Brendan Walsh was the guest on the Eamon Dunphy show last Saturday. You can listen to the interview (which covers the current crisis, amongst other topics) here.
Author: Philip Lane
Two current policy problems for Ireland are to tackle the loss of external competitiveness and to determine the appropriate level and composition of government spending. These issues are linked, since government spending affects the real exchange rate for Ireland, through its impact on the relative price of nontraded goods in terms of traded goods.
In a new paper “Fiscal Policy and International Competitiveness: Evidence from Ireland” (joint with my TCD colleague Vahagn Galstyan), we show that the long-run behaviour of the real exchange rate and the relative price of nontradables is increasing in the long-run level of government consumption but decreasing in the long-run level of government investment.
The intuition is that government consumption tends to drive up economy-wide wages and nontraded prices (since the public sector competes for scarce labour and non-traded inputs), while government investment in the long run improves productivity (especially in the non-traded sector) which is associated with a reduction in the relative price level.
The appropriate levels of government consumption and government investment depend on a range of socio-political factors, but these results are worth noting in any debate about the connections between fiscal policy and external competitiveness.
The ECB has released its latest Financial Stability Review. From a domestic perspective, the report highlights that Ireland has seen the sharpest decline in commercial property values, from the fastest-growing market in early 2007 to the greatest contraction in 2008, with the gap growing over the course of the last few months. Similarly, the Irish residential property market is the worst performing in the euro area.
Tuesday’s FT has a long piece on the Spanish banking system: you can read it here. An interesting difference relative to Ireland is that the Bank of Spain insisted on banks building up reserves against general future risks. However, these provisions are not formally counted as part of its capital base and the general push towards higher measured capital ratios means that the Spanish banks are also looking to raise capital. This may reduce the chances of these banks getting involved in acquisitions in Ireland, at least in the near term.
The government has announced the launch of its recapitalisation process. The official statement is here.
It is up to each bank to decide its recap strategy. It will be interesting to observe the extent to which the major shareholders of each bank become actively involved, relative to leaving it to the management teams to develop these strategies.