“Surely not; it might mean replacing mantras with hard thinking..”

In the Sunday Business Post, as the discussion on the Irish economy continues, David McWilliams has another look at the history of economic recoveries.

In the light of our own banking travails, much has been made of Sweden and Finland’s bank recapitalisation and recovery plan. What most of this discussion fails to mention is that the devaluation and subsequent printing of money by both central banks did the trick. Is it worth considering here? Surely not; it might mean replacing mantras with hard thinking. That would be far too much to ask as the economy heads for a 10 per cent contraction.

Read the whole thing.

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  • frustrated democrat

    The serious position of the Irish economy has yet to be fully grasped, a 10% downturn may only be the start.

    The exchange rate differential with the £stg will have very serious consequences as exports decline and imports increase. I know of NI companies who are now tendering for jobs in the RoI at a 30% price advantage over a year ago.

    I cannot really see how the Euro can be maintained when a 30% devaluation is also required to match the UK if not more. The financial centre is also in jeopardy for the same reasons as salaries and overheads are way beyond those now paid in London and cash is in short supply.

    The future is bleak, it is at times like this the 60%+ of GDP in NI looks very comfortable when combined with the 30% devaluation v RoI.

  • Quagmire

    The NI command economy is not sustainable in the long term though. Whenever El Gordo or whoever is in charge in London decides to turn the tap off, we will be in shit street. The Republic has a highly educated workforce and very competitive tax rates (12.5% corp tax compared to our 28%) which will stand them in good stead when this is all over. Currency fluctuations served the north’s economy well this time, but this may not be the case the next time. The truth is both jurisdictions in Ireland cannot employ effective long term strategies for their economies while the border still exists. We need an all Island economy/approach to truly reach our full potential. The border holds us all back.

  • Modernist

    Since sterling has been devalueing so much recently does that not make the repayments on foreign loans taken out by UK based banks to prop up the property bubble more expensive to pay back. Alot of the money was probably borrowed in euro so would it not have to be paid back in euro? I really wonder how much the NI economy is actually benefiting from the recent increase in trade from the south. I’ve heard about alot of job cuts on the north recently(mainly well paid jobs) .Is the increased tax take not just moving south to fill El Gordos coffers in London?

  • percy

    Niall Ferguson has a great piece … futuring.
    I don’t like his politics but he has great insight, and writes better than he speaks.
    His approach is global.

    An imaginary retrospective of 2009

  • Dave

    McWilliams is essentially arguing that Ireland should reclaim sovereignty over its monetary policy from the ECB, but for some curious reason (perhaps the fact that he is writing for a Europhiliac newspaper) doesn’t make this explicit – or perhaps it is because the bi-partisan policy that operates in both the houses of the Oireachtas to censor all democratic debate about the merits of EU integration has created a climate of hysteria within the Irish media wherein it is deemed to be heresy for anyone with a public profile to suggest that Euro-Federalism is not in the Irish national interest (and to even suggest that Ireland should have a national interest).

    Does Ireland have a future? I wonder why folks insist on talking about a ‘recovery’ in the Irish economy when there is nothing to recover. According to the CSO, Ireland’s external debt stood at €1.67 trillion as of 30 September 2008. That was the Phantom Economy created by the monetary policy of the ECB. The wealth that was in the Irish economy was all borrowed wealth from foreign banks. In effect, Ireland had an overdraft and not an economy. All of that money that folks borrowed to buy vacant houses (and 340,000 properties have no tenants) was borrowed from Irish banks who borrowed it from foreign banks. That was the fraud that was our ‘economy’ and we can’t recover that fraud. What do we have to recover?

    Ireland’s national debt is now 960.86% of GDP. That’s is the second highest of any country in the world (only the principality of Monaco is higher). That external debt per capita is $448,032, compared to $42,343 for the US and $189,855 for the UK. Out of all the countries in the world, Ireland is the sixth most indebted (quite an achievement for a country with a tiny population).

    How are the Irish going to be able to repay all of that debt when they don’t even have a proper economy to generate the wealth to do it? It’s now a case of what can we replace our fraud with? As McWilliams points out, we can’t even build an economy based on importing wealth (by exporting goods rather than importing wealth by borrowing it) because the Euro is insanely overvalued and that kneecaps (to borrow a term from NI) our manufacturers and exporters.

    We can’t leave the Euro now as the ECB has truly screwed Ireland and an independent currency would go haywire, so we can’t regain control over monetary policy and, ergo, can’t regain control over our economy. Joining the Eurozone was the worst mistake Ireland ever made, and you may thank your Europhiles for that and your policy of censoring all debate on the subject.

    What a bloody banana republic…

  • percy

    dubs can you put that stick away, my back hurts mate

  • Dave

    By the way, Ireland’s external debt was 508,621m as of October 2003:

    http://www.cso.ie/releasespublications/documents/economy/2003/externaldebt_q22003.pdf

    Ireland’s external debt was 867,747m as of June 2005:

    http://www.cso.ie/releasespublications/documents/economy/2005/externaldebt_q22005.pdf

    Ireland’s external debt was €1.67 trillion as of September 2008:

    http://www.cso.ie/releasespublications/documents/economy/current/externaldebt.pdf

    That is an increase of 1162m (€1,162 trillion) in 5 years. That was where your ‘boom’ came from – borrowed wealth (which you now have to try to earn the wealth to repay sans a little thing called an economy).

    Percy, the stick stays. 😉

  • frustrated democrat

    Quagmire

    YOu are correct about the border, it is keeping the RoI out of the UK where it logically belongs in an economic sense.

    A United Ireland within the UK is the logical outcome to many of our problems.

  • Dave

    Give us two trillion euros to clear our external debts and you can have the other three counties of Ulster (for an extra tenner, we’ll throw in Cork).

    A large measure of this sabotage of Irish sovereignty – of the Irish nation-state – is rooted in that Redmondite agenda. John Hume, of example, proffered unity in a context where the Irish people would be majorly stripped of their right to self-government by a process of transferring sovereignty to the EU and Bertie “I won large quantities of Sterling on a horse called ‘Tout & About'” Ahern saw uncontrolled immigration to Ireland as a means of destroying its status as the last de jure nation-state in the EU (all of the others had a substantial non-national population to promote self-censorship of the indigenous culture as a means ensuring multicultural harmony), and it wouldn’t surprise me in the slightest if he oversaw this destruction of the Irish economy toward that agenda.

  • Scaramoosh

    There is one subtle difference between the situation now, and any previous historical one, and that is the level of personal debt in both the UK and Ireland. Whilst the personal debt hangover remains, no amount of fiscal easing is going to create demand from consumers. Moreover, the full extent of the debt position will not be revealed until house prices have stopped falling.

    The debt position, of course, feeds into the housing market, where it is very difficult to forsee any catalyst that is going to drive prices back up. In the future, everybody is going to be restricted to 3.5 x their salary (or combined)and house prices are going to have to fall until this level is reached. After that, the catalysts that drove the last few housing booms are absent from the equation.

    In broader terms, one should keep an eye on China.
    Any slowing down in production there, is likely to result in social unrest; perhaps on a scale that nobody has yes anticipated.

    Rhetoric is fine, and measures of last resort must be tried, but neither are going to get us out of the mess that we are in anytime soon.

  • frustrated democrat

    Dave

    €10 for Cork way over valued.

    From my oberservation over the years one indicator of problems in any economy is when average house prices pass 5 times the average salary. That is not to say everyone can have a mortgage of 5 times their salary, all it says that someone on an average salary with a deposit can buy an entry level property eg if the average salary is £25,000 then the average house price should be £150,000 which means that a property at entry level should be around £100,000 or 4 times average salary. If there are no entry level buyers there is no market!

    How far are we from that level north and south?

  • blinding

    For economic stability on this Island we really could do with just one currency in everyday use on the island. Whether this is sterling or the euro well thats a big question. Could Northern Ieland join the euro and remain part of the UK.

  • Ulster McNulty

    “How far are we from that level north and south?”

    Don’t worry – we’re getting there.

  • Mack

    Calm down lads!

    First some facts.

    Total United Kingdom exports (2007) – $442.2 billion

    http://en.wikipedia.org/wiki/UK_economy

    Total Ireland (Republic) exports (2005) – $102 billion

    http://en.wikipedia.org/wiki/Economy_of_the_Republic_of_Ireland

    To spell it out with less than 7% of the population of the UK we export 1/4 of what they do.
    It is likely our exports will fall in this recession, but for those of you who think that we have failed as an exporting nation and that ‘devalutation’ relative to a collapsed Sterling (the only important currency that has actualy collapsed relative to the Euro) – I say take a good luck at the export figures above, breath deep and reflect on the meaning of the phrase “Trees don’t grow to the sky” (especially Dave!!).

    Next reflect on this

    Ireland’s main export markets

    United States 18.7%
    United Kingdom 17.3%
    Belgium 15.1%
    Germany 7.3%
    Netherlands 4.8% (2005)

    So the currency of one of our partners has collapsed. 83% of our export markets are unaffecting. In fact the currency of one of our main trading partners has strengthened against the Euro.

    Let’s not obsfuscate things. The main problem is the insolvency of the banks. No one was screaming blue murder about the Euro when the Dollar was at $1.60 per Euro earlier in the year.

  • Mack

    For those who think we need a single currency on the island, or that Ireland needs to rejoin the UK / Sterling area – this facts might be worth considering…

    1. Just 2% of Irish (Republic) exports are to Northern Ireland
    2. Just 17.3% of Irish exports are to the UK
    3. Most of our retail goods are foreign imports
    4. Most of your retail goods are foreign imports

  • Mack

    Dave –

    On Irish debt, large amounts of it is owed by large property developers who should do the decent thing and just admit they are never going to able to repay it. Ultimately those who lend are as responsible as those who borrow, the value of your investment can fall as well as rise (etc). We’re all adults, the foreign issuers of that debt should not be repaid.

    That debt is mostly private, rather than sovereign debt. The Irish government, having made the mistake of guaranteeing that debt for two years, should do all they can to make sure that the people are not left permanently on the hook for it.

  • David (not Dave)

    Mack,

    Remember that people’s bank deposits are the money that has been loaned to the irresponsible investors. If the investors default then the savers get hammered with the bill. Banks only take the commissions, they don’t lend their own money.

  • Mack

    David –

    They can’t pay them back – they are bankrupt, but are being molly-coddled. The loans to the developers are supposedly assets on the banks balance sheets – it’s the other responsibilities including deposits (and money raised on the wholesale markets) that are liabilities and many banks won’t be able to meet these.

    Currently the government (and thus the tax payer) is on the hook for all liabilities (deposits, wholesale borrowing other sources of capital) money. Over the next 20 months or so, I’d like to see the government manoever us, so that some banking system remains in Ireland (hopefully much reduced and more prudent) and that by the end we are not guaranteeing banks liabilities beyond some deposit protection.

    If it’s a choice between paying back foreigners who lent credit junkies their fix and bankrupting the country – or telling the foreign lenders they made a mistake. I’d take the second option.

    The price to pay to save banking in Ireland for the Irish, may be to great. The Irish banks messed up anyway, I can’t see foreigners doing any worse. I just hope that the government does not permamently saddle us with that debt, that Dave thinks it will…

  • David

    Mack, your policy is to make Ireland a worse basket case economy than Iceland. I do not see how Ireland could default on foreign debts and remain within the eurozone, or even the EU. It seems like a suicide option.

    It is obvious that there is no easy way out of the economic crisis, the problem is that it is not that clear whether there is even a difficult way out. I think that the interconnected nature of the world economy means that decisions in individual countries, especially small ones, are not likely to make any big changes.

  • Mack

    David –

    They’re not sovereign debts, so it is not ‘Ireland’ defaulting on foreign debts. They’re debts held by insolvent banks! The tax payer is not responsible for that – the commercial entities that undertook the loans are. They are now bankrupt and on government life-support.

    What we need is solvent, well-run foreign banks to come in and take over the market from the incompetent bankrupt Irish banks. People seem to be scared of this, but like I said, they couldn’t do a worse job!

    Any insolvent Irish banks should be let file for the most suitable form bankruptcy once the guarantee ends.

    The reason Irish sovereign credit spreads have been rising, is because the guarantee makes the government temporarily responsible for repaying those liabilities. The market rightly questions the ability of the Irish government to repay any new debt issued. What we need to do, is get those commericial liabilities of the governments balance sheet. If that means they won’t be paid back – so be it – the commerical entity that entered into that arrangement won’t exist either.

    If it turns out the banks aren’t insolvent – then happy days. I really do hope this will turn out to be the case, (and realisitically it might be for one or possibily two banks) but I think most people are sceptical about this.

  • frustrated democrat

    Mack

    You need to remember that the UK may only be about 20% of exports overall but I suspect in certain market sectors it is much higher, such as maybe food.

    This coupled to a rise in imports from the UK and a collapse of markets in the the US should send out serious signals that to try to sustain its position and competitiveness it needs a devaluation in its currency by at least as much as the £.

    It does not take a major move in one thing to lead to potential economic collapse just a few smaller ones will have the same effect.

  • Mack

    FD –

    This coupled to a rise in imports from the UK and a collapse of markets in the the US should send out serious signals that to try to sustain its position and competitiveness it needs a devaluation in its currency by at least as much as the £.

    Nonsense. If markets in the US have collapsed, how would a depreciation of our currency help? Incidentally, relative to the dollar the Euro has fallen about 20% since the summer.
    If the UK is collapsing how would we make up the loss caused by devaluation? The broke British would need to be spending a lot on Irish products!

    How would we pay back our Euro mortgages, and other loans?

    Ireland should focus on areas where it has a comparative advantage. We can’t compete with everybody on price. The Chinese can make gadgets cheaper, the Argentinians can perhaps farm beef for less. More important for our economy going forward is focusing on delivering high value, hard to compete with products and services – if you want Botox in Britain, who are you going to buy it from? (Hint: it’s made by Allergan in Westport). If you want to promote your British website, who are you going to purchase search keyword advertising from? Google in Dublin, perhaps? (If you want world-leading e-learning for schools then see Riverdeep / Houghton-Mifflin-Harcourt in Dublin – or best of class medical devices then try Creganna in Galway – to add a couple of Irish owned firms to the list).

    If you want the bottom end of the market, fine. There’s a lot of competition down there.

    In the areas where we get hammered on price by we need to become more efficient. Perhaps uncompetitive farms will go bust – allowing bigger more efficient farms to buy them out. Perhaps companies will re-engineer their business processes and outsource non-core work. Perhaps they will establish low cost bases in the UK. Perhaps, wages in Ireland in some areas need to fall! The best course of action for each company may be different, devaluation is the lazy man’s way out – it does not drive increased efficiencies, in fact it often causes the opposite – there is no hard thinking at all there!

  • frustrated democrat

    Mack

    I wish I lived in your world where the West was so far in advance of the rest of the world, the facts are it isn’t any longer, the East has cauught up in terms of quality an innovation.

    The high value of the RoI wages and other cost has got to be reduced (the same for the UK) to a level where the RoI is competitive again it just isn’t at the moment and the longer you look for these ‘superior niche’ markets the longer it will be until a recovery starts.

    What can be produced in the RoI that can’t in the far East that will make a meaningfull difference?

    The time has come to look at the real world and admit the employees in the RoI are overpaid and will have to reudce their costs immediately, the easiest way is by devaluing the currency to a level where RoI is again competitive and can start to grow again. The 30% fall in the £ is achieving that already. The alternative will take so long it will be too late too matter.

  • Dave

    Mack, as George has pointed out, you need to discount Carousel VAT fraud* from those figures. Also, Ireland’s exports have stagnated since joining the Eurozone and we will end a decade of Eurozone membership with fewer exports than when we began it. That is failure, not success. In addition foreign-owned firms were responsible for over 90% of Irish exports (they also export their profit); and they are leaving for more competitive economies (EU countries such as Bulgaria and Cyprus, for example, have lower rate of corporate tax than our fabled rate and Estonia has now abolished corporation tax). Less than 8bn is exported from Ireland by Irish-owned companies. That is a pitiful amount and it shows how vulnerable Ireland and its Phantom Economy are.

    * This EU fraud costs Irish taxpayers pay billions annually (another hidden cost of our EU membership).

  • Mack

    Frustrated Democrat

    That’s a stronger argument, something I worry about too. We can’t get into a race to the bottom, there is real wealth in the West and thus far the East has specialised in making providing low cost products and services for the Western market (rather than develop their own internal consumer markets). We have intellectual property rights that protect our innovations in western markets. We have strong regulations that inspire confidence at the high end of the market (want your life support machine sourced from China?) and strong legal traditions to enforce them.

    Large devaluations erode the capital base (your innovators and companies can purchase less cheap Eastern labour if they need to), it risks importing inflation (never mind printing money) – energy costs rise etc.
    Even then, with reduced labour costs it may not be enough to compete on price alone.

    No doubt about it though. We’re in a period of relative decline re The East. That may not require actual reductions in standards of living – Ricardo would argue otherwise. If it does, hopefully it can be managed over a long period of time. That said the innovative Japanese have coped really well in this environment so far.

    I take it you regard the fall in Sterling, and concommintant fall in purchasing power / wages as permanent?

  • Mack

    Dave

    In addition foreign-owned firms were responsible for over 90% of Irish exports (they also export their profit);

    Publicly traded companies either reinvest their profits in the company, or redistribute their profits to their shareholders as dividends. This is the same for Elan (Irish) as it is for Pfizer (US). The shareholders of each could be from anywhere. They are taxed here on those profits, and pay wages here – whether they are Irish or American.

    I’ve seen that 90% quote a lot, but never with any hard facts.

    According the Irish Exporters review of 2007 the IFSC accounted for 33% of Irish service exports of which their were (€64.8 billion for the year 2007). While many banks from many countries operate there, the IFSC is itself an Irish institution. Would you deny exports from the City of London as British exports?

    In addition the same review says that tourism accounted for over €5 billion of exports (selling to foreign tourists – you may not be counting these as exports).

    There were €7.2 billion exports in the Agri-food sector. Surely most of these would count as Irish?

    Many of our software companies have been bought out by US multi-nationals. Does this discount exports by Iona, for example?
    Other subsiduaries have substantial Irish management ownership. Still others exist to sell services into the Irish and European markets – they’re well embedded into the system.

    I don’t think it matters where a multi-national has it’s ultimate HQ as long as it is contributing to our economy and intends to stay a while. Wages aren’t the only concern – there is infrastructure (commercial top level broadband), skillset, ability to attract workers, aforemention protection for intellectual property rights, legal system, banking system (ahem) etc.

    Btw, can you name any multinational that has left Ireland for Bulgaria or Estonia?

    While Dell leaves, Facebook looks for Dublin office space.

    Presumably VAT fraud also affected UK exports?

    Here are those links –

    http://www.irishexporters.ie/IrishExports2007Review.shtml

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

  • frustrated democrat

    Mack

    I am currently attending a health exhibition where they sell, among other things life support machines, the quality is equal to anything in the West and much cheaper.

    I cannot see a slow move to lower wages being possible as the change in economics is here and now.

    The pay back for years of profligacy in the US, UK and RoI is happening, largely out of control, and no matter how much money is thrown at it will not get us back to where we were or anywhere close.

    I don’t how it can be done but the RoI needs to get out of the Euro and let its currency settle to whatever level the markets demand or it could even link back to sterling as the two countries have largely convergent cycles.

  • Mack

    Alan Aherne is excellent on this today in todays Irish Times.

    Solving Ireland’s fiscal crises (Income tax rates will have to rise)

    I think his prescription is more realistic than David McWilliams’.