvements that we believe Irish economic fundamentals are likely to continue to experience. Furthermore, by experiencing a decline in real wages, Ireland has orchestrated an internal currency devaluation and, as a result, is now running a sizeable trade surplus. We feel that the recent gross domestic product (GDP) data and the outperformance by the Irish government of its fiscal targets support this view, and this is currently our main eurozone government bond exposure.”

  13. @ All

    The debate with regard to austerity seems somewhat surreal in circumstances where a country has no choice in the matter, other than between the devil (austerity) and the deep blue sea (default and an even bigger collapse).

    For Ireland, the real issue is whether or not the concept of equality becomes the guiding principle for the conduct of economic policy. It is not, after all, that hard a principle to grasp. There should be no two-tier health system, for example, and the conditions of employment should be the same for all workers, whether in the public or the private sectors (with appropriate protections for the avoidance of (i) arbitrary dismissal in respect of all and (ii) the misuse of power in respect of a fairly narrow cohort of public servants, not including academia).

    Such an approach is the secret of success of the Northern European economies, the most successful being those that have adopted the principle most rigorously, notably the Scandinavian countries, as it ensures the efficient use of a country’s resources, whatever they may be and in all walks of life.

    Do’nt hold your breath! The history of Ireland since independence suggests that the belief in “pull” as the road to success is deeply embedded in the Irish psyche. That, and the dream of all Irish mothers until the advent of the Celtic Tiger, now deceased, of a safe job in the public service for her offspring. In this, they do not seem to have differed much from their Greek, Portuguese, Spanish, Italian and French counterparts. I wonder what they have in common!

  14. @hogan

    Parts of the Greek economy provide evidence that Keynesian stimulus can go on for too long and can undermine an economy’s long run prospects. Discuss. (30 marks)

  15. @ Tonicforthetroops

    Are you worried about your pensions bonanza?

    A blog post isn’t a national plan and I do know that the annual budget comprises more than pay.

    Excluding the capital budget, public procurement costs €9bn — lawyers get half a billion; doctors, pharmacists and so on get their slice.

    Surplus staff in the public service should be left go if they cannot be practically deployed.

    If for example housing department staffs in local authorities have little work to do, even the motivated would end up with no motivation eventually.

    There are 188 planning authorities.

    Bord Snip proposed over €5bn in potential savings from various reforms including amalgamations of local authorities.

    What’s the justification for the pensions link with earnings?

    The welfare budget was massively expanded by new schemes during the boom, in addition to the standard cash payments, which compare well with for example the UK.

    Part of the €2.5bn annual science budget should be used to support startups in other sectors of the economy.

    The late Brian Lenihan said in 2008 that salaries would be benchmarked with other similar size European economies. That plan appears to have been shelved because it would be too revealing.

    Two examples, one from Sweden, one of Europe’s few star economies, show the potential for savings elsewhere. The litany would be very long.

    1. More than four of five new Swedish members of parliament earned an increase in their annual income following their election to the Riksdag after the Sept 2010 general election.

    Salary €72,000; Standard TD’s salary €92,000

    Swedish MPs’ expenses are very modest compared with Irish counterparts who even get lunch money.

    In addition to generous expenses and 2 paid assistants, an independent TD trousers €205,000 tax free over 5 years without even having to submit one receipt.

    2. Quangos

    In 2010, the chief executive of the National Consumer Agency earned €176K plus 4K expenses – plus pension put her over €200K.

    She earns mare than the Fed chairman

    The NCA has 14 board members and their fees were €140k

    One small quango cost €5.5m in the year.

    Multiply that by several hundred and you would get thousands of fee recipients (some retired civil servants can make handy earners from nodding through such board meetings) and more than small change in total costs.

  16. On that kink above to previous Krugmam stuff, does anybody have the time to re-word this bit to make it clearer?

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

    One way to see this latter point is to compare net exports with GDP in the lands of ice and ire:

    [graph Eurostat]

    Net exports as % of GDP
    Iceland’s positive swing has been about twice as large as Ireland’s — and we’re talking an extra 10 points of GDP here. That’s a lot of extra stimulus, and to the extent that it was due to devaluation, that’s a major plus for having your own currency.”

    Paul?

    .

  17. @ DOCM,

    “In this, they do not seem to have differed much from their Greek, Portuguese, Spanish, Italian and French counterparts. I wonder what they have in common!”

    A warm generous spirit, an appreciation for good wine/stout/olives and a cracking sense of fun with just a hint of the anarchic on the side.

    @ Eoin Bond,

    “from US mutual fund giant Franklin Templeton”

    You know, I’m always so impressed by these bond guys that I kind of imagined them to be like William Wallace: You know seven feet tall. Kills men by the hundreds. And if HE were here, he’d consume the English with fireballs from his eyes, and bolts of lightning from his arse.

    So I checked up Franklin Templeton, got the name of the investor who wrote that, and then searched in google images to see what he looked like. His name is Michael Hasenstab, and you know, although he doesn’t look a lot like William Wallace, doesn’t wear face paint or a skirt, he does kind of have an aura about him, a sort of saintly glow that makes me feel all warm and fuzzy.

  18. @hoganmahew: The person giving the message [Krugman] has not been consistent in it – sometimes austerity is inevitable, sometimes it is always wrong.

    I’ve seen this claim quite frequently, but I’ve never seen it supported with a link to Krugman saying that the Irish government has any choice in the matter. I think he’s quite clear about the fact that Ireland is not free to set its own policy. There’s no inconsistency involved in saying that Irish policy is (a) controlled by foreigners and (b) it is a bad policy even for a small country (and downright crazy for a large one).

    There is a large body of evidence (and indeed theory!) that says that even the larger economies will struggle with excessive debt loads.

    Sure, but the time to struggle with them is when the economy recovers. A look at long-term bond yields will disprove the notion that the US and Japan are struggling with their debt. Krugman’s prescription for the US is deficits now, coupled with a clear long-term plan for tax-rates and Medicare, which is by far the most serious fiscal worry. He would also like the Fed to adopt a higher inflation target, which will not only create an incentive to invest in real capital (as opposed to financial assets) but also reduce the burden of both household and public debt.

    There are arguments against his position of course; but having read at least 90% of his prodigious output, I find him very consistent indeed.

  19. Michael
    I dont have a pension bonanza. I wish i had.
    And, if you read my post, I’m nit saying I disagree with what I think is your basic point. However, that is not the bee and end all. It’s wholly pointless to compare wages without comparing the effective cost of living and tax rates.
    By all means cull the quangos. Nobody will really notice. But, again, the hole is made up of too low taxes and too much expenditure. You generally seem here ( I mostly don’t but will now read your own site but don’t recall seeing lots of detailed plans there) a one-sided view. I presume you wouldn’t have an issue with higher tax levels here?

  20. @KD: “Sure, but the time to struggle with them is when the economy recovers.”

    This is where I sense the predicament – ‘the economy recovers’.

    I am slowly, steadily, being led to the realisation that ‘recovery-as-usual’ cannot occur. There are structural variables in the global economic system, which were either absent in the past, or if they were present, have only risen to salience in the last two decades. Hence, the contemporary economic Model-in-Use, Permagrowth (which sucks on the ideology teat of Capitalism) may have reached an inflection point and is headed toward its physical maximum – 2/3 decades perhaps?

    We (the global economy – in aggregate) cannot all ‘grow’ together. It is not possible in a finite system. So, there will be ‘winners and losers’ – and the global economy would be worse off, overall. I think.

    If, and its an iffy if, our economy ‘recovers’, then our local politicians will want to divert all spare resources to bolster their re-election. Must be popular at next election! Else they’ll be FiannaFailized!

    Brian Snr.

  21. @disgruntled, eoin

    Hasenstab! C’mon!

    This is what proper, celebrity investor / pundits thought at the beginning of August:

    http://www.bloomberg.com/news/2011-08-09/billionaire-ross-buys-assets-as-fear-not-economics-fuels-market-declines.html

    “Ross joins Templeton Asset Management’s Mark Mobius and Marc Faber, publisher of the Gloom, Boom & Doom report, who said they see opportunities in oversold markets. The MSCI World (MXWO) Index has declined almost 7 percent since Aug. 4, the day before Standard & Poor’s downgraded the U.S.’s long-term sovereign debt rating that added to investor pessimism.

    “Has the world really gotten 10, 12, 15 percent worse in the last 48 hours? I don’t think so,” Ross said”

  22. Ah, Michael Hennigan again with the old PS “pensions bonanza” canard. Tell me, Michael, while you enjoy life in your Malaysian aerie, have you got all of your retirement savings invested in Irish government bonds? If you think being a creditor of the Irish government is so wonderful, you should. After all, you could make nearly 9% on the 10-year…

    Not interested? Then tell me again how my pension, which is backed by nothing more than the faith and credit of the same government that has to pay those outlandish bond yields, is “gold plated” and the very very bestest thing there is in the whole wide world.

  23. Na seriously grumpy. Those guys don’t glow so much, although that might just be the pictures in the link you provided.

  24. @Brian Woods Snr.

    ‘… Permagrowth (which sucks on the ideology teat of Capitalism) may have reached an inflection point …’

    Some in Amsterdam agree with you

    http://www.presseurop.eu/en/content/cartoon/982971-feeding-time

    @Ernie Ball, Tonicforthetroops

    Your vested interests are showing … this is a public blog; pls tuck them in.
    Blind Biddy has had her disability allowance cut twice; the successful visiting family teachers for the Traveller community has been discontinued; etc etc etc a certain group of senior public upper_echelon ‘servants’ refused any cuts to their inflated sarlary/pensions and got away with it. Irish Trade Unionism has largely dumped on those not in the public sector; a vast range of ‘sheltered’ gougers from tribunal barristers to crony directors on quangoite welfare, through odious payoffs for failed ass-holes of various hues, etc through tax sleight of hand for those who benefited from ponzi schemes etc ….. all sukkin on the tits of the real productive sectors of the society/economy that remains on its knees …… some ruthless weaning is in order: as in the link above – sometimes the Tits Bite Back.

  25. @DO’D: Jeeze! I had no idea. Pics is def better! 1000 words an all! 8)

    Maybe we should have a Cartoon-of-the Day under the masthead.

    Brian Snr.

  26. @ disgruntled observer

    Close! What I had in mind was the fact that, unlike their Scandinavian sisters, they are not in the workforce in an organised manner based on equality of treatment between the sexes. However, Ireland, in the usual unplanned manner, seems to be drifting towards the Northern model through the tax equalisation scheme introduced by McCreevy but, of course, without the necessary concomitant of near free access to child-minding facilities.

    Listening to Brenadan Howlin at midday, I realised that pressures from the Troika are forcing us to confront indirectly the glaring pension anomalies between the public and private sectors. Running away from hard choices having finally bankrupted the state, maybe the future will be different as it is in the hands of outsiders with a Northern rather than a Mediterranean bent!

  27. @ All

    A hot off the presses item from the FT Deutschland which seems to confirm:

    (i) agreement to speed up adoption of the ESM (Schaeuble being quoted as “having nothing against it””)

    (ii) added “flexibility” for the EFSF (one anonymous diplomat being quoted as speaking of its firepower being increased by a factor of five)

    (iii) Weidman weighing in for the Bundesbank ruling out monetary financing of government deficits but with Schaeuble hinting that there were other means

    (iv) the IIF being quoted that in the matter of PSI, circumstances had changed since the July agreement.

    http://www.ftd.de/politik/international/:schuldenkrise-schaeuble-will-rettungsschirm-schon-2012-aktivieren/60108537.html

  28. @ All

    Reuters Deutschland confirms the story.

    http://de.reuters.com/article/topNews/idDEBEE78O00320110925

    There are two major additional elements. First, as real cash would (finally) have to be put up front by the creditor countries, the antics of the True Finns in the matter of collateral (and the Slovaks generally) would no longer be effective. Second, there could be no question of increasing the funding of the EFSF as this would imply a major change requiring that the agreement of the Bundestag being sought on Thursday would not be possible as a new parliamentary procedure would have to be started.

    Unfortunately, Berlin has put itself in a bit of a bind in insisting on a change to Article 136 of the TFEU – requiring ratification by all 27 member states – in order to allow it to participate in the ESM. But, like a delayed birthday present, it is the thought that counts. It remains to be seen if it proves sufficient to mollify the injured party: the dreaded markets.

  29. @ Ernie Ball

    I have no money for bonds.

    As for your unfunded pension expectations, you could fall under a bus long before pension age or any number of other things could happen on a bigger scale.

    However, are you worse off than the majority of private sector workers, who have no occupational pension and are entitled to a contributory State pension of about 33% of average earnings; in contrast, countries like Austria have a public pension system that covers 90% of pre-retirement earnings for low and middle income earners.

    For those with occupational pensions, you may be unaware of the negative real returns on Irish pension funds over the past decade and the current decade is not likely to be different; employer contributions to defined contribution schemes will give people little, even if returns improve.

    As for being a canard, pensions now account for 13.9% of the total public sector pay and pension totall, up from 8.8% in 2006. Overall, the pensions bill has increased from €1,433m in 2006 to €2,390m in 2011 representing a 66.8% increase over the period (pay in contrast decreased by 0.3%).

  30. Let’s see: the government encourages/threatens ps workers to avail of early retirement so it can stop paying their salaries, thereby saving money. Then, when (predictably) pensions come to represent a larger proportion of the (shrinking) public sector pay and pensions bill, you think it’s convenient enough to use that fact as as a club with which to beat the pensioners.

    Do you ever get tired of such intellectual dishonesty, mr finFACTS?

  31. @Kevin Donoghue
    http://www.nytimes.com/2009/04/20/opinion/20krugman.html?_r=3
    “As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.”
    Fine.

    “And the lesson of Ireland is that you really, really don’t want to put yourself in a position where you have to punish your economy in order to save your banks. ”
    Yes.

    But as Seamus Coffey has shown time and again, only about a third of the increase in national debt can be put down to the banks. A lot, for sure, but not the most important factor. The most important factor was “when I have it, I spend it”.

    And if we had not choice but austerity, then don’t use us (or Iceland or Latvia who equally had only bad choices) to compare with the US or the UK or Germany who do have choices. Apples and pears isn’t even the half of it.

    Oh and another thing, a quarterly SAAR growth rate of GDP of 10ish% is not a small uptick… (yes, yes, the figures are volatile and seasonal and the seasonal adjustment doesn’t seem to work all that well, but still…).
    (Comments directed at Mr. Krugman not Mr. Donoghue!).

  32. @hoganmahew
    You’ve no disagreement with the two remarks you quote. As to how we got into this mess, AFAIAC the bank-driven increase in debt is what landed us in the IMF ward. The McCreevy Doctrine did a lot of damage of course, that’s not in dispute. You will remember (as Krugman certainly does) that before the roof caved in George Osborne was pointing to Ireland as a shining example.

    As to the proper use of international comparisons, Krugman isn’t doing what you think he’s doing. He’s contrasting two approaches to macroeconomics: roughly, saltwater and freshwater schools. On one side you have Krugman, DeLong, Thoma (to mention only the regular bloggers) and on the other you have Barro, Alesina and Lucas, who don’t blog but their views are well known. What Krugman is saying is, look what the two schools of thought say about fiscal multipliers and look what you see happening in places where policy is very expansionary or contractionary. One school is reality-based and the other one publishes elegant papers with a lot of guff about transversality conditions and suchlike.

    Whether the policy is adopted from choice or necessity has very little to do with this. The expansionary policies which ended the Great Depression didn’t have lot to do with choice. The governments of Germany, Japan and Italy put paid to any hopes Britain and America may have had of sticking with fiscal rectitude. The question is not about why the decision gets made but whether the multiplier, dY/dG, is significantly greater than zero in an economy with severe unemployment.

    As to whether the latest upturn is a big deal, Brad DeLong’s graphs tell the story. I’d say “uptick” is a fair description, but let the reader decide:

    http://delong.typepad.com/sdj/2011/09/department-of-huh-ireland-cuir-siao-ar-ghabhar-agus-is-ghabhar-edition.html

  33. @ David O’Donnell

    Trade Unionists opposed all of that which you, justifiably, complain about. They have also campaigned on behalf of private sector workers. A cursory examination of their websites alone will tell you that. Or perhaps protecting Blind Biddy’s pension is now to be regarded as a campaign on behalf of vested interests?

  34. Hoganmahew
    “But as Seamus Coffey has shown time and again, only about a third of the increase in national debt can be put down to the banks. A lot, for sure, but not the most important factor. The most important factor was “when I have it, I spend it”.”
    How easily, politically and economically, would it have been to deal with the 2/3 debt? A whole lot more I suspect. Straws and camels backs come to mind.

  35. @Tonicforthetroops
    It’s so 20th century, it’s so 1970s… that’s the problem. Runaway government spending (as evidenced by the deficit) would have caught up with us anyway. It is a constant in closure of bond markets. It lies behind Hungary and Latvia’s problems. Portugal and Greece have not had banking crises… so far. Before the IMF were called, the stories were about the deficit trajectory, not about the banks. I think that small countries just aren’t ‘permitted’ to carry the debt load that larger ones are.

    Thefineartofsurfacing might be more appropriate.

  36. “What do you think this would do to the already depressed domestic demand? No, I’m not saying its palatable, or easy, but it’s not clear we can cut our way out of this.”

    And what is borrowing to pay public service wages going to do for future demand (and let’s not forget savings / investment). The demand siders don’t care if the money is coming from the future – as long as it is coming to them and now.

  37. @Kevin Donoghue
    Not just George Osborne, but M. Trichet too. They, though, were wrong. As was McCreevy. You can’t divorce the history of the economy and public finances from the trigger points. The deficit increased dramatically with the bursting of the bubble. It destroyed both the banking system and the economy. The government chose initially to try and save both, moving on the night of the guarantee to trying to save only the banks.

    It is not good enough just to blame the banks. There are vast departments of government that are supposed to look at these things and assess whether the economy is moving in a sound direction. They failed. The seeds of destruction for both the banks and the economy were sown in 2002 as there was an effort to prevent a property collapse then.

    Mr. Krugman is doing more than contrasting schools of economic thought. He is attempting to score political points in an increasingly polarised America. He has held us up as victims of the banksters with a captive government compared to the government for the people in Iceland. If you look at the link above, you’ll see plenty of Icelanders bemoaning the outcomes for the people of Iceland of their situation. Unlike here, savings have gone (in purchasing power terms), debt remains, capital controls are still in place. Iceland is no more an open economy than Cuba.

    You’re a funny guy, though, I’ll give you that. Reality based versus elegant guff papers based? Well, if that’s reality, I want my ulcer back. I don’t hold that either school is ‘right’. Neither inhabits reality. Me? I recognise that there is no free lunch. Consequences have actions [sic] and therefore actors. Even without the bankjob, we’d have to cut back to near surplus. With it the cuts are all the more severe.

    We could do with more people in jail, but I wouldn’t limit it to just bankers. For agreeing with me on that, the current Icelandic government is to be applauded.

  38. PS I don’t see how a saar of 10% GDP growth can be airily dismissed as an uptick. If two quarters of contraction makes a recession, two quarters of expansion marks a recovery, no? These, as Dreaded_Estate pointed out, are the first back-to-back quarterly GDP increases (seasonally adjusted) since Q3 2006. Personally, I’ll wait until next quarter to see that both GDP and GNP are back-to-back positive before popping the champage corks, but to dismiss it as an uptick is pretty ignorant (and I’ve a lot of time for Mr. Krugman’s analyses with what is wrong, as you can see from above).

  39. @Dom K

    Well, the majority of people do tend to live in the now. So if you reduce demand now, how far into the future do you anticipate demand to manifest itself? Tomorrow? Next month? Next year? 5 years time? 10? Surely you have an answer. The long term unemployed shouldn’t be kept waiting.

  40. Yobbah,

    I have an answer for you. If you think it is wise making 50k a year and owing 50k on your credit card adding another 2k every month ‘to maintain your demand’ then why don’t you do it yourself? Because that is what you’re asking your government to do. Instead you should ask yourself ‘how far in the future do you anticipate your kids to slave away to support the demand of those who live in ‘the now”.

  41. Not really. Public finances are not the same as a household budget. I’m merely asking the government do what governments normally have done in recessions in the past. If there is no demand in the now to keep businesses open, where will our kids work in the future? At least you’ve answered my question: approx 20 years.

  42. Yobbah,

    Money is money but what you’re really saying is ‘public money is not the same as my money’. We know that already – that’s why the various governments of the western hemisphere are in the poo-poo up to their knees.

  43. @hoganmahew
    You’re making to much of this ‘uptick’ word. Look at the context:

    “…Tyler Cowen and others seem, mysteriously, to believe that any uptick in Irish GDP somehow refutes Keynesian analysis….”

    He is talking about what theory predicts and what it doesn’t. Austerity forces the real exchange rate down, eventually doing what devaluation would do more quickly if we had that option. As competitiveness improves the economy turns around. Recent Irish experience seems to me to fit that prediction.

  44. “There’s no guarantee that they will reopen, why would they if there’s no demand.”

    Demand will return once imbalances built up during bubble years clear and people stop feeling like they’re going to be royally screwed with every new budget.

  45. At least that’s something we can agree on. I think the “austerity fatigue” which the IMF warned about several years back is creeping in.

  46. @ Hoganmahew

    “As was McCreevy. You can’t divorce the history of the economy and public finances from the trigger points. The deficit increased dramatically with the bursting of the bubble. It destroyed both the banking system and the economy….”

    WTF? Did I read that right? The deficit destroyed the banks? Do you care to elaborate? Also, since we ran a surplus up until 2008 the deficit didn’t increase then, it began then.

    “It is not good enough just to blame the banks….”

    Why not? Sure you can partly blame the Mc Creevyite, PD, view of the world, and for a number of reasons: for the gutting of regulatory power and practice; for the gutting of the tax base so as to subsidize private business by increasing net wages at the expense of gross; for the belief in such a ridiculous thing as the laffer curve; for the insane tax breaks given to property “investors,” amongst other “investors;” for a whole myriad of insanities related to neoliberalism (which to be honest has always been government policy here, even before the term was invented), but you can’t blame him for running a deficit.

    The average surplus from 2000 to 2008 was 1.8% if I remember correctly and exceeded only by Finland which over the same period ran one of 4.1% (saw this on a graph recently and can’t remember where to reference). By 2008 we had the lowest public debt in the eurozone, and a sovereign wealth fund of approx 25% GDP. Now you can make the argument that we should have been Finland, but two things: the Finnish had a very recent banking crisis to inform their policy and considering the scale of the inflows it would have been considerably less than the surplus required.

    Lest it’s forgotten, at the time we had a booming population growth with all the demands for social services that implies. Everyone in the country was clamouring for more public services and rightly so. It had been historically underfunded. Equally, as JTO often points out, we had a demographic demand for housing which saw in the 1990’s a very real price increase based on lack of supply which was subsequently ripe for an explosion during a credit boom. Now this was all happening in the midst of an international credit boom which was without precedence and of which Ireland became one of the largest per capita beneficiaries/victims. Just think of the oil price, think of euro interest rates over the period versus what was required here.

    And what was central to all of that? The banks.

    So the banks go to the wall. Now lets assume, just for arguments sake, that at the end of this, and just to be ridiculously conservative, we end up with a public debt of 150%. As you point out the banks are only a third of that, but that still makes up approx 50% of GDP and would leave us with a load of 100%. Now even in this conservative scenario that leaves us with a load less than belgium and marginally more than France, but we would have a SWF of approx 25% of GDP and a cash balance of approx €30 billion euros to invest. We could absent messed up banks have the mother of all stimulus programs, and do you know something, the markets wouldn’t have blinked an eye. In fact, they would have been clamouring to fund it. Our yields would be core European yields. And that’s if we had even to run a stimulus, as the banks would have been providing credit. Our deficit would have come down in a much less forced manner, and we could have grown our way out.

    All this stuff about deficits is rubbish. Absent the banks our deficits, whilst on the large side where far from incomparable with most other countries, and were even less than some. The markets didn’t shut them out. It did us. It wasn’t the deficits that did it, and saying so is just disingenuous.

    There’s plenty of blame to go around in all of this. But the banks were key.

  47. @ Ernie Balls

    Let them eat cake, Mr. Allen!

    You really did check the facts before accusing me of intellectual dishonesty?

    I’m not going to waste time trying to change preset views nurtured in the smugness of your sheltered workshop.

    It’s a shame to term the ministerial exit packages bonanzas; they had after all arranged this system while keeping employer social security costs down for the expendable.

    Enron/Wall Street CDO-style dodgy accounting supports the delusion that costs last estimated at €129bn are not real costs after all.

    Why would one wonder that additional pension years’ entitlements were so liberally doled out like smarties across the public sector for the insiders inside the SuperVIP tent – – because there was no apparent cost?

    It wasn’t a capitalist running dog but a civil servant who put the real world annual funding cost of an additional pension year for a senior judge or minister at 62% of salary net of employee contributions?

  48. As opposed to your preset views nurtured by your dog-eared copy of Atlas Shrugged

    The constant conflation of ministerial pensions with those of ordinary PS workers when you think it makes your point is but another example of what I’m talking about.

  49. @disgruntled
    “WTF? Did I read that right? The deficit destroyed the banks? Do you care to elaborate? Also, since we ran a surplus up until 2008 the deficit didn’t increase then, it began then.”
    No, you didn’t read it right. The bubble destroyed the banks, just as it destroyed government finances, since bubble income had been committed to current spending.

    The surpluses were based on private borrowing from at least 2003 onwards and maybe earlier. That we were in surplus is just not relevant, except to highlight the number of fools abroad and locally.

  50. PS “All this stuff about deficits is rubbish. Absent the banks our deficits, whilst on the large side where far from incomparable with most other countries, and were even less than some.”
    Eh, no. The banks account for a third of the increase in borrowing. How many times does it have to be said? Absent the banks, our deficits are still the largest in the world (as a percentage of GDP; never mind as a percentage of GNP…).

  51. @ Hoggie

    phew. Had me worried i missed something there. But i agree with you. In summary, we have experienced two seperate but related mega-crises – one a banking/property crisis, the other a fiscal crisis. The banking crisis is, at this stage, hopefully over (at a huge cost), but while the deficit crisis has been stabilised and a plan is in place, it is still unknown how soon we can call it properly ‘over’ (ie 3-4% deficit).

    You could argue for a third, interrelated crisis which will actually have longer, more drawn out repercussions in the unemployment problem.

  52. @ Hogan

    “Eh, no. The banks account for a third of the increase in borrowing. How many times does it have to be said? Absent the banks, our deficits are still the largest in the world (as a percentage of GDP; never mind as a percentage of GNP…).”

    So basically, you completely deny a tenet of macro-economics. That with a cash balance of €30 billion, which if I remember correctly we still have, (ear marked for the banks under the MOU it should be noted) and the NPRF (of which we’ve shovelled most of into the banks) we couldn’t have done something to grow the economy and so shrink the debt/gdp and deficit/gdp ratios. This isn’t the 1970’s again, this is the 1930’s. It’s deflation and deleveraging, not inflation. It’s almost comical that we talk about this country being one of the most open in the world, and yet you completely deny the context of our crisis and how it worked to pervert the obvious solution. I’m not saying there aren’t local causes and there are a myriad of them which I listed in my post above, but this just smacks of wilful blindness.

    Mr Bond above serves to prove my point. He says: “In summary, we have experienced two seperate but related mega-crises – one a banking/property crisis, the other a fiscal crisis.”

    How are they separate? Do tell… Property crashes, unemployment rises, social transfers rise, taxes fall, GDP falls, investment falls, taxes fall again, GDP falls again, etc, etc, and guess what happens, deficits rise. The point is to reverse the dynamic.

    You know, somehow or other, I think we’ll just agree to disagree, because I can tell you, nothing you’ve said is in the least convincing. It offers no sense of the dynamics of a system. And something tells me, that it wouldn’t matter who said what to you, you have your mind settled on some version of the truth. So I’ll leave it at that.

  53. @ Disgruntled

    it has now been universally accepted that we were running a structural deficit in the 2003-2007 period (probably even earlier), at the same time as a cyclical mega surplus. When the cyclical mega surplus turned into a large deficit, when combined with the already in place structural deficit we ended up with a full-on fiscal crisis. The requirement to rein in the structural deficit at the same time as running a cyclical deficit, at the same time as experiencing a banking/property bust, is what has caused a global recession to have depression-like impact on our economy.

  54. @ DoD

    what is that Brad de Long “Cuir Siao ar Ghabhar Agus Is Ghabhar” thing ?

    It’s like an acid trip where random Irish words emerge from the ether.

  55. @Bond, Hogan etc

    We need a LEGO schematic showing the link between Bank external borrowing 2000 on from the vichy_banks, to megadevelopers, to citizenFools, and how this external from the banks filtered through into ‘false’ revenue to allow PD/FF to gorge on LSD (as seafoid puts it) to buy votes, allow the upper_echelons (of all gouger hues) to sit on each others remuneration committees where Atlas Really Shrugged through well thumbed copies of Timothy Leary (CFD, lite touch, criminal ultra_neolib ideology etc) and whereas the ‘deficits/surpluses’ reported were essentially false abstractions etc a decade where 1/3 of annual exchequer income is based on LSD political economics does tend to add up when the sand castles fall down when the big rain strikes …. hence the present mess with the ‘real deficit’ …. et etc and so many still don’t get it! And the fools bought it again in 2007 … and in 2011.

    Simply dictate it to a nine yr old – a few crayons – and we get it posted here.

  56. @disgruntled
    “And something tells me, that it wouldn’t matter who said what to you, you have your mind settled on some version of the truth. So I’ll leave it at that.”
    Et tu Brute…

  57. Austerity is only forced on Goverments by exteranl events, a forieign bank that is looking for cash, a foriegn enitity that has been promised large amounts of cash from a patiorict minister of finance, a large army looking for your natural resources. Austerity by its very nature reduces GDP and increases the GDP/debt ratio. Cop on Ireland.

  58. “…..it is still unknown how soon we can call it properly ‘over’ (ie 3-4% deficit). ”

    And let us not forget debt/GDP ratio that has to come under 80% to have any chance of reasonable growth not being hampered by debt repayment.

  59. Ireland’s skilled labour are not sitting on their duffs bemoaning their fate. On separate occasions I met two in northern Germany in May one was a carpenter and the other worked heavy machinery on the Russian gas pipeline. In the eighties the bars in Mainz were full of Irish skilled labour. There is always a few building booms going on in the world and the Irish gravitate to them. Alberta in Canada with its oil sands construction is active at the moment and sucking in skilled labour from as far away as Chile.

    Granted the pickings are now slim in GB, Aus. N.Z. and the good ole USA. If as now seems possible we go into a world wide recession then Irish skilled labour will be trapped at home. This will not augur well for political stability given the performance of the previous and present governments.

  60. The latest from Krugman:

    To be fair, Ireland is doing a bit better than feared; it’s achieving a significant amount of amount of “internal devaluation” via deflation, which is leading investors to mark up the possibility that it might actually avoid default. I should also make clear that given the commitment to the euro, Ireland had to engage in some kind of austerity program, although it wouldn’t have been as draconian if not for the decision to socialize all the of the banks’ debt.

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