Author: Alan Matthews

A left view of the economic crisis

Michael Burke has an analysis of the nature of Ireland’s economic crisis in the Socialist Economic Bulletin which is a blog published by Ken Livingstone. His account of how we got into our economic crisis is by and large a coherent one (an unfortunate typo suggesting that NAMA proposes to pay €54bn for assets worth €77bn notwithstanding) although one can quibble with some of his judgements. For example, his claim that the April 2009 budget was regressive is not supported by the results reported by Tim Callan using the ESRI tax-benefit model on this blog. One point he highlights to which I had seen little reference before is the implication of the collapse in domestic asset values for our net external debt position, given that much of this borrowing was financed by foreign bondholders.

In contrast to the detailed analysis of past history, his proposals for responding to the crisis are little more than sketched out and are thus less convincing. Competitiveness is not seen as a problem despite his clear analysis that a big contribution to our current trade surplus is the collapse in imports of investment goods and that our relatively good export performance is heavily influenced by the special circumstances of the dominant chemicals sector. One proposal is to delay fiscal adjustment because of its deflationary consequences (a demand already being made by the trade union movement). Another is to “take control” of leading property and construction companies presumably in order to restore economic activity in construction, although why this would make sense given the substantial over-capacity that exists in both residential and commercial property is not clear. He also proposes nationalisation of the banks and repudiation of some or all of their accumulated debts, policies which have been debated and which have found some support on this blog.

O’Rourke on trade in the Financial Times

Kevin’s comparison of the trajectory of trade in the Great Depression and the current depression (which I think was stimulated by a post on this blog) gets good coverage in the Financial Times today.

The economics of the Lisbon vote

In this post, I want to raise the economic consequences of the vote on the Lisbon Treaty on October 2nd, not the economic consequences of the Lisbon Treaty itself. The post is prompted by my amazement at hearing the comments of Professor Ray Kinsella of the Smurfit Business School when debating the economic consequences of a No vote with Pramit Ghose of Bloxham on Morning Ireland this morning.

Ghose argued that the financial markets will exact a price if there is No vote on October 2nd. Noting that 80% of Ireland’s debt is owned by international investors, he argued that a No vote would raise uncertainty for these investors who would consequently seek an extra premium for lending to Ireland. Going back to the experience in January–February earlier this year when Anglo-Irish bank was nationalised, he suggested that this premium could be an extra 1% on the borrowing rate the Irish government would have to pay.

This view of an adverse financial fallout from a No vote was disputed by Ray Kinsella, essentially on the basis of efficient market theory. His argument essentially is that the markets are already pricing in the possibility of Ireland saying No, so that if we actually say No, there will be no effect on the premium paid over German Bunds. As evidence for this, he noted that the yield premium over Bunds has been narrowing in recent months, again underlining the complacency with which the markets are viewing a No vote.

Now, Ray Kinsella went on to say that he did not think that the Treaty was good for either Ireland or Europe, so presumably he will be a No voter himself. But, from where I sit, there is a big difference between factoring in the probability of a No vote and the actual reality of a No vote. If markets are reading the opinion polls, they might assess the probability at, say, 40%. If voters do reject the Treaty, the probability ex post is 100%. This is surely not an insignificant difference.

More generally, I was interested to learn that there are economists prominent in public debate who are advocating a No vote on 2nd October. This seems to fly in the face of the Indecon survey which reported that Ireland’s economists are strongly in favour of a Yes vote, though their survey was confined to academic and research institute economists and specifically excluded economists working in the media and banks or other financial institutions. Their findings indicate that 91% of the economists surveyed believed that, taking all factors into account, Ireland’s overall economic interests would be best served by a ‘Yes’ vote.

As I was on holiday at the time, I did not respond to the Indecon survey, but I am a strong supporter of a Yes vote on October 2nd. Perhaps, given the understandable attention to NAMA in these posts over recent weeks, we have not given enough attention to debating the issues at stake in the Lisbon Treaty referendum. Although I want to confine this thread to what readers think is riding on the outcome of the referendum for the economy, if demand is there a thread could be opened on the economic implications of the Treaty provisions themselves. While financial markets are one channel whereby the referendum vote will affect the economy, there are clearly other channels as well, including foreign investment inflows as was highlighted at the benefit bash in Farmleigh over the weekend.

Certainly, Ray Kinsella’s comments were a wake-up call for me that Yes supporters can leave nothing to chance for referendum day.

Stiglitz report on measuring economic progress

The report of the high-powered Commission on the Measurement of Economic Progress and Social Performance set up by President Sarkozy and chaired by Joe Stiglitz and with a stellar cast of economists amongst its members was published today. President Sarkozy has promised to follow the report by measuring well-being as well as gross domestic product. The full report does not appear to be available yet on the Commission’s website, [Update:  link is now available]. For a flavour of the issues raised in the report, see Stiglitz’s commentary on the GDP fetish.

Agri-Aware survey of food industry performance and prospects

Agri-Aware, a body set up by organisations in the farm and food industries to improve the image and understanding of agriculture and the food sector in Ireland, has just issued a report The Agriculture and Food Industry – Bigger, Brighter, Tougher prepared by Jim Power of Friends First. The report examines data on the employment performance of the food industry during the past twelve months as well as surveying the opinions of industry managers on the main challenges they face over the next 12 months as well as their views on prospects for the coming 5 years.

Unfortunately, the main finding that the report itself highlights – that one in seven jobs in Ireland are dependent on the agriculture and food industries – appears to be based on a flawed analysis of the survey data. No one would deny that the agri-food sector has a hugely important role to play in helping to turn the real economy round, and there is no doubt that it faces real challenges, as usefully documented in this report. But the attempt to puff the industry up into playing a bigger role than it actually does is simply part of the special interest pleading we see so much of in the run-up to the next budget.

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