The Irish Economy

This is a nice summary of Latvia’s recession or, perhaps more accurately, depression, which thus far has seen a decline in GDP of more than 25 percent. The Latvian example is interesting both because of its parallels with Ireland because of the fixed exchange rate with the Euro and also for its differences due to the problems associated with having a fixed but not “irrevocable” exchange rate.

I’ve been following the news stories on the proposed potential Greek bailout. However, reading articles like this, I’m struggling to find a good rationale for the agreement that’s been reached. The following questions come to mind:

1. Greece needs to address its huge fiscal problems. To do this will require putting through highly unpopular measures. How does the EU’s offer of a potential bailout help get this achieved? How does the Greek government convince its people that harsh measures are required to reduce its deficit and keep open its access to sovereign debt markets when they now know that the EU tooth fairy is waiting by to help?
2. Even if the senior figures in the leading EU countries have ultimately decided to intervene to prevent the disruptions associated with a Greek failure to roll over its debt, why not wait until that failure has happened?
3. Why would the EU wish to be associated in the Greek public’s minds with the harsh expenditure cuts and tax increases that would still have to follow even after a bailout deal?
4. Do those who advocate this policy really believe that the current Greek crisis is sui generis or are they planning to put in place a safety net for the whole Euro zone? If the latter, can such a policy really be credible?
5. Is the long-run macroeconomic stability of the Euro area better served by avoiding the dislocations associated with one its constituent members going through a sovereign debt default or should we be more concerned about the problems created by the new bailout mechanism that lets governments know that the EU will intervene if they choose not to tackle their fiscal crises?

I feel that in asking these questions, I’ve clearly been missing something. Hopefully those who thrashed out this deal have thought these issues through. My concern is that in the somewhat fevered quasi-crisis atmosphere of this week, precedents may be getting set that we will live to regret.

Update: To be honest, I probably should have linked to this hand-wringing Times editorial as a better illustration of what I’m confused about. The editorial worries about “depressing the value of the euro” (which would in fact be a good thing for the Euro area economy) and discusses how this “raises major doubts about the future of the single currency” without explaining why this is the case.  The piece ends with the dramatic note of “The European Union remains on alert and on financial standby.”  It does make one wonder a little whether this issue is being hijacked somewhat by those who see “Europe” as the solution to most ills.

The Irish Times and other media today carried a report on the publication of a new globalisation index produced by Ernst & Young which places Ireland third on the globalised states list. The EY index joins an increasingly crowded field, so what follows is a bluffer’s guide to globalisation indices. As always, a good starting point (but never more than that) is the relevant Wikipedia entry.
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Barry Eichengreen makes the case here, without having to warn about Western protectionism.

I know the parallels are not exact but this story is a reminder that our current banking situation—involving banks that don’t want to lend, governments exhorting them to do so and banks focused heavily on attempting to escape government control—is not exactly unique. Some highlights:

Bank executives say they itch to make profitable loans, as many as possible, but are struggling to find qualified borrowers. They also say that the administration is asking for increased lending even as it pursues financial reforms that will limit the ability of banks to make loans.

And, of course,

“America’s banks received extraordinary assistance from American taxpayers to rebuild their industry,” the president said after the meeting. “And now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild our economy.

And this:

This is the second time the president has convened bank executives to urge increased lending. The first meeting, in March, did little to slow the slide. The president said Monday that he continues to get “too many letters from small businesses who explain that they are creditworthy and banks that they’ve had a long-term relationship with are still having problems giving them loans.” But the White House on Monday defended the value of the rhetoric.

“I think that the bully pulpit can be a powerful thing,” said press secretary Robert Gibbs.

We’ll see whether asking nicely a second time works well for them.

I found this story interesting. Clearly, the underlying story is just that Ireland is being used a political stick to beat Mister Salmond with. Beyond that, though, the exchange raises some interesting questions. Why are Scottish opposition politicians so sure that an independent Scotland would pursue policies that would lead it towards fiscal troubles of the Irish variety? How could Mr. Salmond assure them that this wouldn’t occur? Do the Scottish opposition believe that the Republic would be better off economically rejoining the United Kingdom?

And what about the banks? Would those two disastrous banks with the phrase “Scotland” in their names have been defined as Scottish banks to be bailed out by the Scottish taxpayer?  Presumably not but this raises the question of how one defines the fiscal responsibility for banking measures as one negotiates one’s way out of a united country.

Proof we’re not alone on the fiscal crisis front: The UK Pre-Budget report. The UK government plans to reduce its deficit from 12.6 percent this year to 12 percent next year and then gradually to 4.4 percent in 2014-15. One highlight of the statement: An immediate 50% supertax on bankers’ bonuses paid between now and April. Bankers, apparently, are furious and were seen crying into their Dom Perignon all over the City of London.

This column was not written with an Irish audience in mind, but given its trade patterns and openness Ireland is obviously one of the countries that is most exposed to the risks it discusses.

Now that the worst seems to be over, it is time to start thinking about the next flood. Today’s piece in the Independent is a small start.

Richard Baldwin has just put together a new VoxEU Ebook on the great world trade collapse of 2008. It contains 23 short, user-friendly essays that give a great overview of what we have learned so far about the causes of this dramatic event.