What’s the real difference between Ireland and Iceland?

In the race regain competitiveness, the critical difference is Iceland’s capacity to devalue its currency. The result? Iceland’s unit labour costs have fallen by 29% over the past 12 months, whilst Ireland’s dropped by only 4.3%. The FT’s Brussels blog:

…the hard truth is that Ireland – like fellow eurozone members Italy, Greece and Spain – has a long and hard road ahead to claw back its competitiveness. And this is a lesson with even broader implications for Europe. For when the dust settles, it may well emerge that the financial crisis has served to accentuate the differences in competitive advantage in the eurozone between, on the one hand, Germany and other star performers such as Finland and the Netherlands and, on the other, Ireland and the Mediterranean countries.

, ,

  • Itwas SammyMcNally whatdoneit

    The disaster that a devaluation can lead to is more much serious than a loss of competitiveness and we luckily have our safety net in the Euro. The question, given the rapid devlauation of Sterling, that might also be asked is – apart from the fact fact that Britain is obvioulsy much bigger – whats the real difference between Iceland and Britian?

  • Drumlins Rock

    So far in the crisis the Euro has remained strong, mainly due to the belief that France & Germany have weathered the storm quite well, however weaker members were already in some difficulties before it even began, maybe they just were facing their problems earlier, or maybe their ongoing problems have been obscured by the scale of the big countries problems, witchever it is will come to the surface by the spring I guess. Irelands situation is different once again, and probably is closer to the Baltic states in soem ways, but although they want to join the Euro this is looking more and more unlikely, makes you wonder if Ireland were on the outside looknig in now would they be admitted?

  • Petra Schlem

    “apart from the fact fact that Britain is obvioulsy much bigger – whats the real difference between Iceland and Britian?”

    Why the weather of course…

  • Drumlins Rock

    Sammy, are you having wet dreams of a sterling crash again ?

  • Framer

    “apart from the fact fact that Britain is obviously much bigger – whats the real difference between Ireland and Britain?”

    18 months

  • George

    Wim Duisenberg, the former head of the ECB, stated that one of the great strengths of the euro was that it would force countries to be competitive.

    In the old days of a crisis, what used to happen is that there would be a flight to the safety of the Deutschmark, leaving the Germans struggling to remain competitive as their currency rose in value while the Italians would simply devalue the Lira.

    Germany would feel all the pain. Not any more, he said. Now the Italians would have to implement productivity measures rather than taking the simple option of devaluing.

    Germany’s competitive advantage is here today simply because it never had the option of devaluing, even before the euro.

    Now Ireland doesn’t have the option so will have to think of other methods to become more competitive.

  • Drumlins Rock

    and to answer sammy question, for good or possibly bad as it might turn out, the UK and espically London was the worlds largest finincial centre having just pipped NY to the position prior to the crash, totally different league to Ireland.

  • Ireland’s really between a rock and a hard place. If Ireland had these problems outside the euro we would already be under IMF protection. However, it’s being in the euro that has led to these problems. For too long our interest rates were too low, our currency too cheap which only fueled the boom.

    Banks and investors in other euro countries were threw money at our banks because the returns were so much greater here with our rising economy than in their flatter, under-performing economies. Our banks took that money and threw it at developers with little of the usual due dilligence.

    Our Central Bank and Financial Regulator have not devised ways to control/regulate the banks inside a single currency, the value of which is determined by economies that we are not really synced with well enough to warrant being in the one currency. Old rules about capital ratios were designed under an assumption that the value of the currency would be strongly correlated to the performance of the economy, but that is no longer the case in Ireland.

    The long term solution to Ireland’s issues is for the UK to join the euro, but that’s clearly not a burning issue for the British govt.

  • Itwas SammyMcNally whatdoneit

    DR,

    “having just pipped NY to the position prior to the crash, totally different league to Ireland. ”

    That is a size issue – Britian is following the devaluation path as is Iceland.

    re. wetdreams. It is not as if Sterling has not been through the grinder a couple of times already.

    The City has played a blinder in spite of incredible competition from Frankfurt and NY but post credit crunch the value of this position to Britian preusmably will decline.

    Presumably some/many of Ireland’s debts are in non Euro currencies which must mean that the likely strengthening of the Euro (as long as interst rates dont go up too juickly) will be in Ireland’s favour – that will not be the case for Iceland or Britian.

  • Glencoppagagh

    “The disaster that a devaluation can lead to is more much serious than a loss of competitiveness…”

    Sammy
    Please explain to those of us who are not economically literate.

    By the way are you are resident of the RoI. If not why the ‘we’. You’ll be suffering from the disaster of devaluation along with everyone else.

  • Itwas SammyMcNally whatdoneit

    Glen,

    Devaluation and all that.

    http://news.bbc.co.uk/1/hi/business/1742448.stm

    I tend to use ‘we’ for matters Irish both North and South as takes my fancy.

  • Glencoppagagh

    Sammy
    That link is utterly irrelevant to the UK’s current situation. However, it does illustrate the difference between a devaluation and a depreciation. The Argentinians took a decision then to devalue a fixed rate – a short sharp shock- whereas sterling is gradually depreciating.
    I take it you’re trying to suggest that hyperinflation in the UK is just around the corner.

  • Eagle,

    The long term solution to Ireland’s issues is for the UK to join the euro

    I don’t see how the UK being outside the euro had that much effect on the Irish property bubble. Yes, financial misregulation has a lot to answer for, but as you said above, the reason so much capital was flowing into the system was Ireland’s unsustainable boom. It’s easy to blame this on the low interest rates associated with the single currency, but interest rates are merely one tool in the box, and a blunt one at that. The property bubble could have been mitigated by other means, such as stamp duty. The boom also had no little connection to the pro-cyclical fiscal policies of the Irish Government.

    To put it another way, the euro may have upgraded the engine, but it was the government that pushed the accelerator.

  • John East Belfast

    Sammy

    “apart from the fact fact that Britain is obvioulsy much bigger – whats the real difference between Iceland and Britian? ”

    What about – 20 years ago Iceland’s main Revenue was from Fishing whereas the UK has been a major industrial and financial player for the last few hundred years.

    There isnt the slightest structural similarity between the two countries. Iceland got temporarily rich from the Banking bubble and is now back to where it started.
    Although what they do both have – which the ROI doesnt – is greater flexibility.

    The ROI has many other strings to its bow but the banking bubble has caused severe damage to the country’s strength and standing and membership of the Euro will cause ongoing damage to its competitiveness.

    And Britain’s scale will see it out of the mess eventually as it has the critical mass to absorb this current pain. The key will be future GDP growth – a few years of 3 to 5% growth will see the deficit starting to be eroded away.

    The problem the ROI faces is how such GDP growth can be re-engineered for a small country within the EU monetary, legal and increasingly fiscal straight jacket

  • Itwas SammyMcNally whatdoneit

    JEB,

    the similarity between Iceland and Britian, is not as you point out, in their industrial base, but in the extent that they are in debt and the possibly disastrous downside of their similar response (devaluation) to their predicament.

  • kensei

    Glen

    A devaluation (or its variable rate cousin, a quick depreciation) is not some kind of pain free miracle cure. It reduces the ability to buy imported goods – could be commodities used in the manufacture of value added goods wiping out some of all of the gains, or it might be goods or services from elsewhere that were presumably selected for good reaosns which now have to be substituted for cheaper alternatives. Then there is also the fact that all foreign debts become much bigger relatively, which could have been nasty for Ireland.

    Iceland took a massive hit on GDP, which was even biger in if you measdured it in Euros. Inflation is currently over 10% if you read that article. Iceland may have bounced back a bit, but its a low base.

    Devaluation can help, and has likely helped the UK. But it brings problems of its own and the UK may well develop an inflation problem that will make things unpleasant for us all. And I tend to agree with George in that it can be used as an easy way out. The medium-long run will be interesting.

  • Despite daily shrieks from Tories and the Daily Express, the sky has not, and is not falling. I note there actually is a Chicken Little Award:

    to people and organizations … engaged in deliberately false, media-driven scare campaigns.

    Obviously, there are several candidates already proposing themselves in this thread.

    Not so long ago, admittedly before the Bushies collapsed Lehman Brothers and all that ensued, we were considering here on Slugger the unfeasibly-high values of sterling (@ $2=£1). That was because BoE interest rates were to set to restrain domestic inflation. Didn’t industry scream? In NI, they were queuing up to demand relief and corporation tax lowered to RoI levels (and, yes, the UUP and Tories were up for it as well).

    I recall noting here (borrowing the views of many economists) that there was a case for sterling around its “natural level” of $1.60: which is pretty well what we have had lately. Similarly, the main downside of £1=€1.10 is felt by those luxuriating on the beaches of southern Europe, the second-homers in the Dordogne and Chiantishire, and those in the market for a Porsche. Result: FTSE up 21% in three months, so someone has confidence in the UK economy.

    Therein lies some of Ireland’s post-bubble problems. Household debt (190% of income at the last count) is second highest in the developed world. In the third quarter of 2007, before the world crisis, the BIS reported that Ireland’s eurobond and note issues had surged from $10bn to $35bn. Ireland had then $123bn of external debt. We can now see that was a bankers’ panic to raise collateral.

    I admit to be mildly Europhile (which in modern UK terms amounts to raving enthusiasm). That said, it is hard not to see membership of the € as Ireland’s cross to be bravely borne. Since joining the EMU, Ireland’s competitiveness has declined by over a fifth. The Irish economy is the one in the Eurozone most exposed to £ and $ weakness against the now over-valued €. Ireland is locked into externally-determined interest rates, cannot devalue, has very limited room for fiscal stimulus, and has to compete for EU subsidies against the more-deserving recent entrant nations.

    Now we have NAMA, the pale rider of the banking apocalypse. I recently had an authoritative finger repeatedly jabbed at my flabby chest, and hectored on how the Nordic model of the early 1990s was the way out. I never got in edgewise that the Swedes had to depart from the ERM to achieve monetary lebensraum (or whatever the Swedish term might be).

    I repeatedly wonder why the lamp-posts of Dawson Street are not behung with failed Fianna Fáil politicos and their economic advisers. A tolerant and long-suffering bunch, Dubliners.

  • Greenflag

    Britain is also between a rock and a hard place . If the pound is seen as weakening relative to the Euro or Dollar -interest rates will be driven up thus forcing increased ‘servicing ‘ costs on the already huge debt both public and private . Any sign of a future British Government ‘devaluing’ it’s way out of the bind will meet a similar fate . Having an ‘exposed’ currency like the pound sterling will also attract those who will profit personnally from driving the pound even lower .

    Where is Houdini when you need him 😉

  • Greenflag

    malcolm redfellow,

    ‘I repeatedly wonder why the lamp-posts of Dawson Street are not behung with failed Fianna Fáil politicos and their economic advisers.’

    Because to paraphrase an old idiom , there are not enough people at the end of their ropes -yet ;).