My thanks to commenter Eamonn Moran who pointed me to this paper recently published by the Central Bank, and which deserves a wide readership, especially among advocates of “internal devaluation” strategies across the Eurozone periphery. The Irish figures are very striking, not just in terms of how few firms have cut wages here, but of the reasons why.
Month: June 2013
There are costs and benefits to everything, even emigration at a time of economic crisis. We Irish have probably gotten so used to (silently) thanking our lucky stars that our young are not hanging around at home being unemployed (or at least, not to the same extent as the young in the Mediterranean), that we may have forgotten this. Indeed, I had forgotten that I wrote this back in 2010. But now Paul Krugman points us to this post (and see also this one) which brings up the issue, and it is worth thinking about it seriously.
Long run GDP and tax revenue may not suffer that much if people return home eventually, especially if they bring home new skills and contacts, but what if funding crises happen before then? And are we perhaps too optimistic about the prospects for return migration? My generation came home in droves because of the 1990s boom, but that sort of growth is obviously never going to be replicated: you can only catch up on the technological frontier once. And as I pointed out in that earlier post, there is scope for negative feedback loops here, related to the overhang of government debt.
All in all, another reason to think that debt restructuring is going to eventually have to take place around the Eurozone periphery.
(H/T Alan Taylor who suggested the title of the post. That is a clue as to what it refers to by the way.)
Details here.
Apologies for the belated response to Paul Krugman’s post on Ireland (linked to here by Stephen last week). Paul focuses on Ireland’s poor post-crisis growth performance, noting that real GDP is still well below its peak at the end of the property/credit bubble. There is no disagreement that the growth performance – and especially the performance domestic demand – has been weak. This reflects a combination of harsh austerity measures, distressed balance sheets and the weak performance of Ireland’s trading partners.
This graph extends the real GDP series further back in time. In judging the continuing shortfall from the peak in 2008, we should not forget the unsustainability of the bubble-driven growth that took place from 2002 onwards. It is also worth noting that the recent flatness of the GDP graph hides a marked slowdown in net export growth (mainly due to the weak performance of the UK and euro zone economies) combined with tentative signs of a stabilisation in domestic demand (see here).
But any assessment of Ireland’s progress is incomplete without also looking at this picture. From early 2010 to mid 2011 Ireland steadily lost its capacity to borrow from financial markets. It is noteworthy that creditworthiness continued to erode in the months after entering into the Troika programme. This reflected bad news on fundamentals – notably the size of banking-related losses – but also bad signals about the emerging nature of the euro zone’s lender of last resort in terms of the potential for forced debt restructurings and the seniority of official creditors. The interaction of better news on the a LOLR (most recently the announcement of the ECB’s OMT programme) and the demonstration that Ireland could meet conditions for official assistance has led to a dramatic fall in borrowing costs.
Given where we were in mid 2011 – particularly the danger of a default that would have added another vicious twist to the adverse feedback loops that laid the economy low – I can’t see how a fair assessment can leave the creditworthiness developments out.
The EU Commission have recommended to the Council that Latvia be admitted as the 18th member of the Euro area from the first of January 2014. Documents here.