Three interesting contributions:
Yesterday, former Minister for Finance Charlie McCreevy appeared before the Oireachtas banking enquiry. His refusal to answer whether or not he believed Ireland suffered a property bubble that burst in 2007 was not only great TV, it also brings up some important issues. For example, the Irish Independent reports:
The conflict arose when Mr Doherty asked the former minister if he believed there had been a property bubble in the previous 15 years before the financial crisis. Mr McCreevy insisted he would only answer for his time in office and there had been no property bubble during that time… [after legal advice] Mr McCreevy said from 2003 to 2007 house prices grew at an extraordinary rate. He supposed that was a bubble. But he said: “I don’t believe the policies I pursued helped to create that bubble.”
The clear implication is that Mr McCreevy believes that, if there was any housing bubble at all, its roots do not lie in decisions made in the period 1997-2004, and that in reality there was no bubble at all. Given the title of my doctorate at Oxford was called “The Economics of Ireland’s Housing Market Bubble”, you might not be surprised to learn that I disagree.
First, I think it is important to note that there are two ways of diagnosing bubbles. They can be thought of as statistical bubbles and economic bubbles. A statistical bubble is one where the growth rate in the price of an asset, such as housing, grows at a rate that is unsustainable for any reasonable period of time. Between 1995 and 2007, house prices in Dublin increased by 300% in real terms (i.e. stripping out inflation), or 12.2% a year. Between 1997 and 2004, McCreevy’s term in office, the increase was 136%, or 13.1% a year. (Nationwide figures are comparable, although slightly lower for the period as a whole, although not necessarily in every year.) Thus, by any statisticians metric, it was a bubble – put another way, if 12% growth had continued for 25 years, a house costing €100,000 in 1995 would have cost €1.7m by 2020.
Yesterday, the First of July, was Canada Day.
Discussing the crisis in the Eurozone with some visiting Canadian relatives led to the question How stable is the Canadian currency union?
At first sight it seems to be much more stable than its European counterpart. The Canadian banking system is renowned for its solidness. It is dominated by five national banks that operate coast to coast, supervised by the much-admired Bank of Canada. There is a large national budget that includes important elements of inter-provincial fiscal equalization. Internal labour mobility is relatively high.
But on the other hand the provincial governments are not constrained in their borrowing, there are enormous differences between the economic structures of the provinces, and there is always the Quebec question.
In fact, to a surprising extent, the stability of the Canadian union appears to depend on the fact that, as the author of this article puts it,”there are no Greeces here”. He draws attention to flaws in the design of the Canadian currency union that could come home to roost some day.
If an extend-and-pretend deal is done it will be the third Greek ‘rescue’. Without debt relief it will also be the third to break the IMF rule, adopted after the Argentina failure in 2001, to avoid financing countries with unsustainable debts.
In early 2010 the debt/GDP ratio in Greece was predicted at 115% (it turned out to be 130%), the deficit in double digits and GDP sinking fast. The Fund rewrote its rule-book to get involved in the Troika despite the unwillingness of IMF staff to sign off on debt sustainability. See the account from the CIGI think-tank
https://www.cigionline.org/sites/default/files/cigi_paper_no.61web.pdf
The 2012 deal repeated the procedure, this time with haircuts of private creditors.
The Greek economy is again contracting, the budget headed back into serious deficit, the debt ratio headed for 180%. Even with low interest rates and long duration of official debts, no sustainability analysis is likely to look healthy. The bond market, to which Greece must return, agrees.
The IMF cannot credibly repeat the routine of 2010 and 2012 – it does have non-European members after all, and its exposure to Europe is already unacceptable to them. Lagarde, as French Finance minister, opposed Greek debt restructuring in 2010 but there is no guarantee that the IMF board will participate again without haircuts, this time for its European ex-partners. The week could see no deal with Grexit, or Trexit, the end of the Troika.
Adele Bergin of the ESRI and I made a presentation to a mini-symposium on Austerity: the Irish Experience at UCD last week. Our analysis points out how wrongheaded it is to suggest, as some have done over the last few days, that if only the Greeks would take their medicine the way we did they might be able to expect an equivalent recovery. This ignores the huge structural differences between the two economies.
Faced with evaporation of the tax base, jittery markets and a need for concessionary funding, our current government and the previous one did what was required on the fiscal side. In the language of economics textbooks however, consolidation was necessary but not sufficient for the timing and pace of the recovery.
The first structural difference is the vastly greater openness of the Irish economy. This cushions the domestic economy to an extent, since imports bear some of the brunt of consolidation.
Irish exports, though they took a hit in the early days of the international crisis, nevertheless propped up the economy in a way that the Greek export sector cannot do, because of the share of exports in the Irish economy, the sectoral pattern of our exports and our portfolio of export destinations.
The fact that Ireland was hugely specialised in goods and services for which international demand remained buoyant massively bolstered the economy. Pharmaceuticals dominate Irish merchandise exports: pharma increased as a share of total US, UK and eurozone imports from 2000 to date (as shown by Stephen Byrne and Martin O’Brien in the Central Bank of Ireland Quarterly Bulletin, 02, April 2015). Computer and information services dominate Irish services exports: these increased as a share of total US, UK and eurozone imports from 2000 to date. Agriculture and food dominate indigenous exports: these increased as a share of total US, UK and eurozone imports from 2000 to date.
Services comprise an unusually high share of Irish exports. Since transmission is almost costless, these are less geographically constrained and substantially less dependent on EU and North American markets than is the case for merchandise exports. In the case of the latter, the MNCs can shift export destinations much more easily than indigenous enterprises can, as reflected in an increased US share as the US recovered earlier from the global crisis. And Ireland of course benefitted much more than other eurozone economies from the weakening of the euro against the dollar and sterling over recent years.
Jobs in export production began to recover rapidly from 2009, driven by labour-intensive indigenous manufacturing exports and by the growth of both indigenous and foreign-affiliate services exports. Ireland’s export-led recovery then fed into domestic demand.
It would be impossible for Greece to replicate this pattern.
And by way of footnote: Even though it’s true that most Irish exports are produced by the foreign-owned multinational (MNC) sector, and that any €1 million of these exports creates less domestic value-added than €1 million of indigenous exports, a different perspective emerges when you look at backward linkages per job. These are particularly impressive in the case of the rapidly growing MNC-services sector.