Battleground Ireland : The proxy war

US neo-Keynesians and the ‘Austerians‘ are slugging it out over the Irish approach to managing the crisis. At stake, the future of US and perhaps global economic policy. First up the Keynesian New York Times :-

In Ireland, a Picture of the High Cost of Austerity

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

Now, the Irish are being warned of more pain to come.

Unemployment was 12.9% in Q1 having fallen 0.4% from the previous quarter, the fall in GNP (probably a better measure of the Irish economy) was much greater last year however.

Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

Hmmm.. Ireland had a much larger credit bubble and much worse banking crisis than any of these countries. That we’ve been spared Greece’s fate must count for something. There is a hefty logical jump there too. Irish bond yields have improved more significantly than Spanish or German yields since they peaked during the banking crisis of 2008. It’s one thing to argue that the evidence that bond markets are rewarding Ireland is minimal, quite another to argue that they are punishing Ireland. Absence of evidence is not the same thing as evidence of absence. The whole tone of this article? America should not turn Irish.

The Austerian Wall Street Journal responded the next day with an article singing Ireland’s praises, and it’s up beat assesment of our prospects contrasted vividly with the depressed, all is lost, tone of the New York Times piece.

Weaker Euro Set to Spur Irish Turnaround

The Emerald Isle has high unemployment and one of Europe’s deepest budget deficits, and is taking some of Europe’s harshest austerity medicine. Economists, however, are starting to feel less dismal about Ireland’s prospects because of the unique nature of its export economy.

Exports account for more than 50% of Ireland’s gross domestic product, ahead of even Germany. And while many euro-zone countries’ exports go to their European neighbors, Ireland sends much of its chemicals, business services, technology and food to the U.S. and U.K. That maximizes the benefit of the falling euro, which has lost approximately 15% against the U.S. dollar and 8% against the British pound since the beginning of the year.

Which contrasts with the more sanguine NYT article which noted the difficulty in converting exports into jobs.

Ireland, which is set to announce its first-quarter GDP on Wednesday, is expected to announce that its economy grew at the beginning of the year from the last quarter in 2009, technically pulling it out of a recession. Economists now believe Ireland could grow 0.5% or 0.6% this year, reversing earlier forecasts that called for a full-year contraction.

Recession over? Again? We had a Schrödinger’s cat moment last year, but it turned out the cat was just dead. No ambiguity there, when GDP growth figures were later revised downards last year.

Ireland’s experience seems to suggest economies can recover even while slashing spending, though the path of the export-driven economy is one that may be harder for its euro-zone neighbors to follow.

Ah yes, there it is – austerity works. That’s the reason this article was written.

And.. things are looking up.

Also, key manufacturing and services sectors have started to expand, while retail sales have held up reasonably well. Ireland’s trade surplus—the value of goods exported compared with those imported— has continued to grow throughout the downturn, hitting about €39 billion ($48 billion) in 2009 from €29 billion a year earlier even as the economy shrank 7%, according to the Central Statistics Office.

The export picture looks encouraging, with demand rising in the U.S. and China. Prices and wages in Ireland, meanwhile, are falling, making Irish companies more competitive and encouraging foreign direct investment./

But surely the invisible bond market vigilantes have not noticed?

Traders in derivatives agree. While the cost to insure Ireland’s government bonds using credit-default swaps has risen about 68% this year, similar costs for Portugal and Spain have leaped by 251% and 135%, respectively, according to data provider Markit.

There it is again, the relative comparison. Can’t wait to see one on Paul Krugman’s blog. The Keynesians tend to look at the absolute numbers as they support their case, the Austerians, the relative position as it tends to support their case. In the meantime both oversimplify the Irish problem in a manner that fits seemlessly with their own internal narratives. Or as Philip Lane put it on Irish Economy

A more accurate and comprehensive headline [for the New York Times article – Mack] might have been: “Ireland paying a high price for boom-bust cycle in property sector and attendant banking crisis, amplified and abetted by procyclical fiscal policy and now requiring a sustained fiscal correction” – but that is probably too long!

Perhaps, the first causality of war is the natural verbosity of the economist!

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  • Anon

    I didn’t think the NYT really said anything about what the US would do. But that austerity Ireland is not a fun place is simply a fact.

    The entire world cannot export its way out of recession. Newsnight last week had the UK Government’s breakdown of where growth will come from. “Exports” had entirely replaced “Governemnt” as a section. Who are all these countries going to export too? There is little evidence China is ready to take up the slack. If the US also goes on a savage budget cutting exercise, does the world keep turning?

    Here is a comparison you’ve missed: http://seekingalpha.com/article/203358-stat-of-the-day-table-of-eurozone-debt-and-deficits?source=feed

    Ireland’s budget deficit is still the worst in the Eurozone. Paradox of thrift?

  • Mack

    Probably should have linked to this in the post. Here is Paul Krugman’s follow up “A Terrible Ugliness is Born”

    http://krugman.blogs.nytimes.com/2010/06/29/a-terrible-ugliness-is-born

    I don’t disagree with you that it’s impossible for all countries to improve their balance of trade (exports over imports) simultaneously. Although, some will be more successful at it than others. I read a British economist lately who argued that in the UK private business could take up some of the slack if properly encouraged. I’ll see if I can hunt it out..

    Ireland’s budget deficit wound up being the worst in the Eurozone because Eurostat included the money being spent on bailing out Anglo (that’s the proximate cause, the ultimate cause being our bubble – credit, property, government spending was much bigger).

  • Mack

    Here – Roger Bootle.

    Seems to think increased exports to the surplus nations (e.g. China, probably Germany) and increased investment by business are the solutions for Britain. China needs to be pressured into rebalancing it’s economy towards it’s consumers.

    http://www.telegraph.co.uk/finance/comment/rogerbootle/7857835/Austeritys-all-very-well-but-someone-must-spend-more-to-ensure-recovery.html

  • Anon

    I agree that Krugman’s looking in a much too simplistic fashion, but there is surely something in the fact that its reward has not been great for substantial amounts of pain. The same could also be said in Eastern Europe. Ireland’s economy is also very small, very flexible, and very export orientated and I’m not sure it is a good comparison for anything other than countries of a similar size.

    As Roger points out, China seems to want only consmetic changes and to carry on as before (though – who do they think they can exprot more to, exactly) and Germany appears hell bent on auserity. I’m not sure that BRIC economies can get us out of this, though its possible.

    Not all consumers are skint, and there will surley be some recovery there, but we are probably going to see higher savings rates as before. i can’t see it being the big engine of growth again, but possibly I’m underestimating the appetitie of American consumers to spend.

    So that leaves business investment. The UK at least has been trying to encourage more of that since Labour came to power, not partcularly sucessfully. I’m not sure I’ve seen much int he way of policy to encourage that, though.

    Not sure what happens now. I can see things beign really less bad than expected – growth is returnign to places after all, and I can also see very bad things ahppening. What happens if we do get a douple dip recession? Panic?

  • Mack

    The area where Irish people experienced the most pain, isn’t in cuts to wages of well paid public sector workers with secure jobs, but in the hundreds of thousands of construction workers, retail workers and public workers on temporary contracts who lost their jobs.

    It’s much easier to cut capital spending than current spending. The people affected generally don’t work for the government, and they are represented in negotiation by easily ignored private companies (rather than boisterous Trade Unions). We probably should have increased capital spending to offset the deflationary impact of the cuts in current spending and tax rises. We need to make the cuts and raise taxes because we have a permanent structural deficit.

    The one concern I’d have about increasing capital spending is that it would typically boost construction and that sector of economy – which was up at around 20% or more of GDP, was already way to big. There is huge legacy overcapacity with hundreds of thousands of residential properties we don’t need and tens of thousands of offices we don’t need.

    In Ireland’s case, though we fear the bust, it was the boom that was the real problem.

    Pray we don’t get a double-dip. If we do, surely we’ll have to begin a global program of debt defaults?

  • Anon
  • Ronan McDonald

    “Which contrasts with the more sanguine NYT article which noted the difficulty in converting exports into jobs.”

    The NYT article is surely less sanguine, not more?

  • Mack

    Yes indeed.

  • Alias

    It’s a case of neither camp seeing the wood for the trees. Ireland traded its economy for a credit card when it joined the Eurozone, so its economy was based on borrowing wealth rather than creating it. Irish credit consumers were borrowing circa 300 billion a year at the peak, and have acquired an external debt of 1.67 trillion since joining the Eurozone (up from 11 billion punts a mere 11 years ago).

    Fiscal stimulas assumes that wealth is created within a state, and that the money sustains this creation during a slump, preventing a greater decline in output and government revenues than would otherwise be the case. Ireland’s economy, however, is not recoverable. Its economy was built on the construction industry, and output has stopped with a surplus of property that will meet its demands for the next 30 or so years. Outside of construction, the rest of its economy was largely sustained by the borrowed eurosystem money with consumers borrowing money and spending it like there was no tomorrow.

    Instead of importing wealth from the eurosystem as Ireland did since it joined it, it now has to stop importing it and start exporting it. Unfortunately, it lacks the means to generate 1.67 trillion plus interest in wealth. As we must now switching from being an importer of wealth to being an exporter of it, our economy can only continue its decline. The government cannot stop that decline since it cannot generate wealth by importing it but only add to the debt and to the wealth that must be exported.

    The markets only care about getting their money back. To this end the Irish state has greatly pleased the eurosystem markets by acting to contain all of its risky loans within the state (absorbing them into NAMA and nationalising Anglo) and by forcing those who didn’t borrow the money to repay it in place of those bankrupt folks who did borrow it but can’t repay it. However, it’s a mixed blessing for the eurosystem markets because, on one hand, they know their loans were underwritten by the state, they also know, on the other hand, that the state is putting the eurosystem systemic risk considerations before the national interest. That makes them nervous about lending to such a dysfunctional state, particularly when there is no ability within the state to generate the required wealth. Austerity measures offer them reassurance that the state will put the eurosystem markets before the interests of its own citizens by diverting government revenue from public spending for services for those citizens and giving it to the eurosystem markets instead. The downside, of course, is that wealth is exported, so the eurosystem markets remain nervous about the ability of the state to repay its debt.

    The actual Celtic Tiger period was between 1993 and 2000. That was built on exports. Exports are now half the level in real terms than they were before Ireland joined the eurozone. The other factors that created it are also gone, e.g. a wage-competitive workforce, lowest corporation tax regime in the EU, control of macroeconomic and monetary policy, etc. Ireland doesn’t have any economic sovereignty (excluding modest fiscal control) so its future is simply as a debt-containment zone on the edge of the EU (a market that is itself in terminal economic decline) that is presided over by a regional administration whose main purpose is to ensure that they serve the EU’s interests and are duly rewarded with plush jobs and grand pensions by the EU when their domestic political careers expire.

  • Cormac Mac Art

    Neither side give a damm abour our country. Its only a means of scoring points and/or advancing dogma.

  • Munsterview

    For once Cormac, in full agreement with you!

  • Cormac Mac Art

    And I find myself in full agreement with you too!

    On a serious note, I hope you’ve taken the time to write up your memoirs, as the stories you relate give a fascinating point of view of the times you lived in. It would sadden me to think that what we read here on Slugger is all that would be left for future generations.

  • Greenflag

    thanks Anon some highlights from same from R.Samuelson

    There’s a great deal economists don’t understand. ‘

    Well yes and don’t forget the politicians and other policy makers either .

    ‘Not surprisingly, the adherents of “rational expectations” — a theory that people generally figure out how best to respond to economic events — didn’t anticipate financial panic and economic collapse. ‘

    Neither did the CIA despite spending billions of dollars every year on ‘intelligence’ predict the collapse of the Soviet Union .

    ‘The disconnect between theory and reality seems ominous. The response to the initial crisis was to throw money at it — to lower interest rates and expand budget deficits. But with interest rates now low and deficits high, what happens if there’s another crisis?’

    If there’s another crisis you can just bend over and say goodbye to your rear end otherwise head for the hills , heavily armed and pray you’ll be able to fight off the cannibals 😉

    Confidence is still lacking and this G20 has not done enough .
    Who picked the members of the G20 anyway ? Why was Saudi Arabia and Indonesia picked ? Probably because they are strategic allies of the USA and can be depended on not to rock the boat too much ?

  • Mack

    Indonesia is the 17th (world bank)/18th (IMF, CIA)biggest economy in the world and the biggest in the South East Asia region by some margin (China, Japan, and South Korea represent East Asia).

    Saudi Arabia is the 25th (world bank)/22nd (IMF, CIA) economy in the world and the biggest in the middle east region.

    So I think that’s why they were picked. Some big European economies lost out though – Spain (the 8th/9th) largest economy, also the Netherlands, Belgium and Poland lose out.

  • Munsterview

    Thanks ! Have already done so in another life in a cultural context and picked up a few significant National and international awards along the way for my efforts. This was also despite having being subjected to overt and covert censorship for a quarter of a century.

    I am currently working with a prominent Historian to cover to 68 94, to give an insiders view and will be available to research students next year. However it is a bit premature for a ‘warts and all’ blunt historical perspective : there is a lot of unfinished business yet and a way to go.

  • Cormac Mac Art

    There is ALWAYS unfinished business, even though a person’s life itself ends. Record what you have to say somehow, if only in a ‘voices from the grave’ context. You and I differ immensely in political terms, but at this point in our lives some note, no matter how subjective, should be left for the future. Some stories can never be told, and never will, so take care of those that can.

  • aquifer

    Is it ever too late to do the right thing?

    In the boom there was never time to save imported energy, to develop public transport, to do rational land use planning, to look to the basic resources of the country such as agriculture fisheries renewable energy.

    With skills it is use them learn them or lose them. Productive assets are no use if they are not being used, so creating efficient local markets in these could be critical, making sure that the assets of bust businesses and the skills of the unemployed are used in some way. No point in enforcing idleness when the dole is already too generous.

    Irish people are pretty smart rational and cooperative.

    We cannot claim we do not have time to meet and talk about these matters, whether called economics or anything else.

    In a global crisis the smart money bets on the country that understands its own problems.

    When (even) economists have trouble understanding the problem, the only visible evidence of understanding is considered debate.

    Lets run a lot of public conferences. The visitors can fill hotel beds.

  • Greenflag

    Mack ,
    Indonesis is fair enough if economic size were the sole criteria but obviously they were’nt otherwisw Spain would be there instead of the Saudis . But my question was who does the ‘picking’ ? To me it looks like the USA/IMF .

    Confidence as I said is still lacking . The USA lost 8 million jobs since Aug 2008 and 13,000 were ‘created’ last month -way less than the 65,000 expected by the market . The latest Pew report shows that one third of all adult americans have experienced job loss and or a deterioration in their pay/earnings /hours worked since 2008 and that most over 60’s believe they will have to postpone any hopes for retirement until into their 70’s if ever . Meanwhile Republicans vote down any extension of benefits to the near 20 million unemployed which in the USA means several million will join the already 40 million on federal ‘food’ stamps .And this at a time when the USA is pouring billions into holes in the ground in Afghanistan and Iraq ;(

    Those whom the Gods wish to destroy etc etc 🙁

    In the UK the budget impact should soon swell unemployment lines to over 3 million by Christmas with another half million by this time next year .

    But the ‘market’ Gods have to be sacrificed to and the banks appeased and the rest can go jump on their bikes just like they did’nt do in Norman Tebbit’s time 🙁

    I can see a double dip emerging just below the economic horizon and our ‘leaders’ are apparently powerless to prevent it -there may be some on the extreme right who may even welcome it ;(

    Let that be a lesson to ye plebs eh ?

  • Greenflag

    British exports to Germany will now be more expensive given the euro /pound exchange rate drop . As for China being pressured -good luck with that 🙁

    To paraphrase an old adage

    ‘Austerity -austerity
    A necessary requirement
    But when everybody gets austerity
    They get even more unemployment ‘