Sterling in crisis – will it end in tears?

While some northerners see opportunity in the form of southern shoppers from sterling’s precipitous fall in recent months, others in Great Britain are less sanguine about the benefits accruing from the weakness of the British currency, not least because of Gordon Brown’s budget profligacy to try and encourage consumer spending in the UK as a whole. Willem Buiter, Professor of European Political Economy at the London School of Economics and Political Science highlights some of huge issues facing the British economy and the currency in particular. Buiter points to the exposure the British government has to the banking sector in the country:

The UK government has taken on a massive contingent exposure through its policies to bail out and support the UK banking sector. Very soon, for instance, it is likely to own around 60 percent of all RBS stock. At the end of 2007, the balance sheet of the RBS Group was just under £2 trillion. Against this roughly £2 trillion increase in the UK government’s liabilities, one has to set the value of the assets of RBS Group.

While Brown may be feted by the international community for his actions in the financial crisis to date, David McWilliams is less complimentary, believing he has made a huge mistake by “buying stakes in the British banks too early and has lost a fortune of taxpayers’ money as a result”.

More worringly, this exposure looks likely to grow, according to Buiter.

Demands on the budget may also be made in the not too distant future by non-bank financial intermediaries, including insurance companies and pension funds, and by large non-financial companies, if the US experience with AIG and the Detroit car manufacturers is anything to go by…

… The UK government is severely fiscally stretched by its wide range of explicit and implicit, formal and informal, firm and flaccid financial commitments to the UK banking sector. It is not clear that the government debt issuance implied by both this massive actual and contingent exposure to the banking sector and by the discretionary fiscal stimulus the government is preparing, will be financeable in the global capital market. There is no guarantee that the market will be willing to absorb the additional debt issues the government must be planning for the next few years.

It will do so only if it believes that the government is able – economically, administratively and politically – to raise future taxes and/or to cut future public spending by enough to ensure that the increase in its total indebtedness net of the increase in the assets it acquires is matched by a correspondingly higher present discounted value of future primary government budget surpluses.

If there is doubt, then there will be a further sharp decline in the value of sterling with the authorities unable to monetise enough of the debt of the state (including the socialised debt of the banks) to restore solvency.

The reason is that much of the debt of the banking system is foreign-currency-denominated rather than sterling-denominated (total foreign currency liabilities and assets of the banking system are each over 200 percent of annual GDP). With the foreign currency liabilities of the banking system likely to have shorter remaining maturity and more liquid than its foreign currency assets (these are banks, after all), the UK would be likely to face a (partial) sovereign debt crisis as well as a foreign exchange liquidity crisis, even if the government tried to inflate its way out of trouble.

While Buiter recommends the UK considers membership of the eurozone, this remains a political impossibility so what are the alternatives and, more importantly, the possible consequences?

The UK is on a borrowing spree it cannot afford. It runs a trade and current account deficit, which means that inflows of capital from abroad are required to balance its external accounts. But as the UK government spends and borrows more to help offset the recession, the returns for foreign investors have fallen. Also, further interest rate cuts and increased government spending mean the currency will most likely fall further.

  • Pete Baker

    “While some northerners see opportunity in the form of southern shoppers..”

    George

    And buying non-Irish is the “ultimate act of patriotic sabotage”..

  • Mick Fealty

    There are a few others in Buiter’s camp too George. But I’d also ask you take Gerard O’Neill’s point about the aggravating effect that is likely to have in the short term over the assymetrical retail war that’s going on between the two states just now…

    The point about getting sufficient value for the public money is a fair one too… but, so far as I can see… I don’t think he’s actually being critical of Brown’s general reflationary approach…

    There is a question here of whether it is wise for the Republic to go the deflationary route whilst its biggest trading partner goes the other way…

    But it’s not one I have a pat answer to btw…

  • Nomad

    It might not mean much, but the pound has risen steadily about $0.03 against the dollar in the past week, breaking against analyst expectation. I watch everything carefully.

  • Harry Flashman

    Labour’s in power, the economy is tanking, businesses are going cap in hand to the government for bailouts, borrowing is going through the roof, unemployment is rising, the Chancellor wants to soak the rich and we’re headed for a run on the pound, yippeeee it’s the 1970’s all over again.

    Will it be Slade or Gary Glitter for the Christmas number one? Now where’d I put my flares?

  • Nomad

    I wish editing was possible on this site.. to clarify my last sentence- I mean I will continue to watch the situation unfold. Not like I’m omnipresent or magic or anything.

    Harry- you think they are just unlucky?

  • JD

    Do most stores take Euros?

  • Harry Flashman

    To paraphrase Oscar Wilde Nomad, to bankrupt the nation once might be unfortunate, to do it a second time rather seems like carelessness.

  • Dave

    “There is a question here of whether it is wise for the Republic to go the deflationary route whilst its biggest trading partner goes the other way…”

    The importance of the GB to the Irish economy is overstated (probably for political purposes). Total merchandise exports for Ireland in 2007 were 88,852 billion, of which 14,908 was to GB (16.7% of the total). Adding exports to NI for a UK figure gives 18.7%. (Incidentally, Ireland exported merchandise to the value of 1,743,500 to NI in 2007 but only imported merchandise to the value of 1,354,400, giving a trade surplus of 389,100 million to Ireland’s advantage.) Ireland imported more merchandise from GB than it exports to it. It imported merchandise to the value of 19,394,100 from GB in 2007, giving a trade surplus of 4,485,700 to GB’s advantage. While Ireland’s exports of merchandise to GB account for only 16.7% of its total merchandise exports in 2007, it imported 31% of its total merchandise from GB in the same year.

    Sterling has devalued considerably against the euro, and Brown’s public spending/borrowing policies will ensure that it continues its move toward parity with the euro as international markets continue to lose confidence in the UK’s economy. That is good for Ireland because sterling’s decline of 15% against the euro since the start of the year means that imports that formerly cost Ireland 20 billion will now only cost 17 billion, saving a respectable 3 billion (or cutting total imports by about 5% on the 2007 figure). I doubt that Ireland will import substantially more goods from GB as a result of the lower costs of GB imports because public consumption is now constrained by the need to repay mortgages on 340,000 vacant properties, now that it has dawned on the plebs that they aren’t going to be in a position to resell for the projected handsome profit or ever find tenants for them as the immigrants depart to from whence they came or switch to social welfare housing as a result of unemployment. Exports to GB from Ireland, of course, will become more expense for GB buyers, but as we import more than we export, the Irish economy will be better off as a result of sterling’s devaluation.

    Brown is incompetent, and it is only mass hysteria, ignorance, and a pitiful desire among the electorate to believe in the infallible wisdom of their appointed messiahs that keeps folks from accepting reality. They need to believe that the state is all-knowing because if they ever accepted that it is run by dunderheads and sociopaths, how could they ever keep their faith that the state will always provide for them? As dire as the Irish government is, let us all pray that it never follows the lead of the insane. G-d help the English. By the time this lunatic is finished with their economy, they’ll be repaying debt for the next 20 years – and all of them caused by the policies of their government and its agency, the Bank of England.

  • Dave

    This is a useful tool from the CSO if anyone wants comparative statistics for the “Value of Merchandise Trade by Year, Area and Statistic” or to check the figures quoted.

  • Dave

    To add services exports to the figures for merchandise exports:

    Total services exports were 65 billion and total merchandise exports were 89 billion, giving a combined exports total for 2007 of €154 billion. The UK knocked the USA off the top spot for Irish merchandise exports in 2007 for the first time in 5 years. The UK also has the top spot for Ireland’s services exports in 2007, accounting for 14 billion (22% of the total for services exports). Even if Irish exports to the UK fell by a massive 20% in 2008 (and no-one is forecasting this), then that would only result in a marginal decline of 4% in the projected total of Irish exports. So, while the UK is an important market for Irish goods, it is unwise to overhype its importance.

    The Irish Exporters Association gives these figures in its forecast for 2008:

    [i]The impact of tighter financial liquidity, the perceived need to control rising inflation in China and other Asian economies and the potential slowing of the US economy, struggling with the impact of the housing slump, is seen to cause a weaker global demand pattern in 2008.

    Hence, the IEA expect a fall of approximately 3% in merchandise exports in 2008. Services exports are expected to continue their strong growth, albeit at a less aggressive rate than that experienced in 2007. The forecast for 2008 is for a 15% growth in services exports. Hence, the total export forecast for 2008 is as follows:

    2008 total export forecast

    · Merchandise -3% to €86,617 million
    · Exports +15% to €74,496 million
    · Grand Total +4.5% to 161,113 million euro[/i]

    http://www.irishexporters.ie/artman_new/uploads/year_end_review_2007_full_document.pdf

  • Alan

    Dave,

    You will find it unlikely that Irish Exporters will stand over their figures from 1 March this year in the current circumstances.

    A proportional result at this year end is also highly unlikely, a key motor for change there will be movement in stirling and GB taxes. It is the change pattern that will be all important, not past performance.

    Interesting to see you posting so late in the day – is that Montana time?

  • aquifer

    So we will sit for years or a few months waiting for interest rates to rise to defend Stirling. Collectively we had best spend or invest but individually paying down debt looks safer?

  • Rory

    Why the need to defend Stirling? Is the castle under siege again?

  • eranu

    JD, only in newry i think. if business people in other towns and cities have any sense they will follow newrys example pronto.

  • gram

    >>While Buiter recommends the UK considers membership of the eurozone, this remains a political impossibility so what are the alternatives and, more importantly, the possible consequences?<

  • Mack

    On reflationary / deflationary fiscal policies –

    The monetarists of the Chicago and Austrian schools of economics will tell you that

    “inflation is always and everywhere a monetary phenomenon”

    http://en.wikipedia.org/wiki/Austrian_School#Inflation

    The Austrian’s defined inflation and deflation purely in terms of money supply. Increasing the number of Pounds or Euros in circulation decreases the value of each unit of currency. Consumers experience this as price inflation as each devalued unit can purchase less goods. The reverse holds true for deflation.

    With Fractional Reserve Banking an increase in bad loans effectively means the destruction of money in the system – reducing the money supply – resulting in debt deflation.

    The British can print pounds to offset this process. Ireland operates within the Eurozone and has no control over monetary policy. The ECB set the agenda in terms of money supply for Ireland – all we can do is manage our economy within that. If the British borrow in pounds, they can debase the currency, if neccessary, by printing pounds to pay back their loans (as can the US). That option isn’t open to Ireland, we have to pay back our debts in full at the price we borrow them at. (Conversely if the British borrow in Dollars or Euros and the pound tanks they may find the burden of their debts grows rather than shrinks).

    http://en.wikipedia.org/wiki/Monetarism
    http://en.wikipedia.org/wiki/Austrian_School
    http://en.wikipedia.org/wiki/Chicago_school_(economics)

  • pacman

    JD,

    At least one toy store in Newry is currently doing euro for pound prices on all their stock.

    The euro cash machines are taking a particular hammering by the locals.

  • Congal Claen

    Hi All,

    Remember the financial problems are founded in people overextending on housing. That is by no means a purely UK phenomenon. If anything the RoI has invested more in bricks and mortar. That will have to be paid for. Being part of the Euro won’t fix that. You’re part of a monetary system not a banking one. So, the Irish banks can goes tits up no problem – I’d be amazed if none do. Anglo Irish is especially suspect.

    BTW, Gordon Brown is a fekking halfwit! Only 3 months ago the chancellor was getting a dressing down for saying it was the most serious financial situation for 60 years. Now, GB’s borrowing 118 billion in one year!!! If he’d any morals he should resign immediately.

    At least we’ll be back with the Tories next time.

  • Greenflag

    CC ‘

    ‘Gordon Brown is a fekking halfwit!’

    So how does Britain’s saviour from Blair go to loser (by elections) to winner ( financial crisis speedy action) to now halfwit ? Short sighted knee jerk reaction CC .

    The British Government just like the American have little option except to try to reflate their economies . The alternative would be to sit back and let ‘society’ collapse with tens of millions unemployed – major industries go under , and probable major social unrest all in the middle of unpopular wars half way across the world ? And with an election in the offing in the UK and one just over in the USA that is not a political course for any party that is seeking election to government

    Will it work is another question ? So far it’s mixed signal . The bus has’nt gone over the cliff yet but it’s still perched precipitously on the edge . The rescue teams are running around in the background

    It has taken the better part of 20 years to get into the present economic situation both in the USA and UK . Both economies have been relying on their respective financial services sector to keep their economies afloat. Now that sector is shedding tens of thousands of jobs and both economies are now relying on shell shocked consumers reeling from property bubble bursts , stock market 40% loss of value , retirement savings shrinkage, credit crunch , rising unemployment etc to reboot their economies?

    Given that most British trade is with the Eurozone then ‘debasing’ sterling may seem a way out for the UK . Devaluing one’s currency was always an option in a world with a hundred differnt ‘sovereign ‘ currencies but in a world where most trade is conducted via the dollar , euro , yen and pound the result for the UK could be much worse than that which ensued from the 1970’s devaluations .

    ‘At least we’ll be back with the Tories next time’

    Ah yes the party that should have listened to Michael Heseltine and joined the Eurozone . Well I guess British ‘euro’ naysayers can always sun themselves on beaches of Blackpool or Brighton and enjoy ‘financial’ sovereignty when it’s 3 pounds to a Euro .

  • frustrated democrat

    GREENFLAG

    I think that Ireland being in the strait jacket of the Euro is not in Ireland’s best interests in the current economic phase.

    Some local control would enable changes to be made that would help stave off some of the effects that Ireland faces, the interests of Germany and France are very different from those of Ireland and a high Euro is not good for Ireland.

  • Mack

    fd – “I think that Ireland being in the strait jacket of the Euro is not in Ireland’s best interests in the current economic phase. ”

    The juries still out. Other countries with control over their own monetary policy have floundered – Iceland, Argetina etc. Ireland should at least be safe from a currency crises that would see the real costs of her borrowings soar. In a sense the real inflation / deflation battle (money supply) is being fought by the ECB and not Dublin. I trust the prudent Germans on inflation and the soundness of the currency more than I do Gordon Brown and Alister Darling!!

  • Greenflag

    frustrated democrat ,

    Short term thinking . The devaluation of the pound in the 1970’s was supposed to lead to a revival of British manufacturing and engineering competitiveness . It did’nt .

    The Germans know from experience i.e Weimar days what happens when a currency becomes worthless . I’m not suggesting that Britains future money printing policy will end making the pound ‘worthless’, but it once you go down this road particularly in today’s global economy you run the risk of not only turning away investors but of encouraging your own citizens /subjects to put their money in a currency that is not as subject to endless devaluation. Sterling is not the dollar . It is not the world’s reserve currency of last resort.

    Like Mack above I trust the Germans and a currency backed by 450 million than one backed by the UK and just the UK . It’s 2008 not 1908 .

    The idea spouted by Dave and backed by some others that Ireland could somehow have maintained Celtic Tiger levels of economic growth while the USA , the UK and rest of the EU go into recession is wishful thinking verging on lunacy .

    I believe that while British entry to the Eurozone seems a political no no right now, I suspect that after 4 years of continuing recession and further devaluations the British people will choose economic stability and a strong currency over the dated notions of former imperial glory and anti EU rhetoric . For Northern Ireland continuing British devaluation will may mean more prosperity via higher retail sails for areas just north of the border.

    I don’t expect to see much light on any of this and how it will play out until well into next spring . By which time the words the general election will become the focus of Gordon Brown’s politicking .

  • Glencoppagagh

    The biggest danger with the British approach is if other major economies adopt a more cautious approach, in which case sterling will remain under pressure and if that leads to serious inflation, the UK economy will really be in trouble.
    The expansionary option was less obvious for RoI since its domestic capital market is relatively small and borrowing abroad on a large scale could jeopardise its creditworthiness.

  • Harry Flashman

    GF, in what way would you say the Republic’s economy is any different from the UK’s (besides being in the Euro)?

  • Congal Claen

    Hi Greenflag,

    “So how does Britain’s saviour from Blair go to loser (by elections) to winner ( financial crisis speedy action) to now halfwit ? Short sighted knee jerk reaction CC .”

    You’ll find no mention of me ever thinking any different. He has fekked things up for years. Heare’s a few of them…

    1.) He sold our gold at a low point. Not only that, he advised that he was going to do it thus suppressing demand/price.
    2.) He has fekked pensions with his stealth taxes that have bankrupted many companies. Woolies being the most current example.
    3.) He chose CPI as an inflation indicator which artificially reduced interest rates and caused the bubble.

    However, his latest reckless gamble to borrow billions is rather like an alcoholic trying to drink himself sober.

    He is a halfwit.

    As regards the Euro, it’s going to fail. Currency union without political union is always going to fail. So, I’d prefer to stick with Sterling.

  • Mack

    Glencoppagagh – “The expansionary option was less obvious for RoI since its domestic capital market is relatively small and borrowing abroad on a large scale could jeopardise its creditworthiness.”

    Your right that the Republic has less room to manouvre in terms of the expansionary option, but I think your reasoning is wrong.

    The domestic credit market for Ireland is the Eurozone (Irish domiciled institutions can borrow or issue bonds in the domestic currency across the world’s largest economy), as such it’s much bigger than Britain’s. The collorary of that is that the Irish don’t actually control it. They pool sovereignty and have an input. Incidentally it looks like there is a large stimulus package coming but at the EU level.

    http://www.spiegel.de/international/europe/0,1518,592710,00.html

    I notice a lot of NI & Scots politicians comparing being in a large economy to being in a small one. Arguing they are better of in ‘large’ UK than in a ‘small’ Independent Scotland or United Ireland. You could easily reverse that – Ireland is part of a much larger Eurozone economy. By the end of this crises we shall see whether or not Europe can act as one to weather the storm. Certainly, the comparisions with Iceland are spurious. Ireland is not like Iceland precisely because it is a state in a much bigger economy.

  • Mack

    “As regards the Euro, it’s going to fail. Currency union without political union is always going to fail. So, I’d prefer to stick with Sterling. ”

    That’s the risk. Of course there is political union – the EU is just that. While in the political arena it’s just missing a top-down, traditional command hierarchy. While that upsets the human animal psyche – there’s no reason why it can’t work. The top-down chain of command does exist in the economic arena under the ECB.

    That said, I would prefer if Britain stuck with Sterling too. The last thing we want is Eurosceptics in the Eurozone!

  • Congal Claen

    Hi Mack,

    The European Union is not political union. So, you have differing laws and tax rates in all the countries that make up the union.

    The current crisis has highlighted that there’s no top down hierarchy in the ECB either. That’s why the Republic were able to bail out their banks much to the annoyance of everyone else in the Euro. Countries are in it for what they can get out of it. No sense of Europeaness. There isn’t even a common banking system ffs. Just a common currency.

  • Mack

    Congal Claen – To some degree, I think we’re arguing semantics here. The EU is political, but I can see why you wouldn’t rate as political union on the same scale as the UK.

    We do have European laws. Common tax rates aren’t neccessary (the states in the USA have different tax rates – e.g. Nashua, God bless ’em – has no state income tax!).

    There is a single central bank & common market – my economics are informed largely from the right (with a strong preference for stong social safety nets, and strong regulation in cases where fear of failure – the creative destruction of capitalism – engenders moral hazard) so that’s good enough for me. All else will flow from that in time. What the market needs, it gets. The other state is just big state beaurocracy.

  • Mack

    Sorry, meant New Hampshire (Nashua is the capital)

  • Greenflag

    CC,

    Note I did not refer to Mr Brown as a saviour nor as a genius . Nor did I mention Mr John (we’ll never devalue the pound unless Mr Soros insists) Major . And as I recall Mr Soros did insist and Mr Major said bye bye to a billion pounds.

    ‘I’d prefer to stick with Sterling.’

    That old captain of the Titanic spirit eh ? Keep right on to the end of the road eh ? I’d suggest some yen exposure plus some euros plus some gold and some property minus any mortgages . But for the true loyalist of sterling there is of course as a refuge of last resort establishments such as this one where succour may be found by means of exchanging all remaining articles of value for pieces of paper with Queenies head on the front of some and Grouchy’s (Wellington) on others. If you are seen to wave a Union Jack and are heard humming Land of Hope and Glory they’ll throw a few extra sterling your way 🙂

    The Gold Shop,
    Pawnbrokers in London
    89 High Street, London NW10 4NT

  • Comrade Stalin

    As regards the Euro, it’s going to fail. Currency union without political union is always going to fail. So, I’d prefer to stick with Sterling.

    You don’t think the political union with Scotland is precarious to some degree then ?

  • Dave

    “You will find it unlikely that Irish Exporters will stand over their figures from 1 March this year in the current circumstances.” – Alan

    The CSO figures for the first 8 months of 2008 show a decline in merchandise exports of 5% and a decline in merchandise imports of 10% compared to the same period in 2007. The IEA predicted a decline of 3%, so they were out by 2%. Since imports declined at twice the rate of exports, that is good news for the balance sheet. There was strong growth in exports that helped to compensate for the decline in exports to the backward economies of Euroland, e.g. exports to the China increased by 31%, Malaysia by 70%, the Philippines by 53%.

    Exports to the US grew by a more modest 3% during the first 8 months of 2008. Given that the euro has doubled in value against the dollar (making Irish merchandise exports twice as expensive), it is a wonder that we are able to export any goods to the US at all.

    “Interesting to see you posting so late in the day – is that Montana time?” – Alan

    No, my internal clock is on Thatcher Time – insomnia masquerading as stamina.

    “The idea spouted by Dave and backed by some others that Ireland could somehow have maintained Celtic Tiger levels of economic growth while the USA , the UK and rest of the EU go into recession is wishful thinking verging on lunacy .” – Greenflag

    The US, the UK, and the EU all go into a shared recession as the inevitable outcome of implementing shared monetary policies. The Federal Reserve, the Bank of England, and the European Central Bank all made the fatally flawed decision to keep interest rates too low for too long in order to stimulate economic growth on the demand-side by stimulating consumer spending with borrowed capital. This quaint Keynesian dogma holds that spending money creates wealth instead of simply creating debt. Ergo, the more money folks spend, the richer everyone becomes. If they don’t have the money to spend, then lend it to them cheaply and they’ll spend it – and the economy will grow! Yes, it’ll grow but only for as long as its growth is sustained by the availability of cheap credit. Once banks stop supplying the cheap credit and have the impudence to demand that the folks repay their borrowings, the economy stops growing and descends into recession as folks realise that they’ve borrowed too much money and they don’t have the wealth to repay it. As this deranged monetary policy was implemented by the US Federal Reserve (and followed by the EU’s ECB in order for its slow-growing economy to keep pace with the US economy – 80% of all new jobs created in the industrialised world in the last 20 years were created by the American economy). Likewise, the Bank of England followed the flawed policy of the ECB in order for the UK’s economy to keep pace with the EU. So, that is how the disease was spread from the US to the EU and to the UK.

    States, on the other hand, which retain sovereignty over their monetary policy act as a firewall to prevent lunatics who are appointed to power in one region having the power to inflict their lunacy on other regions. In that instance, the risk of bad policy in foreign regions infecting other regions is confined to a systemic risk. Because the EU’s ECB controlled the monetary policy of 15 member states in the Eurozone, it was able to decimate their economies by its fatally flawed policies without the governments of those member states being able to prevent it. As Keynes said, “Whoever controls the currency controls the economy.” Ireland cannot now be other than a mediocre economy that is controlled by the EU.

    In Ireland’s case, its growth was achieved BEFORE it entered the Eurozone and its growth stalled thereafter, finally stalling, and contracting as its economy was decimated by the ECB’s monetary policies. The growth in the first two years of Eurozone membership was carryover growth from the actual Celtic Tiger economy (built on free market principles, sovereignty over monetary policy, deregulation, etc) and growth stagnated after that point. In fact, the real collapse of the Celtic Tiger happened as soon as the ECB implemented its monetary policy and started to flood the Irish economy with cheap credit. That is when the housing boom began and after that point, all the growth you saw in the Irish economy was sustained by that supply of cheap credit. That wasn’t real growth but rather phantom growth that we will all now have to pay for. The EU took Ireland’s Celtic Tiger economy and turned it into an economic disaster zone.

  • Glencoppagagh

    Mack
    Of course you’re right about access to capital markets throughout the Eurozone but investors in € denominated sovereign bonds have the choice of several so the appetite for Irish paper might be limited unless of course the yield is made sufficiently attractive.

  • Dave

    By the way, Greenflag, you can check the relevant figures of Irish exports at CSO. You can see clearly from the data below that Ireland’s exports stagnated after it joined the eurozone, and we will in all likelihood celebrate a decade of eurozone membership in 2009 with exports being lower than the level that they were at 10 years before.

    Year Exports
    1990 18,204
    1991 19,070
    1992 21,260
    1993 25,179
    1994 28,891
    1995 35,330
    1996 38,609
    1997 44,868
    1998 57,322
    1999 66,956
    2000 83,889
    2001 92,690
    2002 93,675
    2003 82,076
    2004 84,409
    2005 86,732
    2006 86,772
    2007 88,852

    In 1998, for example, GDP growth was 8.7% and inflation was 2.2% with interest rates set by the Irish Central Bank at a sensible level of 6.2% that was in full accordance with the needs of the Irish economy. After transferring sovereignty over Irish monetary policy to the European Central Bank, interest rates were set by the ECB under their one-size-fits-all policy at levels that were inappropriate for the underlying indicators of the Irish economy. House prices and sales of new cars, plasma TVs, Armani suits, etc, soared as the Irish binged on this supply of cheap credit. With two years of joining euroland, the ECB fully controlled the Irish economy and exports stagnated at that point. That is also the point at which the Celtic Tiger economy of the previous 10 years as seen in the data above died, being replaced with the Phantom Tiger economy of the EU.

  • George

    Dave,
    a point on those export figures. You forget the multi-billion euro VAT scam originating in the UK called VAT carousel fraud.

    Look at exports to GB

    2001 – 20.765 billion
    2002 – 20.85
    2003 – 13.4

  • Dave

    “Losses in Europe are estimated at €60bn a year, equivalent to more than half the EU’s annual budget.”

    I had no idea that carousel fraud was on that scale, George. Astonishing. That is a 60 billion fraud that is created by the EU’s single market and is ultimately paid for out of the pockets of the citizens of the member states whose respective governments are subject to the fraud.

    Incidently, at least one senior member of the Irish government seems to recognise that one size doesn’t fit all – even if he is careful to phrase his criticism in a manner that doesn’t alarm the Europhiles who pollute the Irish government and the Dial (accounting for 160 out of 166 TDs):

    [i]”There has been a very rapid deterioration in the Irish economy in the last year and the commission have acknowledged that they have been taken by surprise by the rapidity of the deterioration. So you can’t lay that at the door of the Government,” said Mr Lenihan when asked if Government policy was to blame for the housing bubble and the recession.

    He said Ireland had been harder hit by the economic slowdown than any of its EU partners because it was an open economy with ties to the British and US economies.

    One of the main factors fuelling the domestic housing bubble in the Republic was the low interest rate policy pursued by the European Central Bank, said Mr Lenihan.

    “I’m not blaming Europe I’m simply drawing your attention to the objective economic factors that are there,” he said as he arrived at an EU finance ministers meeting.[/i]

  • Mack

    Dave – I think it’s simplistic to blame Euro membership for Ireland’s woes. House prices entered the stratosphere because the regulator was asleep at the wheel. I shudder at how much money I was able to get approval for! Germans did not abuse cheap and available Euros to the same degree. We had a government that stoked a bubble with pro-cyclical tax breaks – that was even in denial that there was a bubble months after it had burst. Imho, the causes of Ireland’s current woes lie closer to home, though I agree with you the last 7 or 8 years were a mirage.

    We can also look at the Icelandic experience for an alternative. Borrowed Yen and Swiss Francs poured into their higher yeilding bank accounts, and they went on a credit binge that made ours look like a teenagers first credit card. Euro membership protected us from hot capital flows in (and later, in this crises, out). Which I think ties in nicely with this comment –

    “States, on the other hand, which retain sovereignty over their monetary policy act as a firewall to prevent lunatics who are appointed to power in one region having the power to inflict their lunacy on other regions”

    There are enough examples of failed currencies to suggest this protection is an illusion. Give me Alex Weber over any local eejit any day of the week.

    The stagnation in Ireland’s exports does seem to correlate with Ireland joining the Euro – at the same time though the housing bubble was probably attracting and consuming large amounts of the available capital and entreprenuers in the country. At the bubble drove wages higher to unsustainable levels reducing competitiveness, while sales of expensive houses drove GDP ever higher.

    Glencoppagh –
    “Of course you’re right about access to capital markets throughout the Eurozone but investors in € denominated sovereign bonds have the choice of several so the appetite for Irish paper might be limited unless of course the yield is made sufficiently attractive. ”

    Very true, that’s the bond market, and worth highlighting explicitly.
    Being able to borrow in the domestic currency is a massive positive imho. For Euro investors in Irish bonds there is no currency risk.
    Foreign investors in British bonds are also taking on currency risk (as well as demanding a fair yeild). Big Gordo’s Keynesian adventure may well reduce their appetite for that particular risk in the future.

  • Dave

    Sorry, Mack, but I automatically lose interest when I hear Iceland being proffered as a scaremongering alternative to the Eurozone. The alternative to the Eurozone is the punt. You know… that stable floating currency gave us low inflation and the ability to set our own interest rates along with the ability to devalue it when that was required to regulate exports? Iceland used high interest rates to attract foreign to its banks currency and that policy destabilised its currency.
    Secondly, monetary policy is a critical tool for controlling the economy. Rather than restate the argument, I’ll repost it: “The Irish government could have warned against the dangers of the ECB’s monetary policy of flooding the Irish economy with cheap credit, but that would have drawn the public’s attention to the folly of Europhiles surrendering sovereignty to third parties and this Europhilic government’s intent is to achieve full integration with the EU. It could also have imposed higher stamp duties on properties as a means of compensating for its lack of sovereignty over its monetary policy, but that would have been pissing in the wind since a government must avoid a situation whereby the agency that controls its monetary policy is using it to influence its economy in one direction and the government is trying to influence it in another direction. To avoid the conflict, that is why the Bank of England and the Federal Reserve are nominally independent from government but obliged to follow the economic policies of the government. Unfortunately, no such obligation applies between the ECB and the Irish government, so the Irish government must simply follow the monetary policies of the ECB and make sure that its own economic policies do not conflict with it. The ECB controls the Irish economy and it has now turned a solid growth economy into a dismal failure”

  • Dave

    It seems we have all gone italic. Anyway, typo: “Iceland used high interest rates to attract foreign capital to its banks and that policy destabilised its currency.”

  • Dave

    By the way, why don’t Europhiles say “Oh look at Switzerland and Israel! They’re both the same size as Ireland and that’s what would have happened to Ireland’s currency if it never joined the Eurozone!”? Why? Probably because both the shekel and the Swiss Franc are among the strongest currencies in the world. So, far from falling victim to lurking Soros-like figures, both currencies are thriving outside of the Eurozone along with dozens of the world’s other currencies. Europhiles who point to Iceland as the alternative to membership of the EU’s ECB are engaging in scaremongering of the worst sort.

  • Mack

    Dave -Ok cool – I think we’re thinking along the same lines. The difference, I think is, you trust our local bankers to manage a fiat currency effectively – I don’t.

    Switzerland is an entirely different proposition to Ireland. The crazy kind of bubble we’ve just had, wouldn’t be tolerated. Take a look at how our local leaders manager our public services. Switzerland is a country where every hospital has another hospital ready to go in an emergency beneath it! Iceland has lot of similarities – too many people believing their own guff about being the richest or second richest people on the planet! That you get rich by borrowing ridicolous amounts of money. The prudent Swiss don’t think like that – Icelanders and the Irish do.

    George Soros reckons we’re at the end of two bubbles, one national bubbles in property and another the end of decades long credit expansion. These are unprecendented times. The punt is completely untried in these circumstances, but fortunately our Central Bank, our Regulator, and our politicians are not. They failed to recognise the bubble for what it was, they failed to act responsibily and prudently. They ramped up public sector spending on the back of unsustainable tax revenue increases. They thought they had solved the alchemy of finance. That this would go on forever. They had not. It did not.

    The importance of the way the government ramped up public spending in evaluating their performance is critical. All governments face pressure to keep the masses happy with lower taxes than necessary and the unions happy with higher public sector wages. Delinquents like Argentina end up attempting to do both, resulting in the debasement of their currency. Look what our government did? Trust them to make the hard decisions?

    Your confidence in these same charlatans to navigate the punt through the treacherous waters of bubble is misplaced. Note it was management during the bubble that was most important. 12 months ago Bertie was telling people who pointed out the economy was out of kilter to go kill themselves!

    Anyway, our debts are in Euro. There is no going back now. I’m happier to have Weber and Trichet running the show than Hurley and Neary. I understand you may prefer the punt, but you too can take solace in that.

  • Harry Flashman

    [/i]hopefully that will do it

  • Harry Flashman

    Yup fixed, square brackets are yer only man Mack.

  • Mack

    Dave – The ECB did not flood the Irish economy with cheap credit. The made cheap credit available and Irish domiciled financial institutions flooded the Irish economy with cheap credit. The ability of the Irish economy to consume cheap credit was at it’s core determined by the capability of banks to extend such credit to the buyers of property. The unit price of a house determined the total amount of credit sucked into the system.

    The regulator turned a blind eye while banks loosened their consumer credit restriction. House prices soared. Unlike typical economics, we were in a Soros’ Reflexivity situation. Increased property prices led to increased artificial demand from investors (we have in the region of 300,000 empty houses!!). Increased demand of housing was met by increased supply. Increased supply meant a growing construction industry which sucked in migrant workers = increased demand. Feedback loop. Rising house prices gave banks the confidence to further loosen their lending criteria (HELLO Mr. Neary! HELLO!) further fueling the reflexive loop.

    Increased demand and increased unit prices, meant banks felt increasing comfortable lending much bigger sums to developers.

    None of this was Europes fault. The demand for the credit that arrived here was generated internally.

    The regulator could have stopped it all. Everything came down to the price of a house. Had the regulator stamped his foot and prevented credit terms being loosened, this whole fiasco could have been avoided.

  • gram

    >>As regards the Euro, it’s going to fail. Currency union without political union is always going to fail. So, I’d prefer to stick with Sterling.<

  • Greenflag

    ‘Had the regulator stamped his foot and prevented credit terms being loosened, this whole fiasco could have been avoided.’

    Or at least very much reduced . The root cause of the debacle has to go back to the USA’s over reliance on credit to keep it’s economy from a major downturn following 9/11. The USA’s economy is driven by 70% consumer expenditure . The average debt being held by Americans is 110,000 dollars including mortgages . This is up 150% since 1994 ( the year the GOP won control of Congress )

    We can certainly lay some responsibility for this crisis locally at the feet of an Irish Government which should have known that property prices in the couple of years before the burst bore no relation to people’s incomes.

    This was Ireland’s first major mass residential property ‘burst’ so presumably lessons will be learned from this mess . The UK has had several particularly in the south east London area over the past few decades.

    The question now emanating from the USA’s experience is who regulates the regulators ? Where does the money come from in the first place when so many people are in so much debt ? Debt itself creates via the banking sytem the money supply for even more debt . Throw in banker’s greed and a high tech rapacious financial services sector plus an emisserated middle class which ‘thought’ that their home was an investment which could only increase in value and the recipe was there for disaster .

    Perhaps it’s time for the world economic system to write off all debt built on inflated mortgage values ?

    Banks can only make money by people putting themselves in debt. The entire economic system can only work if people spend more than they can earn . If by some miracle everybody paid all their debts tomorrow they would find that the money supply would ‘dry up’ and there would’nt be any banks the day following 😉

  • Greenflag

    ‘He said Ireland had been harder hit by the economic slowdown than any of its EU partners because it was an open economy with ties to the British and US economies.’

    Wow who would have thought thought that back in 2005 as the entire Anglosphere indulged in a property bubble build up ?

    ‘One of the main factors fuelling the domestic housing bubble in the Republic was the low interest rate policy pursued by the European Central Bank, said Mr Lenihan.’

    Which should have prompted Mr Lenihan’s predecessor to rein in the greedy financial services sector and the property developers .

    Tough call when the latter are one of the party’s main financial supporters .

    Ireland is not Switzerland and never will be . We only ever had one English Empire to contend with . The Swiss were surrounded by a multiplicity to deal with and had to walk a fine line between France , Germany , Italy and the Austro Hungarians . All of the latter found it ‘financially ‘ prudent during their centuries of internecine conflict to have at least one nearby territory where they could stash their fortunes.

    Likewise we are no Israel . Apart from the climate there is the not inconsiderable matter of being surrounded by a billion neighbours who would rather you ‘moved ‘ back to somewhere you don’t come from .

    Like it or not we are within the Eurozone and right now that’s probably the best place to be .

    And WTF is Cowen up to running around Finland and the Czech Republic and meeting with the Welsh First Minister while watching Munster play Llanelli Scarlets at the Millenium Stadium ?

    Has to be seen to be doing something I suppose in these trying times eh ? Unlike the dualty North of the Border where they can get by with sitting on their tufts for 5 months and their Finance Minister can then come out in public and say with a straight face that ‘doing nothing ‘ is not an option ? Now that is what’s called chutzpah .

    Could make it as a deadpan comedian if all else fails.

  • Mack

    So it begins –

    Hong Kong based ‘Bejing’ loyalist hints the Chinese may have no appetite for Sterling denominated bonds.

    Headline actually stronger than that –

    “Britain should join the Euro says Hong Kong’s Tsang”

    http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3531461/Britain-should-join-euro-says-Hong-Kongs-Tsang.html

  • Mack