The Irish Economy

Just an update on the planned conference on the economy, part of a sequence of Dublin Economic Workshop meetings in collaboration with the Universities (in this case UCD Geary Institute and UL).

Firstly - venue.   We had planned a city hotel but (a) demand, and (b) lack of appropriate supply, has caused us problems.   So we are pleased to have booked the Conference Centre at Croke Park for the event.  Details on the venue are here - parking (lots), transport (lots) and wifi too for your iPads.

Secondly - RSVPs.   Thanks for those that replied to emma.barron@ucd.ie to give your details.   If you have, you are DEFINITELY on the list (just the volume of response means that Emma has not managed to reply to all, plus she was perhaps going to have to cull the list due to capacity issues (she has a black belt - I kid you not!)).   Due to her efforts at getting the venue we are fine and in fact would like to encourage more of you to come along - again RSVP to Emma.   One favour - if you do RSVP, come along.  While this is free to all to attend, it is not free for the organizers so we may be able to adjust the rooms booked etc.   Also, while we will DEFINITELY NOT be providing lunch but there will be some catering on the day (coffee etc) so it would be great to have pretty clear figures for all of that stuff.

Thirdly - webcasting etc.   We will record and upload after the event - youtube and through the Geary Institute iTunes ‘channel’.   We hope to webcast live but not certain at this point.   We will set a hashtag on twitter and will use the Institute twitter account on the day (@ucdgearyinst) to encourage interaction from those who can’t make it, from those outside the country etc.

Finally - latest draft of the programme is below.  We will update titles etc as we go along.

Thanks again for the patience and the support - RSVP please to emma.barron@ucd.ie, and see you there!

DEW Conference on Irish Economic Policy

Croke Park Conference Centre, Dublin, January 27^th 2012

Yesterday’s release of the end-of-year Exchequer Statement provides the opportunity to update the quick look we gave to the mid-year figures.  The conclusions drawn in July are largely unchanged.  First the overall Exchequer Balance. 

At €24,917 million in 2011, this was the largest Exchequer deficit ever recorded.  The Press Statement released with the figures says that it’s not too bad though.

The Exchequer deficit in 2011 was €24.9 billion compared to a deficit of €18.7 billion in 2010. The €6.2 billion increase in the deficit is due to higher non-voted capital expenditure resulting primarily from banking related payments. The majority of these payments are once-off payments relating to the recapitalisation of the banks  and an exchequer deficit of €18.9 billion is forecast for 2012.

Excluding banking related payments the Exchequer deficit fell by €2¾ billion year-on-year.

Ah, “once-off” banking payments.  Next year’s “once-off” banking payments will be €1.3 billion to IL&P and possibly some further payments to the credit union sector.  So what €8.95 billion of “banking related payments” do we have to remove to turn a €6.2 billion deterioration in the Exchequer deficit into a €2.75 billion improvement?

UPDATE: I had guessed what was included in this calculation but the Department of Finance have posted a useful presentation providing the details.   This is from slide 4.

The issue is the inclusion of the Promissory Notes.  If we exclude this €3.1 billion payment along with all the other banking amounts then the Exchequer Deficit is lower this year. 

We didn’t make a payment on the Promissory Notes last year but we will make this €3.1 billion payment each year to 2023 and lower payments right up to 2031.  From next year there will be accrued interest added to the Promissory Notes that will increase the General Government Debt.  You cannot exclude something that is going to happen for the next two decades as a basis for saying the deficit is getting smaller.

We can strip out a lot of the banking complications by looking at the balance of the Exchequer current account.  This does include the €1.2 billion of income earned from providing the guarantee to the covered banks which is counted as current revenue.

The final outturn and annual pattern of current account deficit has been largely unchanged for each of the last three years.  Between 2007 and 2009 there was a €20 billion deterioration in the current balance.  In the two years since the achievement has been to keep the drop to €20 billion.  There has been no improvement in the current account deficit.

Looking the Exchequer interest payments gives some insight into how this has been achieved.

For a country that has to borrow to fund the deficits shown above it is pretty amazing that the interest expense in 2011 was lower than in 2010.  The explanation is that some of the interest costs were covered from an account other than the Exchequer Account.  Again, the press statement is helpful.

Taking into account the funds used from the Capital Services Redemption Account (CSRA) as well as Exchequer payments, total debt service expenditure was up €1.1 billion year-on-year in 2011, at close to €5.4 billion. This reflects the burden of servicing a higher stock of debt.

For 2011, the Budget target was a General Government Deficit of 9.4% of GDP.  The actual deficit will be around 10.0% of GDP.  This slippage (largely the result of lower than expected tax revenue) was not a significant issue as the deficit limit set by the European Commission was 10.6% of GDP. 

For 2012, the Budget target is a deficit of 8.6% of GDP.  The deficit limit set by the EC is also 8.6% of GDP.  If there is any slippage or lower than expected nominal growth we will not meet the deficit limit.

The latest European Commission report on Ireland is available here. Lots of interesting stuff in it. One bit that caught my eye is a discussion of an internal report prepared by the Central Bank

A second report covering the use of certain types of credit limits, from a prudential point of view, is at an early stage of development. This would take under consideration policy tools including Mortgage Insurance Guarantees and Loan-to-Value (LTV) limits, as well as potentially fixing all interest rates for certain products such as mortgages.

It’s not obvious to me that banning variable rate mortgages is a good idea, either from the point of view of consumers or from the point of view of international financial institions considering coming into Ireland to offer mortgages. While fixed-rate mortgages do offer increased stability, the premium required is quite large so that financing costs would be higher on average (and house prices probably that bit lower as a result).

There are various reasons why fixed-rate mortgages are not common in Ireland or the UK (this 2004 report on the UK mortgage market by David Miles discusses this issue in detail). But banning variable rate mortgages seems to be an extreme proposal.

… happy!

So I thought I would share my thoughts on how the Irish are faring on this front.

Sean and I have an article on green growth at Vox. It builds on a paper recently published in the Energy Journal. Research funded by the EPA.

Michael O’Sullivan and I have an article in today’s Irish Times arguing for a state investment bank. Some links to supporting materials are below the fold.

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Many will have heard Alan Ahearne on Morning Ireland explain why we should try to work our way out of the crisis by ’sticking to the plan’.  He clearly believes that the Eurozone will survive in its present form and that the costs of Ireland defaulting and/or unilaterally leaving the currency union would far outweigh the benefits.

In their recent ESRI publication, John FitzGerald  and Ide Kearney set out in some detail why they believe the Irish debt problem is manageable and why we should should stick to the plan.  This was already posted by Philip Lane and has been discussed here.

Nouriel Roubini, on the other hand, believes that ’sticking to the plan’ has no chance of working in Greece, so it should organize an orderly default and re-introduce the drachma. Some of the arguments he makes are compelling and many of them apply with some force to Ireland, especially the difficulty of restoring competitiveness and growth through a deflationary internal devaluation.

We need to evaluate the prospects for the Eurozone and our place in it.

Guest Post by Dr Chris van Egeraat of the Geography Department at NUI Maynooth and Chariman of the Regional Studies Association Irish Branch.

Enterprise Ireland announced that 445 jobs will be created in 24 new high potential start-up companies which have been supported by government through Enterprise Ireland in the second quarter of 2011. The announcement follows on the 310 new jobs announced earlier this year as part of the first quarter results of Enterprise Ireland’s High Potential Start Ups programme.

Many of the companies involved operate in the sectors that the Government has identified as part of the Smart Economy strategy, including biotechnology, life sciences, ICT and financial services. This is good news for Ireland but from a regional development perspective it is important to consider the extent to which different regions benefit from these developments.

Interestingly the press release includes a breakdown of number of projects and related jobs by location. Unfortunately, the information pertains to 16 of the 24 investments only, and the press office was not in a position to provide details of the other eight investments because of the commercially sensitive nature. The data allows us to between the Greater Dublin Area (including Kildare and Wicklow), the rest of the South and East (S&E) Region and the Border-Midlands-West (BMW) Region.

The results are striking. Three quarters of the new projects are located in the Greater Dublin Area and a further 12 per cent in the rest of the S&E region. Only 12% of the projects are located in the traditionally lagging BMW region. The results in terms of jobs are similar with merely 12% of the jobs located in the BMW region.

The data for the first quarter of 2011, suggests that this is not a once-off result. In the first quarter the GDA accounted for nearly 70 per cent of the new projects, while the rest of the S&E region accounted for a further 16%. With 15% of the new projects, the BMW region again performed poorly. The press release for the first quarter did not provide complete data for jobs.

To put these figures into perspective one can compare these with the geography of employment in all Irish-owned agency-assisted companies by regions in 2010 using figures from the Forfas annual employment survey. Currently the Dublin region only accounts for 31 per cent of jobs in indigenous assisted companies with the rest of the SE accounting for 41 per cent. The BMW region still accounted for 28% of the jobs in 2010.

Clearly, there are some limitations to the new data on the geography of recent project and job announcements, not at least the fact that we don’t have access to the complete dataset. However, if the results do represent a real trend, this will have important implications for the economic development potential of Irish regions and raises questions about the role that different regions can play in the Smart Economy as promoted by the Irish Government.

The regional trends outlined above highlight the timeliness and relevance of the upcoming Irish Regions in the Smart Economy Conference, organised by the Regional Studies Association at NUI Maynooth. For further details: http://www.regional-studies-assoc.ac.uk/events/2011/sept-ireland/programme.pdf

To take our minds off the heavier economic / financial topics for a while I thought I would share some thoughts provoked by the Annual Summary of Vital Statistics for 2010 published at the end of June. Taken in conjunction with the preliminary results of the 2011 Census, it reveals some surprisingly positive trends for a country in the throes of a very deep recession.

Our birth rate is holding up despite the surge in unemployment and the resumption of net emigration (even if at a more modest rate than previously feared).

Over 75,000 births were registered in 2008 – almost 60% more than in 1994 and the highest number recorded in modern times. However, this was probably the peak, as the annual total for 2010 was 2% lower than that for 2008, while the 2010Q4 figure was 4% lower than the corresponding figure for 2008.

The surge in births will have far-reaching implications for the economy’s medium-term prospects.  Most immediately it is placing pressure on the educational system, but over the longer run it could be argued that our relatively youthful population will bestow a competitve advantage relative to the rest of Europe, where the ageing of populations is becoming an acute problem.

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The preliminary results of last April’s Population Census are available here.

They show continued strong population growth, averaging 1.6% a year over the last five years.

The CSO is to be complimented on the timely production of this very informative release.

One of the point that has been made repeatedly about the Irish economy over the past year or so is that weak domestic demand is connected with a high savings rate. (Admittedly, the actual national income data on personal savings rates are only available with a long lag but the slow pace of consumption spending is consistent with this story). Many, including now Minister Noonan, put this increase in the savings rate down to discretionary precautionary savings and believe that once people relax about their future, domestic demand will take off again.

I’ve always been pretty skeptical of this argument. My take on spending patterns has been that the increase in the savings rate may be more connected to people who had previously been able to live beyond their means having to pay back debt because of the change in financial market conditions, while others who have always saved continue to do so.

The implications of this story for the future evolution of the savings rate are quite different. There is little reason to think those who have been saving all along (e.g. for retirement) will reduce their propensity to do so. Indeed, if they were reliant on their funds invested in Irish property or in Irish pension funds now subject to the new levy, then the opposite would be the case. And those who are apparently saving because they are re-paying debt are, in practice, feeling as if every euro they earn is earmarked for either debt repayment or managing to keep going. These people are also unlikely to suddenly start spending if the economy stabilises.

Anyway, I’ve meant to make that point on this blog loads of times but didn’t. Then Seamus Coffey wrote this excellent post and, in comment speak, I want to say “What he said.”

The quarterly national accounts for 2011:Q1 have been released. They show seasonally adjusted real GDP increasing 1.3% quarter over quarter and seasonally adjusted real GNP falling 4.3% over the same period.

Smoothing through the volatile quarterly series, looked at on a year-over-year basis, real GDP was up 0.1 percent and real GNP was down 0.9 percent.

Overall, the picture seems to be one of an economy in which output has stabilised. Given the substantial negative headwinds (fiscal contraction, falling credit, debt overhang and a frozen property market) this is a pretty good performance. Still, it seems too early to say that the economy is about to produce a period of job-producing growth.

The OECD has launched a new index with the aim of facilitating comparisons of the quality of life across countries. You can find the country summaries here.

Ireland does quite well in the rankings, although the usual caveat about using GDP in an Irish context applies.  Moreover, the data used are mostly from 2008 and we have undoubtedly slipped towards the relegation zone since then.

The new IMF Country Report is available here.    A transcript of yesterday’s conference call following the release of the report is also available (see here).   Dan O’Brien provides analysis here.  Update: Additional analyses from Colm McCarthy (see here) and Cliff Taylor (article; SBP editorial). 

It is encouraging that both the IMF and the European Commission are impressed with the government’s implementation of the programme.    The unavoidable fact remains, however, that bond markets are unconvinced on Ireland’s long-term creditworthiness.   Not too surprisingly, the IMF is more willing to be critical of Europe’s approach to resolving the crisis.   It is becoming increasingly evident that uncertainty about the evolving balance between bailouts and bail-ins is making investors shun Irish bonds.   The critical challenge is to convince investors to provide new funds to Ireland, which is now being hampered by fears of being caught up in any future bail-ins.   It is also interesting that the European Commission is more open than the IMF to a modest speeding up of the fiscal adjustment.   This could be viewed as a high-return investment in reinforcing the credibility of the government’s capacity to see through the necessary adjustments, which already differentiates Ireland from Greece and probably Portugal.     

For good or ill, the future financial prospects of the Irish sovereign depend in various ways on the future of the Irish property market, both via its purchases of NAMA property and its investment in banks with considerable mortgage books.

The Irish Bankers Federation report on the mortgage market (data here and press release here) paints a picture of a market that has almost completely collapsed. NAMAWineLake provides his customary high quality analysis here. I’d note that the series seem to have a seasonal pattern so comparisons of 2011:Q1 with peak may be a little misleading but even year-over-year comparisons paint a picture of a market in freefall. These figures also tie in pretty well with the figures from the new house price index from the CSO which showed a faster pace of price decline in the three months to March 2011 than had been seen since mid-2009.

The CSO have released a new house price index (press release here and data here). Analysis by Namawinelake here.

The rise in the unemployment rate reveals a grim picture of the impact of the recession. The overall unemployment rate has risen from 4.4% at the beginning of 2007 to 14.6% today. Male unemployment is now 17.3%, while unemployment among men aged 20-24 is 32.3%.

Concentrating on the situation of males in some key age groups, the first Chart shows the unemployment rates for those aged 20-24, 25-34, 35-44 and 45-54 (four-quarter moving average of the Quarterly National Household Survey rates). Unemployment rose dramatically in all fours age groups, but younger men were most severely affected.

During a deep recession unemployment rates do not tell the whole story because people tend to withdraw from the labour force, cease to search for work and are no longer classified as ‘unemployed’ according to the International Labour Office conventions.

The CSO publishes broader measures of unemployment as well as the main ILO rates. The broadest of these includes those marginally attached to the labour force and others not in education who want work and it now stands at 23%.

This broad unemployment rate is not available by age and sex. However, the ‘employment rate’ (the proportion of the population that is employed) is available by demographic group and it sheds light on labour market trends that supplement the information in the conventional unemployment rate.

The second Chart shows the employment rate in each of the four age groups. As we would expect from the unemployment figures, the fall in employment has been most dramatic among younger men. Since the end of 2009 fewer than 50% of males aged 20-24 have been classified as ‘employed’, compared with over 75% as recently as 2007.

It is instructive to look at the distribution of ‘non-employed’ men between ‘unemployed’ and ‘not in the labour force’. This is shown in the following four Charts. The proportion of the population ‘not in the labour force’ is lowest among men aged 35-44 and highest among those aged 20-24. But in all four groups there has been a significant rise in non-participation during the current recession. In fact the rise in ‘non-employment’ was split approximately 3:1 between increased unemployment and increased non-participation in all groups. While some of the rise in the numbers not in the labour force may be attributable to increased retention of younger males in the educational system, most of it is likely to reflect drop-out due to discouragement and the belief that no jobs are available.

Previous research has shown that those most likely not to be employed are single males with low educational attainment living in areas of high overall unemployment. It is likely that these factors continue to increase the risk of being without work.

The rise in unemployment and fall in employment leveled off during 2011 but as in recoveries from previous recessions further improvement is likely to be slow and the adverse effects of the contraction in the economy will be felt well into the future.

Let us hope that the ‘jobs initiative’ to be announced later today can make some impression on these figures and will include measures to ‘re-activate’ those who have dropped out of the labour force as well as those who are overtly unemployed.

Results from the Quarterly National Household Survey for 2010:Q4 are now available (press release here, full release here.)  The seasonally-adjusted unemployment rate for the quarter rose by one percentage point to 14.7%. This is a percentage point higher than the previously available proxy for the seasonally adjusted rate based on Live Register figures.

I’m not sure what the explanation is for such a large divergence between the QNHS and Live Register series for this quarter. One possible factor is that some people are now reaching the expiry of their benefit eligibility and thus falling off the Live Register while still being unemployed. The different behaviour for 2010:Q4 doesn’t seem to reflect a big drop in the labour force, due to emigration for example, because the decline in the labour force was of a similar magnitude to previous quarters.

A book that deserves some attention from policymakers here is Edward Glaeser’s new book “Triumph of the City“. The book has nine chapters, along with an intro and conclusion. It makes the case that city-living is, in general, conducive to innovation, health and environmental protection. The nine chapters go through the role cities play in bringing people with ideas together, the role of slums in acting as a pathway from destitution, the attractiveness of cities as places to live, the health advances that have been made in cities, the benefits of building up, the role of human capital policies, and the environmental advantages of cities.  Glaeser puts particular store on policies designed to build human capital in cities through education and through attracting intelligent and entrepeneurial people. Its simplifying his position somewhat but he strongly advocates building up rather than sprawl and he is a critic of the use of building projects as methods of urban renewal. Glaeser has published several highly influential articles in Economics and he really packs ideas into this readable book. If anyone has read it, or is going to read it, feel free to use this thread to talk about some of the ideas in the book as well as their relevance in Ireland.

Oliver O’Connor interprets the election results for WSJ readers here.

Dan O’Brien completes his excellent two-part comparison of the Irish and Icelandic economic crises in the Business section of today’s Irish Times.   Today’s instalment is available here; last week’s here.

Update: Paul Krugman responds here.

Some conclusions (it is important to read the articles for full context):

The first conclusion is that the size of the bubbles in the two economies – rather than anything that happened when or after they burst – was the main determinant in explaining the magnitude of the two calamities.

. . .

The second stand-out fact from a comprehensive comparison between the two economies – in this case since the bursting of the bubbles – has been the role of exports in contributing to recovery. . . . [T]here has not been a significant difference in export performance between Ireland and Iceland.

This is not at all what one would have expected. While being part of the euro protected Ireland from even greater instability during the worst of the crisis, the downside of being locked in to a single currency is that devaluation is unavailable as an option to rapidly regain competitiveness and make adjustment to the shock easier to deal with.

Iceland suffered all the downside of having its own currency, but far less of the upside. Iceland’s export performance has been nowhere near as strong as one would have expected following a 50 per cent devaluation, while Ireland’s has been better than could even have been hoped for.

And the absence of an export boost from exchange rate depreciation has not been confined to Iceland alone. Another neighbour has been similarly disappointed, as the chart illustrates. Despite the weakening of sterling, British exports remain below pre-crisis levels.

No currency regime is perfect and all have positives and negatives. Although things may very well change, at this juncture the benefits for Ireland of being part of a much larger single currency have been considerably greater than the benefits to Iceland of having its own currency.

But the most important policy lesson from all this, it would seem, is that policy actors must be far more willing to make calls on whether bubbles exist and to take measures to deflate them if they conclude that they exist. Of course, this is not easy as there is no way of knowing for sure whether growth is sustainable or mere froth. But given all that has happened, the case for pre-emptive pricking of suspected bubbles appears incontestable.

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This is an addendum to John McHale’s last post and a response to JTO’s plea for more real data on this site. Below is a consistent series (based on CSO data) for the net migration rate from 1961 to 2010.  The net flow has been expressed as a rate per 1,000 average population. The years are to end-April.
We await with great interest the results of the 2011 Census, which will give us a fix on the migration trend for the year ending April 2011 and allow the estimate for 2002 to 2010 to be updated. 
Preliminary Census results should become available by the end of the summer.

In the FT, Peter Orszag argues that savings lotteries can boost the US savings rate.  His article cites various examples (especially the UK) but he may want to consult the Irish prize bonds site also (here).

The twin problems of unemployment and the public deficit make it imperative to search for low-cost schemes that can help to stimulate employment creation. “Marginal employment subsidies” were much discussed in the international literature in the early 1980s and might have a role to play today.  

A specific and fairly modest proposal to start with would be to abolish employers’ PRSI contributions for new jobs; i.e. for any increase in a firm’s employment over and above the level recorded at a specific date in the past, e.g. X/X/2010. (The importance of choosing a date in the past is that it would prevent firms gaming the policy by shedding jobs in advance of its introduction). This avoids the extensive deadweight losses associated with e.g. a cut in employers’ payroll costs. There would still be some deadweight loss in tax revenues resulting from jobs that would have been created anyway, but it seems unlikely that there is much new employment creation at present. The proposal would amount to a wage subsidy of over 10% for new jobs. (If it looked like it was starting to have an effect, it could be extended by taking into account some of the resultant savings in social welfare).

Care would need to be taken to prevent firms closing down and establishing under a new name to exploit the scheme, but I assume this could be surmounted.  

Many of the existing schemes in place today (details here) might be thought similar to the present proposal. Most are targeted however at particular groups of disadvantaged workers, which make them less likely to succeed, and, as far as I recall, some displacement effects were found. The present proposal avoids these.

The proposed scheme might be gradually wound down as follows: the implicit subsidy to be reduced by Y% for each 50,000 jobs recorded in the economy over and above the level prevailing at X/X/2010.  

If the economy were solely cost-constrained, the proposal would raise employment through both the output and substitution effects. The substitution effect will still apply if the economy is purely demand-constrained, and by getting people back to work will have beneficial demand effects. 

Examples of the literature from the 1980s include:

Chiarella, C., and A. Steinherr (1982), “Marginal employment subsidies: an effective policy to generate employment”, Commission of the European Communities, Paris, Commission of the European Communities Economic Papers No. 9, November.  

Layard, R., and S. Nickell (1980) “The case for subsidizing extra jobs”, Economic Journal, Vol. 90 pp.51-73.  

Oswald, A. J. (1984) “Three Theorems on Inflation Taxes and Marginal Employment Subsidies”, Economic Journal, 94, 375.  

Whitley, J. D. and R. A. Wilson (1983) “The Macroeconomic Merits of a Marginal Employment Subsidy”, Economic Journal, 93, 1983.  

See also:
Snower, D. (1994), “Converting unemployment benefits into employment subsidies”, American Economic Review, Vol. 84 pp.65-70.

Philip Stephens argues that UK would have been better off to have joined the euro: article here.

Ben Broadbent provides an analysis of the current UK economic situation here.

Rossa White (Chief Economist of the NTMA) has written an article on debt and sustainability issues - it is here.

The Q3 2010 results in this new data initiative are now available from the Central Bank: the summary is here.

This presentation can be found on the Department of Finance website.

The ESRI’s new emigration forecasts are sobering (see here for QEC Press Release).    For the year to April 2011, net emigration is forecast to be 60,000, falling to 40,000 for the year to April 2012.  The gross emigration forecasts are 75,000 for 2011 and 60,000 for 2012.   The numbers are consistent with anecdotal evidence of a resurgence of interest in the emigration option.   It is also worrying that significant outflows are forecast in the context of a relatively depressed UK labour market, and despite quite restrictive and skill-biased immigration policies in the destinations of choice: Australia, Canada and the US. 

The numbers are a reflection of how limited opportunities are at home for young people, though it would be even worse for those who leave if outside opportunities were not available.   The unemployment rate for those aged 20-24 is 25.5 percent.   And this is despite a fall in the participation rate from roughly two-thirds in 2008Q3 to half in 2010Q3.  

We must also worry about the implications of large-scale emigration for economic recovery.    In a thought-provoking post back in November, Kevin O’Rourke drew attention to the danger of an adverse fiscal feedback loop given the large fixed cost of the national debt.   We get a form of fiscal increasing returns: the more people leave the greater the tax burden (and indeed the poorer provision of State services) for those who stay, further increasing the incentive to leave.  (more…)

David McWilliams discusses the Irish version of the ‘Gavyn Davies’ sector financial balances graph in the Irish Independent today. He makes two points. The first is to highlight the restoration of the foreign sector balance in recent years, which he interprets as meaning that, absent the banking crisis, the government would not have needed to seek EU/IMF funding given the availability of sufficient domestic savings to fund the government deficit.

His second point is that the chart shows that austerity will not work because, if the private sector keeps saving, then either the government deficit remains high (as a result of a further contraction of the economy) or there is a build up in the current account surplus on the balance of payments, which he also sees as undesirable because it means that “we will export capital to the rest of the world for them to use, while projects in Ireland are starved of capital”.

While the first point may be true in the sense that the state would not have faced the downgrade on its sovereign debt in the absence of the banking crisis, I think the second conclusion is wrong. (more…)