Celtic Tiger Sharpening her Claws?

Peter Sutherland, the Irish chairman of BP and Goldman Sachs International, accentuates the positive in the Financial Times. He highlights some issues we’ve mentioned here previously, such as Ireland’s flexible labour market that is in the process of boosting Ireland’s international competitiveness, and the improvements in Ireland’s balance of trade.

While I do not want to trivialise the difficulties that Ireland faces, its problems are acute in nature rather than chronic. Once Ireland overcomes this short-term panic – and I believe that last week’s budget, whatever its alleged deficiencies, was a vital step in this process – the basic strengths of the Irish economy remain formidable. If the Irish people continue to react constructively to the harsh measures necessary, Ireland will be in a very strong position to benefit from the eventual global recovery and its healthy demographic profile will greatly help in this.

I agree, once we solve the problems associated with the destructive whirlwind that was the great Irish property bubble, we can back on track rebuilding a strong economy that provides productive employment for the vast bulk of our citizens. When we do, let’s hope the lessons of the past our learnt and we never allow ourselves to be convinced that debt = wealth again.

  • TK

    At last people are starting to focus on recovery and not the doom. The economic past – like our own – turblent past- provides acres of information for armchair commentary but it does not bring us one inch further on. Thank god for Peter Sutherland – I hope his Fine Gael colleagues are listening!

  • ngg

    mack

    since we are next door neighbours i wish nothing but success for the republic.

    however i cant see how it will easily prosper in the medium/long term. the big companies, which are mostly based elsewhere will be faced with the “bring home our jobs” problem. this will mean that new big high tech jobs will be missing in the future.

    ireland is far, far from the centre of europe, leaving it far from political power and even more poorly placed to sell its produce as we move on into a world where long distance transport is seen as evil.

    the UK and USA will continue to offer jobs to the highly skilled and as we know the property boom is well and truly over.

    if anyone can tell me why im wrong please do, but i think the celtic tiger has had its claws pulled.

    ngg

  • Dave

    “I agree, once we solve the problems associated with the destructive whirlwind that was the great Irish property bubble…”

    That was a symptom of the problem rather than the cause of it. The cause was expansionist monetary policy within capital markets that provided too much money far too cheaply, leading to too much money chasing too few investment opportunities, creating bubbles in economies for whom the monetary policy was entirely inappropriate and leaving one of those economies (guess which one?) with an external debt of 1.67 trillion of which, according to Mr Lenihan and his assets management gimmick, a mere 90 or so billion is bubble money. That external debt, by the way, was 11 billion punts before Ireland joined the Eurozone.

    “Another issue on which there has been much comment is the alleged disadvantage to Ireland of being in the eurozone. In reality, Ireland may have been saved by its membership from the possibility of a run on its currency – however unwarranted such a run would have been.”

    Mr Sutherland is a shameless europhile who is repeating defective circular logic that claims that membership of the Eurozone is a saving grace, when, in reality, Ireland would not be in need of saving graces if it did not join the Eurozone.

    Just as arbitrary macroeconomic policies have destroyed Ireland’s domestic economy, arbitrary macroeconomic policies will have the same effect on any recovery plan. It is also not the case, Mack, as you seem to think, that Irish ministers could have warned about the dangers that the ECB’s monetary policy would have on Ireland’s economy since (a) the people would have asked why then did we give control of our economy to the ECB; (b) finance ministers are obliged under the Maastricht Treaty to adopt a policy of support for the common macroeconomic policy, and (c) macroeconomic policy is none of their business, since it is illegal for a member of the Eurozone to offer any advice to the ECB about what macroeconomic policies would be helpful to the domestic economy.

    There would have been no credit bubbles if the Irish central bank still controlled Ireland’s monetary policy. The problem of easy credit would not have arisen since we would not have signed up to the regulatory framework, and the problem of excessive borrowing would not have arisen either since the central bank would have raised interest rates to prevent the excessive borrowing, the bubbles, and the overheating. Borrowing was out of control by design.

  • jone

    I always smile when the enormously self-regarding figure of Peter Sutherland fails to mention his tenure as a non-exec at RBS in the potted CV at the bottom of his regular epistles.

  • Frustrated Democrat

    Unless you can get companies headquartered in the RoI then you are a number on a balance sheet and in a mobile world as secure as the next increase in the Euro or market downturn.

    You need ‘Owned in Ireland’ not ‘Made in Ireland’ the same problem exists in Northern Ireland where historically we had several major manufcturers which declined and died and the the man made fibres which again died as they were not headquartered here and new investmnets went elsewhere.

  • Oiliféar

    The one good thing about all of this is that all the Republic’s chickens came home to roost at once: global recession, property bust, financial crisis, domestic recession, Dell moving out. It was feeling biblical there for while, but imagine if they had come one-after-another?

    Sutherland is spot on (why would he not be?) when he describes the problems facing the Republic as being acute. The fact that we are still standing demonstrates that they are not chronic.

    Time now that the panic is over to re-focus our energies on coming out of this in an even better place than we went in. We’ve learnt some good lessons that won’t be easily forgotten. The recession will strip the fat and re-double our energies.

    ngg, we live in a globalised economies. There are globs, but no longer any centres. Britain and Ireland benefit by being inside the glob that is the EU, but there is no centre to it. Just as there is no centre to the global economy.

    As regards transport, it is as easy/difficulty to fly/ship/truck a laptop to France/Italy/Spain/Germany (to take the Dell example) from Ireland as it is from Poland. It was not for want of transport that Dell shipped out of Limerick, but for want of lower labour costs. Not being actually on the continent is of little significance to Britain and Ireland. Being island economies doesn’t matter for air transport, is of benefit for sea transport and, when you are an island like Britain or Ireland, ferry transport is of such global excellence that it is genuinely not an issue. How often do you hear road hauliers in Britian or Ireland complain about the state of ferry transport between or off these islands? It just doesn’t happen.

    As for “bring home our jobs” problem … ummm, there is no such problem. We live in a globalised economy. “Ireland”, for example, has invested as much in the “US” as the “US” has invested in “Ireland”. No centres. No homes. No “Ireland”. No “US”.

    You are right though when you say that the property boom in the US and UK is well and truly over (as it is in Ireland). That is a good thing. The UK is the second-largest recipient of FDI in the world, but that is not evidence of a fundamental weakness of the UK economy. It is a sign of its strength, just as it is in Ireland. What economies like the UK, US and Ireland have to do now is to re-focus on their fundamental strengths that can attracts business investment – and shift away from the illusionary wealth of property booms.

    Dave, I didn’t read what you wrote … but that is not a requirement to know what it was. Blaming the ECB for setting a low inter-bank rate might carry some weight had domestic policy not been to allow for free-and-easy access to money. The historical evidence is that regardless of whether the Irish Government had access to the levers of a central bank, they would still have used them to fuel the property boom (as they did with every other level they had access to).

  • Ray

    The basis of Ireland’s economy for the last few decades was unbridled greed in the extreme. It was the belief that the Irish knew more and were much more clever than anyone else in the world simply because they were more cunning and crafty.
    There was the absence of any sense of moral integrity or honour. The intrinsic banking criminality at the very top of the managmemnt structure and the institutionaled political corruption put Ireland on par with the most corrupt regimes whether in Africa, Asia, or South America.
    Ireland had tranformed itself into a banana republic but was in complete denial.
    Whether Ireland is capable of changing itself to the straight and narrow is probably doubtful.

  • TK

    I can only thank God that many of the contributors to your blog Mick may never get the chance to have their representatives run the economy North or South.
    No doubt I am seen as a capitalist and therefore discounted but at least I employ 26 people – not through a multi national-and it is I who worry about their families – their homes – their children during any downturn.
    Checking the blogging source of many of the contributors to this site they are either work for political parties or are known supporters of parties- political journalists or members of the civil service. Whinging is becoming a profession

  • “Thank god for Peter Sutherland – I hope his Fine Gael colleagues are listening!”

    BP investors advised to rebel over Peter Sutherland

  • Oiliféar

    “It was the belief that the Irish knew more and were much more clever than anyone else in the world simply because they were more cunning and crafty. There was the absence of any sense of moral integrity or honour.”

    Yes. (And not just among the business and political classes, but across the width and breadth of society – typified IMHO when we sent Dustin to the Eurovision and those who said no to Lisbon because they thought “we don’t need Europe”.)

    “The intrinsic banking criminality at the very top of the managmemnt structure and the institutionaled political corruption put Ireland on par with the most corrupt regimes whether in Africa, Asia, or South America.”

    No. (That is a ridiculous exaggeration.)

  • TK

    More of the same from more of the same.

  • Chris

    The Irish Taoiseach has three private executive jets at his disposal so he does have to face the ignomy of flying on a commercial jet first class or sit beside those who pay his wages.
    He has a private Mercedes. He is paid much more than the president of the United States.
    The standard way of conducting business at government level in Ireland is a large suitcase full of money delivered to an offshore bank account, if you want to get a large construction project like the motorway at Tara or Shell-to-sea.
    There is no penalty for corruption as Shell-to-sea proved when the original contract was shown to have been secured through bribery. The Irish courts refused to nullify the bribed contract.
    And this is barely the tip of the iceberg.
    Such is the good life in the banana republic, as the Financial Times referred to Ireland a couple of months ago.

  • Dave

    “The historical evidence is that regardless of whether the Irish Government had access to the levers of a central bank, they would still have used them to fuel the property boom (as they did with every other level they had access to).” – Oilifar

    What an idiot. I guess you missed the part when the external debt ballooned to 1.67 trillion since joining the Eurozone, when the “historical evidence” is that it was 11 billion punts before joining it, thereby showing your spurious assertion that the Irish central bank has historically promoted borrowing to be your customary EU media pack propaganda. The historical evidence is that the Irish central bank have always adopted an extremely sensible fiscal conservative approach. At the height of the actual Celtic Tiger, the central bank set the interest rate at 6.7% in order to prevent the excessive borrowing that resulted when it was slashed by the ECB to a quarter of what it should have been set at in Ireland.

  • Dave

    “When we do, let’s hope the lessons of the past our learnt and we never allow ourselves to be convinced that debt = wealth again.” – Mack

    I agree with this, but I don’t see how this lesson is to be learned or applied. It is a collective lesson, right? Meaning that “we” as a nation must learn it. So you are advocating it as something that we accept as a self-evident truth and apply as a policy. But you forget that it is a policy that we cannot apply as a nation whether we have learned it not. The nation does not determine such policies. These macroeconomic policies are determined by the ECB, and not by this nation. So, if even if we learn it, we cannot apply it.

    What then if those who determine our macroeconomic policy have not learned the same lesson from their expansionist monetary policies that we have? Is there any admission from the ECB that their policy of promoting borrowing in order to generate wealth on the demand-side by spending the borrowed money was a dismal failure rather merely served to generate mountains of debts instead of the anticipated wealth? Is there any promise from the ECB that they will never again implement this macroeconomic policy in the Eurozone which created a plethora of commodity bubbles (of which property was just one) and bubbles in the financial industry, and thereby in Ireland? I am aware of any such admission or promise. We still have the same policy but the borrowing is transferred from the decimated private sector to the soon-to-be-decimated public sector.

    So, what do we do when or if confidence returns to the private sector, and we see that those who have not learned the same lesson as us are encouraging us to repeat the mistake? We can do nothing at all, can we? Because the nation will find that its state does not have the power under the Maastricht Treaty to declare that the macroeconomic policy is flawed or to offer any advice about what an appropriate macroeconomic policy would be. In fact, the nation will find that the government of its state is bound by international law to support the macroeconomic policy irrespective of what the nation thinks or what lessons it has learned. So who will speak for the nation in opposition to its own state when its state must once again cheerlead expansionist monetary policy?

    No one will speak for the nation on matters of macroeconomic policy because the nation does not have the sovereignty to decide its own macroeconomic policy. Therefore, learn all the lessons you want, but you’ll just be pissing in an EU wind. Those who control Ireland’s macroeconomic policy will do so with no regard to the Irish nation (it is illegal under the Maastricht Treaty to offer any advice whatsoever about what monetary policy would be helpful to Ireland) or to its unique insights (which it has no entitlement to under one-size-fits-all policies) or to its unique economic conditions and underlying dynamics. You will get whatever macroeconomic policy best suits the German economy (which contributes the bulk of the EU’s budget) and you will respond to that macroeconomic policy as all people respond to macroeconomic policy, i.e. the nation and its economy will act according to the macroeconomic policy that controls it. If that policy is designed to promote borrowing, then that is what the nation will do, lessons or no lessons.

  • Dave

    “If that policy is designed to promote borrowing, then that is what the nation will do, lessons or no lessons.”

    Just to add that the nation will continue to wrongly assume that its macroeconomic policy is determined by its state in accordance with the underlying economic dynamics and needs of the state rather than arbitrarily decided by the ECB with absolutely no relevance to the Irish economy, thereby wrongly concluding that the Irish government has control and exercises that control in the best interest of the Irish economy. They will trust their government when, in reality, they are trusting those who are simply implementing arbitrary policies as they are required to do under the Maastricht Treaty, with the government making no judgement about whether or not the policies will help or harm the Irish economy. The government have no legal right to make any such judgment anyway since they have given away the applicable sovereignty and are restricted to supporting the policies. When the government promotes the policy, as it must do, the nation will respond to it. That is what it means to renounce sovereignty.

  • Oilifear

    Dave, there are more levers to an economy than just those of a central bank. You say the ECB set an inter-bank lending rate that was too low. I say that the Irish Government followed fiscal and regulatory policies that encouraged lending during the property boom.

    You blame the ECB for causing a property boom, but ignore domestic policy that fueled one. If the Irish Government had wanted to put the brakes on the boom then they could have pulled the levers of a prudent fiscal and regulatory policy. They did not do so.

    Dave, debt in nominal terms has risen, but as a proportion of our ability to pay has fallen steadily since joining the Euro.

    Please think about this rationally: if your annual income is 100 then an debt of 90 is a big problem for you (this is where we were in 1994). If your income is 1000 then a debt of 250 is not such a great problem (this is were we were a decade later in 2004).

    Ireland’s debt to GDP ratio for the pas two decades can be seen here: http://www.ntma.ie/NationalDebt/debtGDP.php

  • Oilifear

    Dave, by the way, Ireland’s “external debt” has fallen to zero since joining the Euro. Though I assume you didn’t actually mean “external debt” but rather the national debt as a whole.

    See here: http://www.ntma.ie/NationalDebt/historicalData1.php

  • Comrade Stalin

    Arguing with Dave is like wading through treacle due to his incapacity for brevity. It takes ages to filter out the parts that are opinion, and when you get to the facts underneath you find that they’re gross misrepresentations.