Lessons from Ireland

Writing in The Telegraph Liam Halligan argues Ireland offers a road map for UK recovery

Ireland’s mature, responsible approach to fiscal consolidation means its bonds are now flavour of the month. That’s an extremely significant prize because, with its sovereign creditors on side, Irish investment and employment will now be more buoyant, growth will recover quicker and Ireland will return to prosperity much sooner than it otherwise would have done.

The UK’s weak-willed response to its fiscal crisis means, in contrast, that PIMCO – the world’s largest bond-holder – is now warning, in ever more lurid terms, against buying British government debt. And no wonder. UK gilts do indeed seem a bad buy, given that the amount of debt the country will issue over the next few years – a direct result of our politicians’ determination not to face reality – will inevitably cause inflation and a weaker pound. To say nothing of all that money printing – sorry, “quantitative easing”.

Ireland and Britain currently have roughly the same annual budget deficit but that’s where the similarity ends. Ireland is on the road to fiscal recovery and sustainable growth. The UK is on the road to perdition.

Could the different approaches taken by the British and Irish governments constitute a natural experiment on the relative merits of Keynesian stimulus versus fiscal consolidation?

  • Framer

    True the levels of state debt are roughly similar.

    The only difference is that by virtue of Angela Merkel the Irish were obliged to end the profligacy and start living within their means.

    The UK with its own currency can wait until the pound collapses.

  • The trouble with the boul Liam is he is consistently out of step with the rest of the economists (financial witchdoctors) even in the Torygraph – but sounds promising.

    Anything comparable being said in the Irish press I wonder?

  • Free State Barsteward

    “Ireland is on the road to fiscal recovery and sustainable growth.”

    Highly optimistic from where I’m standing.

    As for the British, once the election is over and whoever gets in (more likely the Tories), it will be slash & burn!

  • joeCanuck

    So, Mack. Are you going to make significant (for you personally) investments in Irish stocks or other financial instruments?

  • PJM

    There are a lot of problems with this article. Even if one accepts that a small, open economy is comparable to a large G7 one the situations are only superficially similar.
    The deficits are similar only after the Irish cutbacks. The Irish collapse in tax revenues (casued by the ending of the property bubble) is what caused the deflationary policy, that collapse is continuing despite the fact that the Irish have raised taxes significantly.
    The results of these policies is that UK unemployment is 7.8%, Ireland is 13.4%. Ireland is still in negative growth, the UK is early in a recovery.The UK recession was shallower and shorter,partly as a result of the Keynesian measures taken.
    The Irish banking crisis is also a more significant drain on the exchequer than the UK equivalent.

  • Paddy Matthews

    “Ireland is on the road to fiscal recovery and sustainable growth.”

    Male bovine excrement.


    GDP down 2.4% in the last quarter of 2009 (the GDP “increase” in the third quarter turned out to be a statistical mirage).

    Unemployment revised upwards to 13.3% last month.

    Tax receipts continuing to run 15% below last year’s figures (and significantly below even the Department of Finance predictions from January).

    Just because the Von Mises Bible College wants it to be so doesn’t make it so.

  • Kevin Barry

    Moderate Unionist

    Perhaps this is a reason to take him serious?

    It is always tempting to compare Ireland’s economic plight with the UK’s for historical and geographical reasons but as PJM has hinted to this is probably pointless.

    As for the UK’s recession being shallower because of Keynesian measures, this can otherwise be known s ‘re-inflating the bubble’, something which is slightly different to what is happening in the US and China.

  • Halligan has been on about the threat of inflation to Britian for some time and has been somewhat out of step with other Torygraph economisits (often even on the same page) but he surely has a point when warning that just printing money (an option not open to Ireland) to keep the inevitable crash away is not sustainable and that you must actually cutback on spending and increase taxes or you will no longer be able to borrow money to fund your debt.

    As soon as the election is over there will be sudden lurch towards austerity irrespective of who gets in.

  • Kevin Barry,

    Perhaps, we simply do not know, economics is about 80% sentiment and ideology about 20% maths and science (based on 100% observation) and like psychology it often appears that those who have studied the subject the least actually know a lot more about it having simply paid attention to the world around them rather than slavishly following the latest fashionable doctrine.

  • Kevin Barry

    Yes and no Moderate Unionist. Lets go over what you’ve raised (I might be out of the office but you can’t take me out of the office.)We constantly hear about the threat of inflation and hyper-inflation yet what did we have a lot of last year when the BoE was in the midst of QE?, some deflation. The conventional wisdom is the more money in circulation the greater the threat of inflation as per 1920s Weimar. But, maybe we should be looking at what happened in Japan in the 1990s and is still on going. They have stimulus package after stimulus package and QE on a massive scale and they are still in the midst of stagflation.

    Here’s my favourite Contrarian with some insight for your pleasure

    And also, this whole argument over the deficit is amazing for one reason; the real problem we are facing is a banking system that has single handedly brought the Western world to its knees and instead of any kind of meaningful debate on how we need to completely change the risk environment and culture of the sector so that something like this doesn’t happen again, we are primarily focusing on the deficit. I would laugh if this wasn’t so serious.

    The deficit is a big problem and something that needs to be looked at, but the fact that we are 2 years into a crisis and nothing of substance has happened regarding the finance sector is shocking beyond belief.

    As for most economists, I would suggest you read the Black Swan and familiarise yourself with the following phrases for your own sanity

    i) Confirmation bias,
    ii) Science envy (I hope I got that right)

    This is something that most economists suffer from and that’s why I try and stay away from all but a handful.

  • Mack


    The Irish collapse in tax revenues (casued by the ending of the property bubble) is what caused the deflationary policy, that collapse is continuing despite the fact that the Irish have raised taxes significantly.

    That’s primarily because bubble level tax revenues weren’t sustained by tax rates – they were sustained by foreign borrowings introduced to the Irish economy by the banks – once the banks stopped borrowing on the wholesale markets to lend locally (imported capital being multiplied significantly under frational reserve banking and the expanded deposit base being used to borrow yet more cash on the wholesale market). Once that process stopped / switched into reverse deflation was inevitable without another entity (i.e. the state) taking up the cudgel and continuing to borrow huge amounts.

    Worth bearing in mind that we have deflation _despite_ the government borrowing (& spending) an additional €25 billion last year.

  • Alias

    Actually, the real Celtic Tiger period only existed between 1993 and 2000 and was built on the export trade prior to joining the Eurozone.

    After 2000, the money that entered the economy was borrowed money and not earned income – 1.69 trillion euros worth of it in a 10-year period. That influx of borrowed wealth devastated the real economy, replacing it with a fantasy economy that was simply built on spending borrowed money. In effect, Ireland traded its real economy for a credit card. True, a tide of 1.69 trillion euros flowing into an economy will lift a lot of boats but they will all crash back down in a disorganised mess when that tide flows back out in the form of debt repayment. So this bankrupt economy now has to earn 1.69 trillion euros in wealth plus interest.

    Good luck with that when the borrowed money has destroyed everything on which the real Celtic Tiger was based, particularly competitiveness – and that competitiveness won’t be restored by wage deflation or the cost of doing business here since the EU has expanded to include ten new low wage and low cost economies since 2000, so Ireland no longer has the advantages within the EU that it had prior to 2000 and won’t gain any advantage by trying to compete with the new kids on the block.

    Irish exports have more than halved in real terms since 2000, and there is no basis to reverse this decline within the overvalued currency let alone try to get back to where we were prior to joining the Eurozone – which would require a doubling of our exports in real terms just to be equal to where we were 10 years ago.

    There is no future for Ireland other than as a debt containment zone for the eurosystem lenders. Any modest wealth that it generates as a failed state will now be used to repay the eurosystem lenders whose borrowing has been retrospectively guaranteed by the Irish state. If borrowing 1.69 can create a lot of wealth, just wait until you see how much poverty repaying it can create…

  • Mack

    Kevin Barry

    Here’s your favourite contrarian debating with your favourite author. Taleb recommends positioning yourself with a bleed-like strategy to profit from hyper-inflation, on the off-chance it occurs.


    Joe Canuck

    Two bald men, Halligan thinks one of them has a comb…

  • Kevin Barry


    Nice and particularly bleak assessment there. Being a contrarian, I agreed with a lot of what you said until you tailed off into the broad sweeping predictions at the end.

    Ireland has lost a huge amount of its competitiveness over the past decade and will undoubtedly face stiff competition from new entrants to the EU, however, it is not like the Eastern EU states do not have troubles of their own whether it is calling in the IMF for assistance or a lack of investment in R&D. It is easy to say that competitors will go to these countries because they are cheaper, however, there are huge downsides with multi-nationals doing business there (lack of business english, staffing issues etc). Also, home grown companies still have massive advantages over their Eastern competitors with the quality and expertise they offer as not all customers will rush to the bottom and lots will seek added value in their purchases, otherwise Germany would be in a whole lot of trouble.

    As Moderate Unionist highlighted above, we simply don’t know what’s in store and that’s the scary thing.

    All we do know is that Irish Govt Bonds are all the rage at the moment and Ireland seems to be making some kind of head way with cutting its deficit spending, but again, watch this space.

  • Kevin Barry


    Thanks for this, but seen this a while ago. Hugh is quite hilarious. Taleb, as always, is massively insightful also.

  • I tried, quite hard, to make sense of the original piece. The more I studied it, the more bewildering it became.

    When one focuses on the detail, it becomes even more bizarre. For example, the humdinger:

    PIMCO – the world’s largest bond-holder – is now warning, in ever more lurid terms, against buying British government debt.

    What that is based on (I guess) is this:

    BILL Gross, the influential fund manager at fixed income titan Pacific Investment Management Company (Pimco), has urged investors to shun UK government debt due to fears over national borrowing.

    Pimco’s managing director said Britain’s debt burden would force the Treasury to issue increasing volumes of gilts. This would usher in inflation and depreciate the pound, damaging bond returns.

    Gross, who sparked a furore in January by saying the UK economy rested on a “bed of nitroglycerine”, said: “At some point the UK may fail to escape velocity from its debt trap. For now, though ‘crisis’ does not describe the predicament, that bed of nitroglycerine must be delicately handled. Avoid the UK – there are more attractive choices.”

    Gross recommended German and Canadian gilts instead.

    Now, we are considering the Pacific Investment Management Company, a subsidiary of Allianz of Munich, managing the Total Return fund, interested in maximizing yield, in selling short, and buying back. In the immortal judgement of that great financial guru, Mandy Rice-Davies, “He would say that, wouldn’t he?”

    As for Mr Gross, it was he who lobbied hard for the Federal take over of Fannie Mae and Freddie Mac, which was an essential moment in the sub-prime collapse. Benevolent FDR-type New Dealing? Not quite: Gross manipulated himself a $1.7 billion profit on that one. Or, as wikipedia has it:

    Gross briefly played blackjack professionally in Las Vegas, and has said that he applies many of his gambling methods for spreading risk and calculating odds to his investment decisions.

    What Gross is saying, when the froth is blown away, is that the US and the UK economies are (his words) “serial reflators”, that this involves “huge increases in supply and accordingly, significant increases in risk and real yield levels”. It also keeps people in jobs, improves exports, and builds growth (which generates the taxes).

    What Gross ignores is that a large proportion of UK debt is, by international standards, long-term. The Financial Times gave a more temperate assessment, explicitly slapping down Gross (possibly because it doesn’t have the same expectation of instant pay-off):

    … in recent weeks, sterling government bond prices have remained relatively – and surprisingly – calm, even though the Bank of England has recently stopped buying gilts and the fiscal data looks alarming…

    … before investors get too gloomy, there is one number they would do well to note – particularly since it is something which has been almost entirely ignored in recent years.

    This relates to the average maturity of UK government debt, or the frequency with which it needs to be refinanced. In most European countries, the average maturity of debt currently lies between five and nine years. In Greece, for example, it is almost eight years, while in Germany it is six years. Meanwhile, in the US, the number is actually below five years, leaving Washington staring at one of the biggest rollover challenges in the world.

    However, the UK is a stark outlier: the average maturity of the gilt market is currently 14 years, longer than almost anywhere else in the world.

    … this pattern does not guarantee that the UK will avoid a crisis. The country will still need to flog some £550bn of new bonds in the next three years. That could be challenging, unless the Bank steps in again to buy more gilts.

    But, if nothing else, the UK’s unusually long maturity profile does offer a bit of breathing space; or, to put it another way, if the UK had the same debt profile as America right now, its predicament would be dramatically worse.

  • Alias

    KB, a lower or higher CDS rate reflects an insurer’s best guess of how likely a government is to default on its debt at the time when the guess is made, and nothing can be extrapolated from it beyond that. To read it as a vote of confidence in Ireland’s economic rescue plan is a non sequitur. In this case, the government is reducing its public spending, so it has more money available to repay its debt. Ergo, the risk of default is lower, and that lower risk is duly reflected in the CDS rate. It doesn’t follow that the government reduction in spending will generate additional tax revenue or otherwise boost the economy. Indeed, the Keynesians would argue that the opposite will occur.

  • Kevin Barry

    Alias, nowhere did I mention that this would lead us to believe that there would be additional tax revenues generated.

    However, to use a somewhat simple analogy, would a lender give money to someone who is going to see their income decrease greatly over time? At the end of the day, bond markets will only give money at favourable rates if they believe that the money will be repaid. It’s not that big a stretch to then believe that they therefore believe that the situation in Ireland has improved with regard to the Country’s ability to meet its debts.

    Unfortunately, you cannot divorce the ability to pay off your debts from the state of a country’s economy, so following from this, it could be read that it is something of a vote of confidence in the government’s plans.

  • Alias

    I was referring to the thread’s topic:

    [i]”Greece has a role model and that role model is Ireland,” said Jean-Claude Trichet last week, the European Central Bank president singling out the Emerald Isle for praise. “Ireland had extremely difficult problems and took them very seriously – and that’s now been recognised by all.”[/i]

    What is “recognised by all”? Nothing other than the State engaging in wage deflation because it is unable to devalue the currency. There is a deeply flawed assumption there that this will address the underlying causes of Ireland’s problems.

    Now, you could recognise that “competitiveness” is a relative marker, so what is it relative to? How exactly will forcing wages down by say 20% boost exports back to the level they were at 10 years ago, i.e. doubling them? How will it attract FDI when this FDI now has the choice of 10 other EU countries where the average industrial wage is less than the monthly dole payment in Ireland? Would, for example, Dell not have shifted 5,000 jobs from Ireland to Poland if Irish wages were reduced by 20%? Hardly, since they pay those workers in Lodz circa 800 euros a month, and unless that is the level of “competitiveness” that we are aiming for, I see no valid argument at all underpinning it, simply dogma that is divorced from reality and not supported in any way by data on how many new jobs might be created by this dogma.

    It simply remains the case that the government now pay more money to repay its debt, and that is why the rate is now lower. IN a few months time, the rate will be higher.

  • Alias

    Typo: “…remains the case that the government now [b]has[/b] more money to repay its debt…”

  • Alias

    By the way, even the fabled lower corporation tax rate is no longer an advantage. Several EU states now have a lower corporation tax rate and one has no corporation tax rate at all. So the idea that all Ireland has to do to go back to a happy place is engage in devaluation is deeply misguided hogwash.

  • Alias

    Since the ‘economy’ of the last 10 years consisted of borrowing a few hundred billion euro a year from the eurosystem and spending it, what economy is going to replace it now that fantasy economy no longer exists?

    There is nothing to replace it. Yet, whatever is left of the fantasy economy is required be capable of generating a couple of trillion euro in wealth to repay the borrowed money. Where is this economy? It isn’t foreign-owned exports since they have collapsed to less than half of what they were 10 years ago in real terms, and it isn’t the small amount of indigenous industry within the State since this is being starved of credit by a crippled banking system. It isn’t FDI either since this is going to other countries within the EU where wage costs and energy costs etc are a fraction of the costs here and were taxes are now lower.

    The hard reality is that economy built on spending borrowed wealth must now be replaced with an economy that exists solely to repay that borrowed wealth. There will be no wealth remaining within this State to reinvest within it since any wealth it manages to generate over the next 50 or so years will go directly to repaying the wealth that it has borrowed over the last 10 years.

    But the good news that the muppets in this State will have given the last remnants of their sovereignty away to the EU by that time so that these debts will all be absorbed into the new EU state. They might even find a use for all those vacant properties by turning the country into an offshore asylum… 😉

  • Since the main pillar of Mack @ 11:36 AM‘s original post was Bill Gross, I should have thrown in this, by James Ferguson for MoneyWeek:

    I suspect Gross’s motives. He has to send the crowd a different way in order to take bets, which by their nature for him must be contrarian at the time (because it takes so long to switch his funds’ huge positions).

    Oh, and Gross had a book to sell.

    Truth to tell, neither Ireland’s nor the UK’s position is quite as desperate as Opposition politicians and the get-rich-quicker city-slickers would like, and would like us to think. But truth-telling’s not the way you coerce voters or make mega-bucks.

    The position of Ireland was high-lighted by that extraordinary graph from the OECD, anticipating that the “long-term” reduction of output in Ireland, at 11.8% was “possibly the worst in the world” (by comparison, the figures were 3.9% for Germany, 2.9% for the UK and 2.4% for the US).

    The outlier position of Ireland was because, measuring peak-to-trough, there was the disproportionate fall in construction work, the foreign workers sucked in by the property boom left, the tax-base contracted, and the structural deficit (which we all knew was there) suddenly stuck out like the sorest thumb.

    The difference in Ireland, why it is wrong to include Ireland with the PIGS, is that —
    much as we may hate them for it — the Cowen government got on and did something. The wage cuts, forced one way of the other, have restored competitiveness to a considerable degree. Result: the return of inward investment: from $20B negative in 2008, it rebounded to $14B positive in 2009. Ireland was one of only half-a-dozen economies to have any foreign direct investment last year.

  • Kevin Barry


    Regarding the level of competitiveness we want, I most definitely have to agree with you in part regarding Dell. To be honest, this is not the type of low paid work that the country requires.

    However, let me get this straight, by reducing wages in Ireland and also having a competitive corporation tax rate (lower than Poland’s if I’m not mistaken) will NOT make the country more competitive? I beg to differ. You even contradicted yourself by noting that Dell moved work to Poland because it is cheaper, but if Ireland was to decrease real wages it would not make it more competitive.

    Competitiveness is a very intangible concept that can be difficult to quantify and which I am sure we could go back and forth arguing about, but let’s use an analogy here as you now how much I like them. You can look at someone who is over-weight and not be able to tell what their exact weight is, but you know that they’re over weight. Ditto with competitiveness. Ireland was/is incredibly expensive to do business in/with but by reducing costs this should make it easier for Irish goods/services to be sold abroad and at home.

    Again, I refer to what I was hinting at earlier regarding exports, value for money. Germany’s exports are not cheap by any stretch of the imagination (Mercedes, Siemens etc) but still people are willing to pay for these items because of the value they represent.

    What does ‘recognised by all mean’? Here’s an example


    As for the interest rates on debt being higher in a few months time, have you anything to back this up with? With all due respect, it is not entirely out of the realm of possibility that interest rates could stay this low for all of 2010 and for a large part of 2011.

    You are still not really with it on bond markets. They will not finance a country if there finances are perceived to be awful in the years to come. They don’t want to lose money. So, the CDS rates between Irish bonds and German ones have closed because of Ireland’s ability to pay off more debt and because it has a better grip on its finances than previous.

  • Mack

    Malcolm – Do you have a link for those figures?

    As far as I can see FDI continued to drop in Ireland in 2009.

    Foreign direct investment (FDI) in Ireland dropped in 2009, with job creation by foreign multinationals dipping 42 per cent to 7,500.

    Jobs in IDA Ireland supported companies fell below the 2000 level last year. The number employed in IDA-assisted companies has fallen from 141,000 in 2000 to 136,000 in 2009.

    According to the National Irish Bank/FDI Intelligence Inward Investment Performance Monitor, the global FDI market was weak, with the number of new jobs created falling 25 per cent compared to 2008.


  • Mack @ 07:54 AM:

    See Laura Slattery’s piece in the Irish Times, 20 January 2010:

    The UN Conference on Trade and Development (Unctad), the single most comprehensive source of data on FDI flows, said that foreign investment into Ireland amounted to $14 billion (€9.8 billion) in 2009, after the previous year saw a net outflow of $20 billion (€14 billion).

    I assume this derives from the UNCTAD FDI quarterly index. On mature thoughts, despite Slattery’s piece, it surely cannot be a firm end-of-calendar-year figure. I’ve chased it through as far as I can in a brief respite this morning. I see that UNCTAD published its Global Investment Trends No.1 (dated 1 Dec 2009) and based on second and third quarter figures. This incorporates a salient bit:

    … the pick-up in the second quarter was particularly marked in some European Union economies such as France, Germany, Spain, Ireland and Sweden, while flows remained relatively low in economies such as the United States or, in a few cases, even declined (e.g. the United Kingdom).

    That seems, to me, likely to be one prime source for numerous other commentaries.

  • aquifer

    “the average maturity of the gilt market is currently 14 years, longer than almost anywhere else in the world.”

    Nice one Gordon and Alastair.

    Loads of time to inflate yourselves out of trouble without scaring the taxpaying horses.

  • aquifer @ 07:18 PM:

    Yes, plaudits are due.

    They should be paid, as much as to anyone, to the BoE and Treasury mandarins who took lessons from the inflationary spiral of the 1970s. Once Heath’s ill-judged and desperate RPI-indexation kicked in, it was downhill all the way to the IMF visit.

    It’s always been a double irony that the Callaghan government got the blame for the Heath inflation, and the Thatcher government got the credit for Dennis Healey’s dire-but-effective wage-controls (which necessarily involved facing down the unions).

    Similarly, after the IMF thing (which probably was unnecessary anyway, but the Treasury pulled a fast one on Healey — as he maintains to this day), the message went down the pipes “Never again!” That’s where the policy of long-term bonds came from: some (I gather) have a 50-year ticket.