Author: Brendan Walsh

Successful Completion of Tenth Review of Troika Programme

In a statement issued at the end of this Review yesterday, we were given the by-now familiar plaudits for achieving various benchmarks. Going forward, ‘strict implementation’ of this year’s budgetary targets is urged.

The gravity of the unemployment situation is acknowledged. ‘Swift action needed to deal with unemployment’ the newspaper headlines proclaimed. The onus for this is placed on the Irish government and a familiar list of policies proposed, including for example ‘the need for enhanced engagement with the unemployed and the opening up of competition in sheltered sectors like legal services’.

I wonder how much our readers think increased competition between lawyers will contribute to lowering our unemployment rate.

Keynes at UCD

This week marks the eightieth anniversary of Keynes’s inaugural Finlay lecture at UCD.

Charles Lysaght has a background piece about it in today’s Irish Times.

‘Panic Driven Austerity’

Paul de Grauwe and Yuemei Ji have an interesting commentary on the causes and effects of austerity here.

Trends in Living Standards

Readers might be interested in a medium-term perspective on Irish living standards.

Eurostat compiles a series on GDP per person measured in PP$. The values for each country are expressed relative to the average for the EU27 or EU15. This provides a time series that can be used to gauge the trend in relative living standards before and during the recession.

My first graph shows the values for Ireland, Spain, Portugal and Greece from 1999 to 2011.
As usual a caveat attaches to the use of GDP data for Ireland, where the gap between national income and GDP is unusually large and has been growing. In 1999 national income / GDP ratio was 86 per cent, by 2011 it had fallen to 80.7 per cent. Thus not only does the use of GDP tend to overstate the level of Ireland’s standard of living, it also distorts the trend. For this reason I include a series for Ireland that adjusts the GDP data downward by the national income / GDP ratio

The graph shows that according to GDP Ireland started from a position about 10 per cent above the EU15 average in 1999 and zoomed ahead to enjoy livings standards over 30 per above the average by 2007. According to the more realistic measure based on national income, Ireland reached the EU15 average in 2002 and was about 15 per cent above it by 2007. The other three countries achieved some modest catch-up over these years.

All four countries suffered a marked decline in living standards relative to the EU15 average after 2007. The scale of the decline is surprisingly uneven, with Ireland (on the GDP measure) suffering a 14 per cent drop from 2007 to 2011, while the drop in Portugal was only 1.6 per cent, 4.9 per cent in Spain and 8.0 per cent in Greece.

If we focus on the national income measure for Ireland the drop in living standards was almost 20 per cent. This implies that we are now one fifth worse off relative to the EU15 than we were four years ago. Our standard of living has fallen below the EU15 average for the first time since 2001.

The second graph compares Ireland with the UK. When the comparison is based on Irish GDP, it may be seen that we went way ahead of the UK between 1998 and 2007. After 2007 the Irish relative position deteriorated but by this measure we still remained almost 20 per cent ahead of the UK in 2011. When the comparison is based on national income the Irish performance relative to the UK is much less impressive. We drew ahead briefly between 2005 and 2008, but are now some 5 per cent behind.

Inflation in Ireland and the Euro area

In an earlier post I drew attention to the extent to which Ireland’s recent apparent competitive gains reflected the weakness of the euro relative to the dollar and sterling.

Another component of competitiveness is, of course, our rate of inflation relative to that of the Euro area as a whole.

It is therefore of interest to put on record the inflation rates in Ireland and in the Euro area since 1999.

This is facilitated by the European Central Bank’s website, from which monthly data on the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) may be readily downloaded.

The following Chart tells the story.

It may be seen that for the first five years of the new monetary union Ireland’s inflation rate was – contrary to expectations – significantly higher than the Euro area average.  This resulted in a significant loss of competitiveness relative to the rest of the Euro area.

For the years between 2004 and 2007 our inflation rate behaved as expected in a monetary union and differed little from that of the Euro area average.

During 2009 and 2010 we experienced more deflation than the rest of the Euro area. This helped restore some of the competitiveness we had lost in the early years of membership and the ‘internal devaluation’ was hailed at the time in the belief that it would play a big role in getting the economy moving again.

Since 2010, however, our inflation rate has been climbing back up towards the Euro area average.

It would seem that any further ‘restoration of competitiveness’ will require further weakness of the euro on the foreign exchange markets.