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Should Ireland leave the Eurozone?

by Frank Schnittger Tue Jan 12th, 2010 at 07:04:54 PM EST

Despite his admittedly dismal record of economic forecasting, the Times' Anatole Kaletsky is again engaging in a bit of doom porn over the fate of the Euro in 2010:

Disappointment ahead for UK -- and big test for euro

The world's weakest currency is likely to be the euro as US exporters increase their global market share mainly at the expense of European rivals, while Chinese and Japanese manufacturers divert to Europe many of the goods that they can no longer sell in the US.

Again, this is really an extension of a somewhat premature suggestion I made last year, when I said that the focus of global economic troubles would shift from America to Europe. This did not quite happen in 2009, although the falls in output and industrial production were much steeper in Europe than the US. But German government labour subsidies will soon expire and the financial pressures on Greece, Ireland, Portugal, Spain and Central Europe can only intensify.

I therefore repeat a point I made last year: before this crisis is completely finished, the cohesion of the eurozone will be tested to near-destruction.

Meanwhile, in Ireland, economist David McWilliams has been making the case that Ireland should never have joined the Euro in the first place, and should certainly leave now:


The Post - Breaking news

For a currency union to work for a country, the most important thing is that the country trades overwhelmingly with the other members of the monetary union.

This ensures that all the countries in the union move roughly in the same economic cycle. It is also important that the structures of the respective economies are broadly similar, so that one country doesn't experience a huge boom, while the rest are just motoring along nicely.

Having similar structures in banking and housing, for example, will imply that a country should not suffer a monumental bust, while the others are merely experiencing a normal recession. Equally, it is important that there is significant movement of people within the currency union - like there is in the US between its states - so that, if a country does slump, its citizens can move to find work in another member country.

In general, for a currency union to work, there should also be a single fiscal policy so that, when one area of the currency slumps, the rest of the union's taxes go some way to ease the problems in the region in difficulty. This is how the currency unions in the US, Canada and Australia work.

Guess what? None of these attributes was in place when Ireland joined the EU economic and monetary union (EMU) and the euro. So it is clear that we didn't join for economic reasons. So why did we join? It seems that we were too insecure to behave logically and this national insecurity - particularly among our senior mandarins - prevented us from having a debate.

Could it be that the people who dictate policy in this country are so in awe of the `big boys' in Europe, and so desperate to be in the club, that they signed up for EMU just to be in the big league? Could it be that they didn't have the confidence to question whether they should be in the marriage in the first place?

The reason we should ask these questions is that it is clear the euro has been a disaster for Ireland, and will ensure our slump lasts considerably longer than it has to. When we look at other countries, we see that, of the three entrants into the then EEC in 1973,we are the only ones using the euro. However, we trade less with other eurozone countries than either Denmark or Britain.

The Danes and the British had the confidence to know that they would still be full members of the EU without the euro. They kept their own currencies because they knew they'd need them at times like this. The Swedes made the same decision. They assessed the risks and concluded that monetary union was not for them.

snip....

Ireland doesn't belong in the euro. That is abundantly clear from the queues of Irish people who choose to shop in the North. Irish people shop in Newry, not Nuremberg. We are locked into an arrangement which means we have to try to be more competitive than Germany. But no one is more competitive than Germany - it is the world's most successful exporter.

So the question I have for those who rightly suggest that we need to get our wages and prices down by 30 per cent to claw back the competitive losses we suffered since joining the euro is: how are we going to do it? In particular, how are we going to do this without leaving the euro?

What is the alternative to leaving the euro? How high does unemployment have to go for us to be competitive again?

If there is an alternative way to get costs down which doesn't involve changing the currency, and that doesn't involve massive unemployment and job losses in the trading part of our economy, I would love to hear it. Irish wages are not that flexible, despite the spin being put out.

Think about it. Irish wages, on aggregate, rose last year when the economy contracted by 9 per cent. If we can't get wages down when we are in such dire straits, how are we going to grind down wages in the next few years?

I realise that even talking about leaving the euro is heresy to the mainstream in Ireland, who try to dismiss this suggestion as the nuclear option, one which would have dreadful political and economic ramifications for us. To them, the question has to be: what is the alternative?

There are a few points to make about this analysis:

Firstly, membership of the Euro didn't cause our economic collapse - we managed that almost all on our own by irresponsible fiscal policies which encouraged a bubble in property prices and a debt binge fuelled consumer boom.  Ireland has some of the lowest property taxes in the EU - for reasons not unconnected to the close nexus between Fianna Fail, property developers, and a peasant culture conditioned determination to own our own property having been tenants and serfs to a semi-feudal imperial power and landlord system for far too long.

Certainly the ECB had a (too low) interest rate policy which was geared to Germany and France rather than Ireland - which was one cause of the uncontrolled, unregulated and irresponsible lending fuelled property boom in the latter years of the Celtic Tiger - and then raised interest rates just as Ireland was getting into real difficulties.  But that policy has been unwound, and now the low Eurozone interest rates are just what this country needs to recover.

However it was Irish regulatory and fiscal policy rather than Euro monetary policy which was the prime cause of our boom and bust, and whilst a c. 30% devaluation could be a short cut to restoring our competitiveness, it would also stoke up inflation, greatly increase the gross value and cost of servicing our (largely external) national debt, and result in soaring interest rates to encourage foreign investors to purchase our Government bonds.

I am old enough to remember the chronic instability of the old Irish Pound, or Punt, where I was paying a mortgage with 15% interest rates shortly after I had built our family home.  With many more recent home buyers currently in negative equity, and many losing their jobs, a higher interest rate regime is the last thing we need - and reverting to our own independent currency is sure to carry a very high risk premium, particularly with our current Government borrowing requirements of c. 12% of GDP and a gross (public and private) external debt of over 800% of GDP.

Secondly, whilst much of McWilliams' analyses was more or less true in the 1990's when Ireland joined the EMS and then the Euro, it is becoming less and less true as time moves on.  Ireland's economy is extremely open and becoming increasingly integrated with the rest of the Eurozone.  Increasingly, Irish people DO shop in Europe, and Irish business is critically dependent on Eurozone trade where the absence of exchange fluctuation risk is a major factor underpinning our export sector and attractiveness for foreign direct investment.

Thirdly, despite McWilliam's estimated 30% overvaluation of Irish Goods and services, Irish exports to the Eurozone actually increased by a net 3% in 2009 - even if there were significant declines in the more labour intensive "indigenously owned" sectors of the economy.  Thus whilst Government expenditure has been hugely out of line with Government tax receipts - it is the non-traded rather than the traded sector where costs have been most out of line.

Fourthly, despite McWilliam's claim that a devaluation is the only way to get our costs back in line, there is ample evidence that a very rapid readjustment is currently taking place in any case. Government expenditures were reduced by c. €3 Billion in the last budget, Asset prices have collapsed, wage reductions or standstills have been widely implemented throughout the economy, and inflation is currently -6.5%, which will of itself restore competitiveness sooner rather than later.

Finally, it is anything but clear that a 30% devaluation is actually what is required - certainly on an across the board basis.  Those sectors of the economy which are least subject to competition and trade have also been those where inflation has been most rampant in the past few years - private medical services, legal fees, and other services controlled by the Irish professional classes who have successfully managed to gouge an ever larger share of national wealth for themselves.  Again, the solution has to be an Irish one - Government regulation and price controls on monopoly or near monopoly service provision.

Thus far from blaming our Euro membership, what we really should be doing is putting our own house in order - controlling our national Kleptocracy, increasing our taxes on property, and using our access to relatively cheap Eurozone finance to prevent a total deflation of the economy whilst the transition to more sustainable price levels is completed.

Indeed the Euro could be our greatest asset if we want to compete with the UK for financial services which require access to the Eurozone. Financial businesses can now set up in Dublin far more cheaply than in London because of our much reduced property prices and salary levels - which brings me back to Anatole Kaletsky's analysis for the UK:

Disappointment ahead for UK -- and big test for euro

The year ahead will be disappointing in Britain for several reasons: political uncertainty before an election; an exodus of financial business from London; tax increases already legislated, with more to come in a post-election mini-Budget; and excessive strengthening of sterling.

So contrary to his prediction that Eurozone membership could produce unsustainable strains for countries like Ireland, any overall weakness in the value of the Euro is to be welcomed from our point of view. At least our competitiveness with non-Eurozone countries (like the UK and US) is enhanced. But most of all it is the stability and direct access to a huge market without currency risk that makes the Euro such an attractive proposition for us. It is an advantage that the UK is unlikely to enjoy under a Eurosceptic Tory Government.

Display:
and crowns rather than pounds...
by redstar on Wed Jan 13th, 2010 at 04:21:50 AM EST
We wouldn't have been too badly off even if we'd just used the good times to reform the tax system into something not so dependent on business cycles.

I'm reasonably convinced McWilliams is either a fool or a liar: isn't he one of the  people delighted by the idea that the government is prolonging the economic slump here by insisting on anti-stimulus? He's building a story to distract blame from the Anglo-American style economics.

by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 05:13:45 AM EST
The one good thing McCreevy did do in the good times was that he ring-fenced tax revenue equivalent to 1% of GDP per annum and put it into the National Pension Reserve fund to fund future pension liabilities.  That is not an insignificant amount of money  - last time I checked they had c. €24 Billion under management - and this has created an experience and a management expertise as well as a very large pool of money for a rainy day - although intended exclusively for the benefit of public servants.

However his biggest mistake was to adopt pro-cyclical fiscal policies - reducing personal taxes at a time when the economy was already booming.  This exacerbated a previous Fianna Fail Governments mistake of abolishing rates on private properties which destroyed the funding base of local authorities and led to the property boom.

Ireland probably has the highest home owner rate in the EU - not necessarily a bad thing in itself - but it created a huge class of people whose political interests were linked to zero property taxes and ever increasing property values.

This was Fianna Fail's answer - latter copied by Margaret Thatcher - to create a property owning bourgeois who would head off the rise of Labour and other left wing parties.  The problem is prices inflated to crazy levels both becuase of the lack of propertry taxes and the availability of cheap credit from unregulated banks.

Now we have a huge class of property owners in negative equity, borrowed to the hilt, foreclosing as thier jobs go, and very vulnerable to even a tiny interest rate rise.  No Nama for them.  This is the economic reason why Fianna Fail's days as the dominant political party are probably over.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 13th, 2010 at 07:30:49 AM EST
[ Parent ]
Unfortunately, when put to it, the alternative is Fine Gael - even worse then Fianna Fail ideologically - or a sudden massive move to Labour.  Not gonna happen. I can still see Fianna Fail returning to power in coalition with some collection of smaller parties next time out, especially if there's any improvement in the economy and they manage to throw the middle earners (not middle class) a flotation device of some kind.
by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 08:06:38 AM EST
[ Parent ]
Fine Gael may be socially more conservative, but their economic conservatism is of the old fashioned - paying your way kind - rather than the Fianna Fail speculator borrow and binge neo-liberal mindset.  Thus they wouldn't have been as pro-cyclical in their taxation policies, didn't abolish rates, and would have been more prudent in terms of managing the public finances.

The Irish political system has been remarkably resilient and stable, and I don't expect a revolution or a left/right split on the European model any time soon.  But their has been a consistent long-term decline in the Fianna Fail base in any case - from their 50%+ vote in 1979 to c. 40% in recent elections and less than 30% if current opinion polls are actually realised at the polls.

However the PDs, Sinn Fein and the Greens are also imploding somewhat - so there is a huge vacuum for someone to fill - hopefully not by some demagogue playing on people's fears.  In the short term I would see this being filled largely by Fine Gael - and then by Labour as Fine Gael inevitably fail to address the core issues. But its all to play for.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 13th, 2010 at 08:27:20 AM EST
[ Parent ]
Fine Gael aren't going to do a damn thing about inequality though, which is a core economic problem.
by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 08:29:09 AM EST
[ Parent ]
They will be trying to look out for the "mortgaged to the hilt", negative equity, aspiring middle class though - that's a core demographic for them - and these people are in real trouble for the foreseeable future.

The problem with Fine Gael is that they are almost "owned" by big business and the professional classes - and these are the quasi-monopoly operators who are really increasing our economic and social cost base at the moment.

But whilst I see Labour also being a major beneficiary in the short term, and perhaps the major beneficiary going forward, I don't see a huge ideological transformation of the country happening just yet.

People are looking for scapegoats - the banks obviously, and the Government - perhaps even the Eurozone a la McWilliams.  But blame the Irish elite?  Never!

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 13th, 2010 at 08:45:47 AM EST
[ Parent ]
The current demonology blames the developers and the poor banks they conned of their money.

I'm not sure I buy your contention that it's the professional classes what done it - and in most their income seems to have taken a pretty serious hit from the recession as far as I can tell. Probably much more serious than most middle earners (except those who lost jobs).

by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 08:53:45 AM EST
[ Parent ]
their income seems to have taken a pretty serious hit from the recession as far as I can tell

Isn't that prima facie evidence that it's them who dun it?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Jan 13th, 2010 at 09:02:31 AM EST
[ Parent ]
No, just that their income is generally faster to react to a downturn than an employees. If you're a solicitor who makes most of your money on house sales, for instance, your income is way down immediately the property market tanks.
by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 09:07:33 AM EST
[ Parent ]
Did their income also massively go up during the bubble?

Who benefitted from the bubble while it was going on? If your income is strongly correlated with asset prices you will benefit when there is a bubble and hurt in the crash. You will also have a short-term incentive to encourage a bubble. You are likely to favour policies which will lead to bubbles. The professional class is also better politically connected than other classes (and lots of the politicians are professionals) and so they have a disproportionate amoutn of political influence.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Jan 13th, 2010 at 09:11:27 AM EST
[ Parent ]
So did everyone anyway involved in property. Builders (as in the guys with the trowels), furniture shops, electricians, solicitors, architects and so on.  All suffering disaster now. A large proportion of our furniture shop clients have gone under.
by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 09:45:54 AM EST
[ Parent ]
I don't think the professional classes caused the crash - they were just making hay while the sun shone like every one else who could.  However in terms of our ongoing competitiveness they are also the most insulated from competitive pressures.  

Have bank managers -other than top executives - taken a hit, have Barristers reduced their fees?  Have Medical consultants or even your local GP?  Half a million Euro p.a. is not unusual for a consultant - half of that from the Government for a part time job.  Even top civil servants have managed to largely reverse the planned budget cut whilst junior civil servants take the full hit. These guys were earning way more that their EU counterparts in most instances, and indirectly they effect the cost of living and doing business here for everyone else.  

Are Fine Gael going to socialise private medicine - never.  Will labour? - not at the moment.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 13th, 2010 at 09:05:52 AM EST
[ Parent ]
Barristers probably have reduced their fees, I haven't tried using one recently. I do know they're having much more trouble getting paid. Anyway, their fees have always been negotiable. And what percentage of GNP is barristers fees anyway?

The whole medical system is a mess, and it's not cleat to me what good "competition" is going to do.

by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 09:11:08 AM EST
[ Parent ]
My experience of solicitors at the mo. is that they are making work for themselves by abusing the legal system by maximising legal obscurantism.  One firm is charging several million for work done on a file which led to damages of less than that.

If you want to reduce the total cost of the medical system, you will have to socialise it, but as it stands our private system is damaging the competitiveness of the rest of the economy by creating huge costs for all that have to be reflected in wages and the cost of doing business.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 13th, 2010 at 10:52:34 AM EST
[ Parent ]
Frank Schnittger:
My experience of solicitors at the mo. is that they are making work for themselves by abusing the legal system by maximising legal obscurantism.

That would be business as usual for corporate lawyers - and many other kinds of lawyers too.

When you're being paid a few hundred an hour for playing with your pencils and designing incomprehensible sentences, there's no particular incentive to be clear, concise and straightforward.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jan 13th, 2010 at 11:43:42 AM EST
[ Parent ]
Anecdotally, bank managers were never paid that much (compared to people in sexier busiinesses): two to three times average industrial wage, maybe a bit more.
by Colman (colman at eurotrib.com) on Wed Jan 13th, 2010 at 09:37:12 AM EST
[ Parent ]
AIB and BofI and the major banks offer superb overall packages in terms of job security, pension benefits, preferential loans, and salaries when compared to the rest of the economy.  Other than top executives losing bonuses, there has been little evidence of a reduction in that cost base, and no evidence at all for reduced charges or better access to credit for consumers and small businesses - both critical to preventing a further slide into depression.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 10:42:05 AM EST
[ Parent ]
You're expecting banks to lend in a recession? The trick of banking here has always been not to lend to people who needed it.
by Colman (colman at eurotrib.com) on Thu Jan 14th, 2010 at 10:49:45 AM EST
[ Parent ]
So why are there now "Public Interest" Directors on their boards representing the 50% taxpayer shareholding in the banks?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 12:46:02 PM EST
[ Parent ]
Preventing a further slide into depression doesn't depend on commercial bank lending but on government running a counter-cyclical fiscal policy.

Of course this runs counter to the prevailing ideology, so here we are.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Jan 14th, 2010 at 11:09:05 AM EST
[ Parent ]
Well, in good news, the rate of deflation slowed in December. Weeee!
by Colman (colman at eurotrib.com) on Thu Jan 14th, 2010 at 11:15:53 AM EST
[ Parent ]
ONLY -5% now!

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 12:57:32 PM EST
[ Parent ]
Is a Government running deficits equivalent to 12% of GDP not running a counter cyclical fiscal policy?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 12:48:08 PM EST
[ Parent ]
If that's the result of cutting taxes, not so much...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Jan 14th, 2010 at 05:23:00 PM EST
[ Parent ]
The tax cuts were 5 years ago and more.  The deficit would have been 15% of GDP without expenditure cuts and some tax increases.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 05:35:27 PM EST
[ Parent ]
Then the policy is 3% less counter-cyclical than it could have been. And a lot more than it should have been :P

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Jan 14th, 2010 at 05:37:08 PM EST
[ Parent ]
I would regard it more as an unwinding of the unsustainably pro-cyclical policies of the prior years - chiefly under McCreevy's regime, but also, to a lesser extent, during Cowen's tenure at Finance.  I don't think going back to a debt/GDP ration of c.100% is a good idea.  As it is we will go close unless there is a turnaround in the next couple of years.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 05:51:23 PM EST
[ Parent ]
(And that is before you take into account the 57 Billion of off balance sheet Nama funding).  Quite how the simple device of a special purpose vehicle can get around EU national accounting rules is difficult to fathom...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 05:53:27 PM EST
[ Parent ]
It's off-balance-sheet
Your imagination is the limit.
Wait, it gets better
Perhaps on the balance sheet of another company.
Usually on the balance sheet of a Special Purpose Entity (SPE).
Your company's shareholders perhaps know it, perhaps not.
LOL
do you mean "creative accounting"?
I prefer to call it "financial engineering".


En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Jan 14th, 2010 at 06:02:09 PM EST
[ Parent ]
Apparently Eurostat think it is a great idea.  And the OECD loved our very innovative "long term economic value" concept for over-paying banks for their assets.  Apparently it was sufficiently vague to defy analysis which was the point of the exercise.

Anyway, you can't fault the Irish for not trying it on...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 06:32:52 PM EST
[ Parent ]
That's just the same argument US banks used to get the US government to overpay for their assets. The idea is that if you just manage to ride out the storm until the sunny day when asset prices are back up to 'normal'...

So much pressure to reform accounting standards to reflect mark-to-market and it had to come to this...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Jan 14th, 2010 at 06:37:18 PM EST
[ Parent ]
Well when the market is "wrong" you just create a futures market in "hope".  Obama did it in politics as well.  You extract a current market premium by leveraging people's aspirations (or desperation) for the future.  It's a bit like selling the power from solar panels that will be generated from "sunny days" yet to come.  Jerome does it all the time in a windier way...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 06:47:36 PM EST
[ Parent ]
High unemployment (of people and plant) causes damage to the economy. If it goes on for a long time it causes permanent damage. Debt to GDP ratios be damned (assuming the debt is used to return the economy to a normal level of activity).

Once the economy starts recovering it will be time to reduce public spending and raise taxes by 3% and more, not while the economy is still in a nosedive.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Jan 14th, 2010 at 06:05:51 PM EST
[ Parent ]
Migeru:
Debt to GDP ratios be damned (assuming the debt is used to return the economy to a normal level of activity)

Normally I would agree but:

  1. Much of the downturn was caused by unsustainable asset and cost inflation.  Assets have imploded.  Costs are only v. slowly returning to "normal"=sustainable levels.

  2. There comes a point at which huge budget deficits become self-reinforcing and unsustainable because the cost of borrowing goes up even more than the rate of borrowing because foreign lenders simply won't lend without increasing risk premia.  Irish public and private foreign debt is c. 800% GDP, so we are huge over-leveraged as it is.

  3.  Most of the down turn has been in the construction and tourism sectors.  Construction was c. 15% of GDP (if memory serves) and we were building houses at a rate c. 50% the level fro all of the UK.  Not only are many of those houses empty, office and factory vacant space is at record levels.  It is pointless trying to reflate that bubble just yet.  

As for tourists - for some unaccountable reason spaniards don't want to enjoy our weather in the same numbers as we enjoy yours. Thus most hotels are closing for lack of demand.theirs.  I suggest the EU force Spaniards to come and holiday here.  At the moment we just get your delinquent teenagers on so-called language courses...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 06:26:41 PM EST
[ Parent ]
I wasn't being totally serious last night but the answer to
I don't think going back to a debt/GDP ration of c.100% is a good idea.

...

Irish public and private foreign debt is c. 800% GDP, so we are huge over-leveraged as it is.

is that the Irish government didn't need to exhaust its fiscal capacity by guaranteeing all debt liabilities of all banks and throwing NAMA on top of that.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Jan 15th, 2010 at 04:14:52 AM EST
[ Parent ]
I agree guaranteeing subordinated debt was stupid but the Irish Government would argue that:

  1. No debt guarantees have been called in yet so at the moment this is not a fiscal drag

  2. Ireland's "responsible" attitude has boosted the confidence of international lenders in Irish Government debt generally and thus reduced borrowing costs

  3. The banks are paying c. 1 Billion p.a. as a fee for the guarantee

  4. All Nama funding will be off-balance sheet and not included in any "fiscal" national accounts - do not pass go and return to # 1 above...

Maybe I should get a job as a Government spokesman...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 15th, 2010 at 07:31:36 AM EST
[ Parent ]
If you're going to argue that, then you can't use the 800% GDP total public and private debt as an argument against running a large deficit.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Jan 15th, 2010 at 08:15:17 AM EST
[ Parent ]
The Irish Government are keeping very quiet on that...don't want to be compared to Iceland, now do we?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 15th, 2010 at 08:39:29 AM EST
[ Parent ]
The difference with Iceland is that you're in the Euro.

The question is whether the ECB can and will be a lender of last resort to Irish banks.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Jan 15th, 2010 at 09:57:07 AM EST
[ Parent ]
There are many other differences as well - scale, size of GDP, diversity of infrastructure and industries, current level of public indebtedness.  Let's not become uni-factorial about this.  Just as the Celtic Tiger wasn't solely caused by EU subsidies or low corporate taxes, neither will Ireland's recovery now be solely down to the Euro or the ECB.  My argument with McWilliams is that I see it as a positive factor, whereas he sees it as a negative one.  Neither of us would claim it is the only factor.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 15th, 2010 at 10:48:12 AM EST
[ Parent ]
Colman:
I'm reasonably convinced McWilliams is either a fool or a liar

He's a newspaper columnist who needs to fill column inches and likes to be as controversial as possible.  It's probably no harm that our Euro membership is debated if only to highlight the fact that the Government needs to use counter-cyclical fiscal polies to manage the economy now that it no longer has direct access to monetary policy mechanisms.

I suspect McWilliams real agenda is to put the screw  n Unions to accept swinging wage cuts when I think the problem lies largely elsewhere.  Irish wage rates - as I indicated in the text - are largely a problem in the non-internationally traded sectors where they have been allowed to get totally out of line with our EU competitors.

Certainly smaller Irish indigenous industries are suffering - chiefly where they are dependent on the Irish market - but also where they are employing old tech or small scale labour intensive production methods.  However future real growth is likely to come in high tech pharma, bio-science, ICT and financial services sectors, and here I see no problems for Irish competitiveness at current wage rates.

If I were in the Govt. I would be hawking the Irish Financial Services centre to every Financial services company in London offering a huge vacant office capacity, low labour costs, a benign taxation regime (to put it mildly) and untrammelled access to the Eurozone - all in an English speaking country one hours flight from London City Airport.  

A few multi-Billion projects could fill a large part of the hole in Irish taxation revenue very quickly - even if it is only a short term quick fix solution and not a long term strategy for sustainable development.  When you are in a ]hole up to your neck in alligators, draining the swamp can be a parallel strategy.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 13th, 2010 at 08:09:45 AM EST
[ Parent ]
McWilliams rehashes the conventional theory of optimal currency unions:
For a currency union to work for a country, the most important thing is that the country trades overwhelmingly with the other members of the monetary union.

This ensures that all the countries in the union move roughly in the same economic cycle. It is also important that the structures of the respective economies are broadly similar, so that one country doesn't experience a huge boom, while the rest are just motoring along nicely.

Having similar structures in banking and housing, for example, will imply that a country should not suffer a monumental bust, while the others are merely experiencing a normal recession. Equally, it is important that there is significant movement of people within the currency union - like there is in the US between its states - so that, if a country does slump, its citizens can move to find work in another member country.

In general, for a currency union to work, there should also be a single fiscal policy so that, when one area of the currency slumps, the rest of the union's taxes go some way to ease the problems in the region in difficulty. This is how the currency unions in the US, Canada and Australia work.

Guess what? None of these attributes was in place when Ireland joined the EU economic and monetary union (EMU) and the euro. So it is clear that we didn't join for economic reasons. So why did we join? It seems that we were too insecure to behave logically and this national insecurity - particularly among our senior mandarins - prevented us from having a debate.

However, in light of the Icelandic experience, Buiter and Sibert wrote the following in their now famous report The Icelandic banking crisis and what to do about it:
6.2 New optimal currency area criteria

The study of the costs and benefits of common-currency areas goes back to the seminal work of Mundell (1961). Conventionally, the major cost of a joining a common currency area is the loss of one's own monetary policy --- the ability to set the short, risk-free nominal interest rate or the nominal spot exchange rate. This loss is harmful for two reasons. First, if there are asymmetric shocks in different member countries of a common currency area, then the common central bank cannot smooth output and employment in individual
countries, even if there are persistent nominal price and/or cost rigidities. Second, if countries have different consumption baskets and if relative prices are changing, then even with a single monetary policy there will be
different inflation rates in different countries. If, say, two and a half percent inflation per year is optimal then a central bank may be able to attain something close to this for the currency area as a whole, but not for individual countries.

...

We argue, however, that these old optimal currency area criteria are not particularly relevant to the case of Iceland. It is true that cultural differences, language barriers and geography ensure that labour is unlikely to be especially mobile between Iceland and continental Europe. Although there have in recent years been quite sizeable labour flows between Iceland and both the Nordic countries and the Baltics, and although Iceland's internal labour market is flexible compared with much of continental Europe, it is not as flexible as those in the United States and New Zealand. The Icelandic consumption basket is unlikely to be similar to the Italian one. However, Icelandic monetary policy is certainly not delivering optimal inflation for Iceland and even if the central bank had a policy of offsetting shocks to the real economy in their own right (that is, as distinct from what shocks to the real economy imply for inflation), it clearly has not been effective and it is hard to believe that it would be effective in the future.

For these reasons, Buiter (2000) concluded that even on the conventional macroeconomic stabilisation criteria for an OCA, it made sense for Iceland to adopt the euro. With the spontaneous euroisation of much of the economy that has taken place since then, the ability to conduct an independent monetary policy --- even the best-practice form of inflation targeting with a flexible
exchange rate --- has been further impaired. National monetary independence today makes no sense for Iceland today, even apart from the financial stability considerations we have emphasized in this paper.

A conventional benefit of a common currency area is the reduction in transactions costs. While transactions costs in the financial wholesale markets are miniscule per transaction, volume is high. The European Commission (1990) estimated that these costs were .25 --- 0.40 percent of the total European Community GDP. The króna, as measured by variations in the nominal
and real effective exchange rates, is volatile relative to that of other advanced economies.12 Moreover, the openness and small size of the Icelandic economy makes it inhabitants particularly vulnerable to foreign exchange volatility. Every business and household in Iceland is in the position of having to be a foreign exchange speculator.

There is evidence to support the view that not all households have been wise speculators. Around 80 percent of the foreign currency loans to households, for instance, were denominated in the two currencies with the lowest interest rates; the Japanese yen and the Swiss franc (see Figure 14). Iceland's households have therefore been enthusiastic proponents of the 'carry trade', borrowing where the interest rates are lowest, and forgetting about currency risk.

Tell me which parts of this analysis wouldn't apply to Ireland.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Jan 13th, 2010 at 05:28:39 AM EST
Excellent juxtapositioning of opposing texts.  The other factor not mentioned by Buiter in the quote is that the smaller the economy, the easier it is for a large investor or hedge fund to game the currency exchange rate.  The UK suffered significant losses to speculators at the time of their last devaluation crisis.  The global arrogance of the "investment community" treated the Irish Punt as a very risky bet even when our economic fundamentals were very sound - simply because Ireland was small and didn't register on strategic radar screens.  (This was before the Celtic Tiger made Ireland such a fashionable place to speculate).

Thus, just as you need to have the sheer size of the EU market behind you if you want to regulate the likes of Microsoft and Google effectively, you also need the sheer size opf the ECB behind your currency if you want to be able to ensure that your currency values reflect economic fundamentals, and is not subject to huge volatility created by speculators and hedge funds engaged in short-selling and by traders with an interest in volatility per se.

Whatever the very marginal case that might be made for a separate Irish currency, I can see no case at all for a tiny Icelandic one.  It represents little more than a night out at the Casino for an average self-respecting hedge fund up for creating a bit of market mayhem on an otherwise quiet day.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jan 13th, 2010 at 07:17:16 AM EST
[ Parent ]
The world's weakest currency is likely to be the euro as US exporters increase their global market share mainly at the expense of European rivals
Having the world weakest currency will in turn strengthen the competitivness of said European exporters...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jan 13th, 2010 at 05:30:38 PM EST
the euro is strengthening again against the dollar, where is the evidence it will be the 'world's weakest currency'?

many would like it to be, for various reasons, certainly, but where is the evidence the USA is going to suddenly retool for major industrial exports in the near future. GM?

even such a low dollar has only mildly tweaked up exports, many still think the dollar overpriced, so this crystal ball gazing at the euro moving from the strongest to the weakest seems over-pessimistic (if a strong euro suits you, obviously.)

i'm sure the euro has some severe trials ahead, but this prognostication smells like fishful winking.

ireland will be a drag on the euro until policies improve, just as latvia, greece, portugal and the rest of the usual suspects, (though i don't see italy on the basket-case list as much as i would have expected.)

but the main axis countries will provide the muscle to drag along the economically weaker countries, they knew that would happen, and exchanged that for easier access to juicy new markets ripe for investment, croatia et al.

ireland and iceland are extreme cases only because of the depth of their commitment to bubblicious casino capitalism, based on creative accounting, rather than creating something real that people could actually use to get richer with, and not just in virtual zeros. england would already have suffered the same fate, were it not bigger and still having some vestiges of its once great industrial machine functioning and as yet not totally globalised out of existence... going fast though...

as for italy, i suspect they're in just as deep doodoo, but have tighter lockdown on the facts, government transparency here being a pravda style fiction, and cosy crony-covening to ring-fence the goodies at the top, the norm. the recent events at rosarno are more indicative of how much of the italian economy is funny money controlled by very unfunny people, and built on illegal immigrant slave labour, and how thin the membrane between biz as usual, and street violence a la Twank.

could be wrong, but i think there's a bunch less of that in ice- or ire-land, though england has its chinese winklepicker issues. is that true, or is some of ireland's wealth built on sweatshops?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Jan 14th, 2010 at 09:14:41 AM EST
[ Parent ]
Ireland has a pretty good industrial base and an improving infrastructure.  The problems were largely created by profligate government spending with poor management and no cost control, poor fiscal policies and non-existent regulatory ones.  

Many of these issues are being tackled and I would expect a turnaround to sustainable growth (though not on the Celtic Tiger model) within the next 2 years.  That's poor consolation to those on the dole or in negative equity, but at least there is a basis for real economic growth in the future.  

A lot obviously depends on how the global economy and the rest of the EU performs.  I would expect the UK decline (and £ devaluation) to be a continuing problem for us.  

Overall, Ireland is too small to have much impact on the performance of the Euro, but we do need the EU, post Lisbon, to get its act together.  We are poorly positioned if, as I expect, the current global recover turns out to be something of an illusion and a longer term recession takes hold in all but China and a few resource intensive countries.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 10:37:15 AM EST
[ Parent ]
but where is the evidence the USA is going to suddenly retool for major industrial exports in the near future. GM?

You'd better believe.  Damned furreners and your gay man-steps.

Howie Long and Chevy judge you, melo!

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 14th, 2010 at 11:33:05 AM EST
[ Parent ]
The Ford Focus has been a best selling car in Europe for 12 years.  You guys finally catching on?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 12:55:47 PM EST
[ Parent ]
Yeah, I mentioned it the other day.  The have the Focus here already, but it's a much different (and totally fugly) design.  The one they're putting out next year is supposed to be the same as the one they sell in Yurp (and it's really nice-looking).

Plus, it's apparently going to be built in Detroit at an old SUV plant.  Can't beat that, right?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 14th, 2010 at 04:32:54 PM EST
[ Parent ]
I've never driven a focus, but it has a very good reputation.  Only problem is that, by the best European and Japanese standards, Ford cars aren't particularly economical.  Even a good turbodiesel would be a huge improvement.  Most new European cars are diesels these days and there is no comparison in terms of performance/economy.  A 2 litre diesel BMW 5 series is even more economical than a Prius, and there is no comparison in terms of room, comfort and performance (and price, unfortunately).

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 05:16:49 PM EST
[ Parent ]
I've never seen what a 5 series costs in Europe, but in the states there'd be no real comparison on room (although the Focus is a compact, the Beamer is a pretty large car), comfort and performance.  However, the BMW wouldn't be as well produced, would cost more in gasoline, and would cost a fortune to repair when something inevitably went wrong.  (BMW is known to stand for "Break My Wallet" among Americans.)  I've never been terribly impressed with German cars for that reason.

But, assuming away the affordability and frustration issues, the 5 series is a nicer car on day-to-day driving.

Cadillacs and Lincolns would be the more apt comparisons with BMWs and Mercedes.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 14th, 2010 at 06:59:34 PM EST
[ Parent ]
...adding: Not that I've ever actually owned a German car, obviously.  That's just my experience listening to friends and family who have.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 14th, 2010 at 07:01:33 PM EST
[ Parent ]
I was just using the comparison to illustrate how much more economical good turbodiesels are when compared to petrol - and the fact that petrol electric hybrids are not anywhere near as efficient as a good turbodiesel.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 07:17:30 PM EST
[ Parent ]
That's very true.  Unfortunately, from what I can gather, we seem to have a really dumb regulatory regime here that prevents good turbodiesels.  The only car I'm aware of that uses one in a VW.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 14th, 2010 at 08:33:48 PM EST
[ Parent ]
regulatory regime?  what's that all about?  I thought diesels were unpopular in the US because they were associated with old loud dirty slow engines that were the norm 25 years ago.

The VW 2.0 Litre turbo diesel which you can get in the Golf or Passat is supposed to be v. good too.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 08:39:29 PM EST
[ Parent ]
The VW sounds okay.  Both the Golf and Jetta have TDI models.  Pretty expensive, though.  Twenty three grand is well into Mini Cooper niche/boutique territory for what isn't really a niche/boutique brand.  And you'd need to save a lot of gas to make up for the five grand difference in price between the TDI and the gasoline models.

Regulatory: As I understand it (as always, I may be wrong), we don't have diesels due to the way diesel emissions are regulated in the US.

Can't see it being because of old associations with the engines.  At least not beyond pushing the cars for a couple years until people see that they're not all those things anymore.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 14th, 2010 at 08:47:12 PM EST
[ Parent ]
ASAIK diesels are also cleaner than petrol engines - certainly in terms of CO2 emissions.  There is no technical justification for the 5K price differential.  Diesels are only marginally more expensive to produce than petrol engines when produced in large volumes.  It must be the low volumes sold in the US that creates the differential - that plus VW making money where they can.  German manufacturers are not noted for price discounting to gain market share.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jan 14th, 2010 at 08:57:21 PM EST
[ Parent ]
I drove a VW diesel for 5 years, Compared to a Ford Petrol of roughly the same capacity, it worked out on Fuel that we were saving roughly £40 per week, the only thing that worked out worse was that like all deisels it was expensive in front tyres with the heavier engine.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Thu Jan 14th, 2010 at 10:13:15 PM EST
[ Parent ]
That was probably the old 1.9L diesel which had good low end torque but v. average diesel economy.  The much newer 2.0 Litre is supposed to be a big improvement in refinement, economy, and performance - but I have never driven it.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 15th, 2010 at 07:38:31 AM EST
[ Parent ]
Jesus, how many miles were you driving per week?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Jan 15th, 2010 at 07:45:29 AM EST
[ Parent ]
About 270 miles a week

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Jan 15th, 2010 at 09:34:31 AM EST
[ Parent ]
The story goes that US particulate emission standards regulate European diesels out of the market.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Jan 15th, 2010 at 03:57:34 AM EST
[ Parent ]
Sounds conceivable. Do they apply the same emission standards to large trucks?  How come VW has Diesels on the market then?  Perhaps it also depends on how "clean" the base diesel is at the retail level.  Are there different refining standards?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 15th, 2010 at 07:36:00 AM EST
[ Parent ]
More room in the big truck for the bolt on scrubber or whatever it is - but if its a sideswipe protectionist measure that better explains how it got through in the first place.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Jan 15th, 2010 at 08:02:07 PM EST
[ Parent ]
... tightening of refining standard for diesel fuel in the last few years, which is a reason why diesel prices started to really pick up steam before gasoline in the 06/07 period - don't know if that was up to Euro standards or up from Euro standard.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Jan 15th, 2010 at 08:05:21 PM EST
[ Parent ]
You don't have VW in the US?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Jan 15th, 2010 at 03:51:06 AM EST
[ Parent ]
do you think it might have something to do with the quality of the macadam?

granted, the distances are another dimension entirely, but i wonder if that's why american suspensions, even in luxury cars, seem suspended in sponge, compared to the equivalent euro guzzler.

i also remember the astonishing number of dead (especially truck) tire shells littering the sides of highways in the USA, something which is rare over here.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Fri Jan 15th, 2010 at 10:27:30 AM EST
[ Parent ]
You see tire shreds on roads here pretty often too. Possibly it's a difference in clean-up policy. It would take an awfully long time before the authorities here would get around to collecting them if they weren't causing a hazard.
by Colman (colman at eurotrib.com) on Fri Jan 15th, 2010 at 10:38:05 AM EST
[ Parent ]
A lot of those are retreads, which tend to blow with higher frequency - don't know if youse Yuros permit retreads.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Jan 15th, 2010 at 08:03:05 PM EST
[ Parent ]


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