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Bailing out the austerity hawks

by Frank Schnittger Thu Dec 5th, 2013 at 12:59:40 PM EST


Ajai Chopra (left) of the IMF and an unidentified colleague pass a beggar as they make their way to the Central Bank in November 2010. Photograph: AP

It's easy to be Snarky about Ireland exiting the Troika Bail-out on the 15th. December, but it really is a big deal for the Austerity Hawks: It proves (to them) that they were right all along, and that austerity "works". Ireland is the shining poster child to be waved in front of Greece, Spain, Portugal and every other prodigal state should they waver from the approved path of austerity. Some in Ireland are attributing historic significance to the bail-out exit, whilst others see it as merely escaping the tyranny of the Troika for the tender mercies of the international sovereign debt markets.

But it also does no good to deny that a significant economic recovery is now underway in Ireland (from a very low base), so does this prove all the Keynesians wrong? I would argue that neither proposition is correct: Ireland has succeeded (insofar as it has) for neither the standard Austerity or Keynesian reasons and has done so due to factors that are mostly non-generalizable to other economies. To understand the Irish recovery, you have to understand an almost unique combination of factors that is making it possible.

Given that the scope and sustainability of Ireland's economy is still under debate, I will begin by offering some evidence for and against the recovery hypothesis and then suggest some reasons as to why it might be happening.


1. Evidence against recovery

First the evidence that Ireland is not recovering substantially:

Between 2008 and 2011 real GDP declined by 5.4 per cent, while real GNP declined by 10.1 per cent. Since then it has effectively flat-lined. Property prices halved and unemployment rose to 15.1%. Ireland went from having the highest net immigration level in Europe in 2006 to the highest net emigration level in 2012. In the meantime, Irish Government finances where devastated by a combination of the bank bail-outs, world recession, and a collapse in revenues arising from the property crash and domestic recession.

So we need to be clear: Insofar as Ireland is experiencing a recovery now, it if off a very low base indeed relative to previous performance. As Krugman has rightly noted, any policy which achieves a modicum of growth having first devastated the economy is setting the bar for success very low indeed.

2. Evidence for recovery

So what is the evidence for a recovery since 2012? First it must be noted that Irish GDP figures are distorted by the huge foreign owned multinational sector which routes much of their global revenues through Ireland for corporate tax avoidance reasons. This has the effect of inflating the real GDP figures. However the extent of those financial flow has been reducing due to the "Patent Cliff" which has seen several block busting drugs like Viagra and Lipitor come off patent, dramatically reducing exports (and GDP) whilst not necessarily reducing real economic activity within Ireland.

Evidence that this is the case is provided by the unemployment figures which show unemployment falling from a peak of 15.1% in 2009 to 12.8% at the end of September 2013, and 12.5% at end November. This includes a fall in unemployment of 42,000 over the past year including a reduction in the rate of Long-term unemployment from 8.9 to 7.6 per cent.

Lest anyone think this was caused entirely by net emigration, it should be noted that there was also an annual increase in total employment of 3.2 per cent or 58,000 in the year to the end of September, bringing total employment to 1,899,300 whilst the total labour force increased by 16,300 to 2,182,100 over the year.

Whilst the the recovery in employment initially included many part time and low paid jobs, the evidence now is that the number of full time and better paid jobs is also increasing with income and spending tax takes increasing ahead of target:

Increased tax take adds weight to recovery claims

Overall, the total amount of income tax paid in the 11 months to the end of November was €35.2 billion, 4.2 per cent ahead of the €33.8 billion collected during the same period in 2012. The total was also ahead of the budget target, which was €34.97 billion.

Total revenues, tax and non-tax, for the 11-month period, came to €51.5 billion, 8.3 per cent more than the €47.6 billion collected during the same period last year 5 per cent ahead of the Government's €49 billion budget target.

The Government spent €60.08 billion during the first 11 months of the year, 0.8 per cent less than during the same period in 2012. The figure was 4.4 per cent less than its budget target of €62.85 billion.

Conal Mac Coille, economist with stockbroking firm, Davy, said that the Government is on track to "comfortably beat" its deficit target for the year of 7.5 per cent of gross domestic product.

Property prices have also begun to rise again after declining 50% from peak - by 15% in Dublin and by 8% outside Dublin in the past year, whilst Dublin rental prices are up 7% due to shortages in supply. The once dormant building industry is beginning to respond. The Irish tourism industry has also experienced a spectacular rebound thanks partly due to Government initiatives like the Gathering.

As indicated in the above quote, however, whatever is driving the recovery in jobs, it most definitely is not Government Keynesian stimulus spending. Neither is the continued recession in large parts of the Eurozone helping to drive Irish export growth, nor, as so eloquently noted by Krugman, is Germany's trade surplus. So what is driving the recovery?

3. Political Stability

The catastrophic banking collapse followed by more widespread economic collapse resulted in an historic defeat at the polls for Fianna fail - for so long the natural party of Government, and for it's close links with crony capitalism and the building industry. It gave the current Fine Gael/Labour coalition government an unprecedented majority and mandate to manage the crisis and lead a recovery process. All blame could conveniently be placed on the preceding Fianna Fail/Green coalition and the political system was effectively purged. Little matter that the policies ultimately pursued were not all that much different from previous Governments for all the bluff and bluster that the new Government would govern "Labour's way, not Frankfurt's way".

I have written elsewhere on the reasons why there wasn't an open rebellion by the Irish people against the bank-bail-outs in particular, and the harsh austerity measures in general. Suffice to say here that Ireland is an extremely stable and cohesive political entity, for all the Troubles in the North, and difficulties in disentangling the state from the Catholic Church. But perhaps the single most important factor was the 30 year tradition of national collective bargaining whereby the Government, Trade Unions, Employers, and the Voluntary and Community sector sit down and negotiate a National Plan which includes agreements on pay rises, taxation measures, social programmes and legislative proposals which takes a lot of the tensions and conflict out of the industrial relations and political process.

That process has become increasingly fraught as austerity bit harder and harder, but the political and social capital which had been built up over the decades enabled it to engineer a mostly consensual way forward. Nothing could be further from  the Thatcherite and Reaganomic dreams of current neo-liberal economic Austerity theorists, and that it was able to survive the catastrophic impact of the banking and economic collapse is truly remarkable.

You won't read about it in neo-liberal economic textbooks or political tracts, however. In fact you hardly hear about much it outside Ireland at all.

4. Corporate Taxation rates

One of the main reasons Ireland's economic recovery is not generalizable to all other countries is because a key component of it is based on corporate tax competition and maintaining a differential with respect to its main competitors. While Ireland's standard 12.5% corporate tax rate is not especially low for smaller or less developed countries worldwide, it is significantly lower than the headline rates charged by Ireland's main competitors for foreign direct investment within the EU. However headline rates can be misleading, and the effective rates (after deductions for allowable expenditure like R&D) are not all that different:

Cantillon: A very different tale about corporate tax

The latest Paying Taxes report from PricewaterhouseCoopers/the World Bank at first glance tells a very different tale to the reports carried in this newspaper and elsewhere about Dublin-based multinationals paying very little tax on whopping great turnovers and profits.

According to the PwC/World Bank report, Irish corporates pay an average effective tax rate of 12.3 per cent, almost exactly the 12.5 per cent statutory rate that applies to non-passive corporate profits.

This compares with an EU average effective tax rate of 12.9 per cent, and a global effective rate of 16.1 per cent. Germany has a corporation tax rate of between 30 per cent and 33 per cent, but an effective tax rate of only 8.1 per cent, while for France the comparative figures are 33.3 per cent and 8.7 per cent.

A far more legitimate complaint about the Irish corporate tax system has been the way it has allowed foreign owned multinationals like Google, Apple, and Microsoft to set up non-tax resident companies in Ireland through which they can route their world-wide revenues and, via further loopholes in Dutch, Bermudian and US tax law, avoid paying tax on it altogether: The infamous Double Irish and Dutch Sandwich. Irish Finance Minister, MIchael Noonan, announced the abolition of the Irish part of this loophole in his recent budget, and it will be interesting to see what impact this has on Irish corporate tax revenues and foreign direct investment in the future

My view, which I have not seen articulated anywhere else, is that it may not have very much impact on Ireland one way or the other. Companies which effectively used Ireland as a tax shelter will find other shelters through which to route their global revenues. Thus no increase in the Irish corporate tax take. However there is also no reason why they shouldn't continue to locate their European headquarters and much of their operations in Ireland, because those activities where always taxed in Ireland in the first place. It is only the nameplate non-resident part of their tax engineering activities which will move elsewhere, and these never generated any tax revenue or much employment in Ireland in the first place. We shall see, but Ireland and the multinationals locating here have always claimed that the relative benign corporate taxation regime was only ever one of many reasons for locating in Ireland.

5. Industrial Development Authority

Of perhaps more importance to the Irish recovery than any perceived tax advantage has been one of the few institutions in Ireland which can genuinely be called world class: The Industrial Development Authority. Over the years it has attracted and persuaded to locate in Ireland a veritable who's who of leading technology and pharmaceutical global corporates often while these companies and their technologies were still in their early stages of development. These are not minor nameplate operations, but production, R&D, and service operations employing thousands. The result has been an increasing cadre of well educated, trained, experienced and confident managerial and technical personnel some of who have gone on to establish their own indigenous companies.

This is also part of the reason why the renewed experience of emigration from Ireland has not been as traumatic as for previous generations: Many of those emigrating are well educated, trained, qualified and experienced and have been able to pick up good jobs in England, Australia, Germany, Canada and the USA and for some, at least, it has been a positive career move. True, they represent a huge loss to Ireland's economic potential, but some are now returning with much enhanced professional and entrepreneurial capabilities.

6. Conclusion

It is not my intention here to present an comprehensive analysis of just why Ireland may be recovering despite the considerable headwinds of a huge public and private debt load, continuing Government austerity policies, anaemic recoveries in our major trading partners, and an unhelpful, to say the least, policy stance from our EU partners: Merely to issue a cautionary note that the standard Austerity and Keynesian narratives don't necessarily tell the whole truth. No doubt the debate below will include many contrary contributions.

Despite German denials, Ireland has chosen to exit the bail-out without a precautionary credit line from the ESM because German and EU political debate on the issue couldn't have been more unhelpful. It must be galling to Ireland's leaders to see the Austerians claim all the credit for "Ireland's Success"(tm) when nothing could be further to the truth. I have written as long ago as July 2011 that Ireland could be on the brink of recovery and it has been a long time coming thanks largely to an unhelpful international economic and political climate. Ireland may have been largely the author of it's own downfall through an unsustainable economic boom and subsequent bank bail-out, but it is now also having to build it's own recovery largely without outside assistance.

Display:
Forbes names Ireland as `best country for business' - Thu, Dec 05, 2013

Ireland has for the first time been named as the "best country for business" in rankings carried out by renowned US financial magazine Forbes.

Ireland has moved up from sixth position in the influential rankings last year. The rankings are determined by grading 145 nations on 11 different factors: property rights, innovation, taxes, technology, corruption, freedom (personal, trade and monetary), red tape, investor protection and stock market performance.

But it should help to sustain FDI

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 5th, 2013 at 02:20:15 PM EST
From your second graph it is hard to see how most commentators could possibly be crowing about an Irish recovery. Ireland 'recovered' by pushing government debt over 100%?! Should not that statistic skewer Reinhart and Rogoff?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 6th, 2013 at 11:01:38 AM EST
Yea, even on optimistic projections national debt is due to peak at 120% of GDP and 160% of GNP. The deficit scolds should be having a field day. But seeing most of it was incurred paying off the "investors" who had stoked Ireland's real estate and hosing boom, it looks better on the national balance sheet than on theirs. The deficit is due to below 3% of GDP by 2015 based on current continued planned austerity. Any failure to reach that target will have the deficit scolds in the Troika and Germany out in force again. Ireland should be complaining loudly that the ECB is failing to meet it's inflation target of 2%. In VSP circles it is preferable to have unemployment above 10% than inflation above 2%...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 6th, 2013 at 11:50:04 AM EST
[ Parent ]
Well I certainly agree that Ireland suffered a very severe 'hosing boom'. I have never before seen an economy so thoroughly hosed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 6th, 2013 at 01:26:22 PM EST
[ Parent ]
My sense of it for some years (anecdotally as someone running a business here) is that the domestic economy has been trying to recover and has been repeatedly stopped in its tracks by the idiocy of austerians. Stop cutting and there should be a substantial local recovery - which would have happened years ago.

It'll be a nasty recovery though: the underclass will fall further behind while the middle and working classes recover.

by Colman (colman at eurotrib.com) on Fri Dec 6th, 2013 at 12:19:08 PM EST
I think the extraordinary thing (which I have struggled to explain in this diary) is the degree to which the domestic economy has survived all the austerity to date, and the degree to which it is growing now despite further austerity.

The debt load will probably prevent much in the way of stimulus for many years to come, so it is heartening that at least some growth can occur in the absence of such stimulus.

What I think we are seeing is an historic readjustment, whereby European standards converge (downwards) with third world living standards which are rising in some countries.

So yes, the underclass will bear the brunt, and even lower middle class and working people (particularly the young) will struggle.

The downside risks are that interest rates will rise, and EU inflation won't rise fast enough and/or the Euro will rise relative to our trading partners. So long as EU policy is driven by savers/lenders/rentiers we have a problem.

Hence the importance of our political rehabilitation in Europe and the building of alliances with other highly indebted members on the ECB and Council. we can play the false praise of the austerians against them.


Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 6th, 2013 at 01:17:50 PM EST
[ Parent ]
There's a strong underlying growth dynamic in the Irish economy, demographically, as a result of infrastructure investment and as a result of its movement from the distant periphery to being much closer to the world (partly as a result of the Internet). The property and finance boom was layered on top of that.
by Colman (colman at eurotrib.com) on Fri Dec 6th, 2013 at 01:26:09 PM EST
[ Parent ]
A thesis worthy of a diary in it's own right. Certainly some of the Celtic Tiger investments - in education,  motorways, better quality housing (when located where people actually want to live), tourism, and in the industrial infrastructure of the country should have lasting benefits. Historically Ireland has had a high public and private reinvestment rate.

The key areas still needing more investment are in sustainable energy, public transport, higher education and R&D, but we do have a base to work off.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 6th, 2013 at 02:00:16 PM EST
[ Parent ]
Impact of patent cliff still visible:
Trade data is weaker than expected
In October, Ireland reported a seasonally-adjusted merchandise trade surplus of € 2,971m, € 245 million lower than September's revised surplus of € 3,216 million (€ 3,193m). For the first 10 months of the year, the trade surplus, at € 31.8 billion, is down by 12.2 per cent on the same period in 2012.

Seasonally adjusted exports were up 0.4 per cent in the month while imports posted an increase of 6.8 per cent, which may reflect stronger personal consumer spending, according to Alan McQuaid, economist at Merrion Capital.

Comparing October this year with October 2012, the value of exports decreased by € 210 million, or 2.8 per cent, driven by a decline of € 177 million (-8.3%) in the exports of medical and pharmaceutical products, and € 67 million (-4.8%) in the export of organic chemicals.

But construction sector up:
Trade data is weaker than expected

Figures on the construction sector were also released today, in the CSO's Production in Building and Construction Index, which recorded the fifth consecutive quarterly increase in the volume of construction activity. The report also showed that the volume of construction activity had increased by 15.5 per cent since the same period last year and there was also a 1.9 per cent increase between over the third quarter of 2013


Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 13th, 2013 at 10:52:04 AM EST
by all as a mistake, but there was no way Trichet would allow the new government to correct it...

Three key truths about the bailout which we are only learning now - Political News | Irish & International Politics | The Irish Times - Tue, Dec 17, 2013

In his fine book The Price of Power, Pat Leahy describes what happened on March 28th, 2011, a few weeks after the Government took office. Michael Noonan did indeed propose a detailed plan to burn some of the remaining bondholders in Anglo. The Cabinet took a decision, in the words of one Minister, "not to repay €6 billion in Anglo senior bonds". Three days later, however, Trichet threatened that he would pull the plug on Ireland if this happened: "If you do it, the bomb will go off." Noonan, Leahy reports, crumbled under this threat of financial terrorism.


Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 17th, 2013 at 10:46:10 AM EST


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Dec 17th, 2013 at 11:15:46 AM EST
He was proposing not paying some 7 Billion to bond holders in a bankrupt bank. Since when is allowing some risk investors in a failed bank to lose their investment "threatening to blow up the EZ banking system"  or an act of terrorism? Trichet, on the other hand was threatening to bring down the entire Irish banking system by refusing to do what a  central bank is supposed to do - act as lender of last resort.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 17th, 2013 at 01:09:57 PM EST
[ Parent ]
Even Gordon Brown applied the Terrorism Act and froze the assets of the Icelandic state in response to the Icesave debacle...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Dec 17th, 2013 at 05:41:55 PM EST
[ Parent ]
He also invaded Iraq in pursuit of phantom weapons of mass destruction... the relevance being?

The Fianna Fail government which introduced the bank guarantee was comprehensively defeated at the polls and replaced by a Government which had campaigned on the basis of opposing the bank guarantee and which claimed it would govern "Labour's way, not Frankfurt's way".

Shortly after taking office they proposed not paying the outstanding bonds not already repaid by the previous government - about 10% of the total. Trichet threatened to bring down the entire Irish banking system - then heavily dependent on ECB liquidity - if the Government did so.

Faced with a complete collapse of the banking system and the economy the democratically elected government capitulated and did indeed govern Frankfurt's way.  Who had at least some democratic legitimacy, and who was the financial terrorist?


Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 17th, 2013 at 06:42:14 PM EST
[ Parent ]
That was Blair, not Brown (yeah, yeah, collective cabinet responsibility...)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Dec 17th, 2013 at 06:44:51 PM EST
[ Parent ]
Did Brown dissent?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 17th, 2013 at 07:22:42 PM EST
[ Parent ]
Number of college graduates employed in economy rises throughout recession
<The ESRI's research, contained in its latest quarterly economic commentary, suggests that the pattern of change in the labour market has been "very different" depending on the educational qualifications of the participants. In spite of the huge upheaval, employment of college graduates rose throughout the crisis period, growing by an average of 2.8 per cent a year.<p>The number of people employed in the economy with third-level qualifications is now 12 per cent higher than it was before the recession struck in 2007. The picture is, however, remarkably different for those without a Leaving Cert qualification. Employment among this category of worker, many of whom were employed in the construction sector, has fallen by 50 per cent since 2007.

Employment of those with a Leaving Cert but without a third-level qualification is also down substantially - by about 20 per cent. The pattern of change in this category is different from those without a Leaving Cert in that the most rapid fall occurred in 2009 and then stabilised, so that employment today is similar to what is was in 2010.

Employment of those without secondary educational qualification - 50%
Employment of those with secondary educational qualification - 20%
Employment of those with third level educational qualification +2.8% p.a. (for 6 years = +18% compound).

I knew there was a class war element to the recession, but I didn't realize the figures were quite so stark.


Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 17th, 2013 at 07:30:56 PM EST
GDP increases by 1.5 per cent in third quarter - Economic News | Ireland & World Economy Headlines |The Irish Times - Thu, Dec 19, 2013

The Irish economy grew by 1.5 per cent during the third quarter according to preliminary figures from the Central Statistics Office.

The latest Quarterly National Accounts, which were published this morning, indicate that on a seasonally adjusted basis there was a 1.5 per cent increase in Gross Domestic Product (GDP) from July through to September, while Gross National Product (GNP) decreased by 1.6 per cent.

On the expenditure side of the accounts personal expenditure increased by 0.9 per cent and capital investment increased by 10.9 per cent between Q2 and Q3 2013.

Government expenditure increased by 1.1 per cent while net exports declined by €233 million in volume terms on a seasonally adjusted basis between the second and third quarters of this year. However, net exports were €654 million higher in the third quarter of 2013 compared with the corresponding quarter of 2012.

On the output side of the accounts public administration and defence decreased by 1 per cent, while agriculture, forestry and fishing declined by 2.9 per cent between the second and third quarters of 2013.

In the twelve months to the end of September, the economy grew by 1.7 per cent in GDP terms, mainly driven by domestic demand.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 19th, 2013 at 07:11:50 AM EST
Brussels unhappy at portrayal of its role in bailout
However, there is disquiet in European circles that recognition for Europe's solidarity was not more prominent as Ireland left the bailout. "There is frustration in Brussels that the Irish Government has not properly recognised the fact that Europe was asked to step in to solve an Irish problem, created by the banking sector, and at all times has shown support for Ireland," said a senior EU source.

In his remarks on Thursday night, Mr Barroso said it would be "wrong to give the impression that Europe has created a problem for Ireland and now Europe has to help Ireland". He added: "In fact it was the banking sector in Ireland that was one of the biggest problems in the world in terms of banking stability. Let's be honest about this."

While praising the efforts of the Irish people, he said the euro was "the victim" of irresponsible practices in the Irish financial sector

No one is denying the Irish banking sector and the failure of regulation was a large part of the problem. But to portray the EU (which encouraged light touch regulation in a single market for financial services and maintained inappropriately low interest rates) as being a knight in shining armour coming to Ireland's rescue is rather streching it a bit. Trichet refused to allow the new incoming government "burn the bondholders" long after the Irish authorities had realised the stupidity and impossibility of the bank guarantee.

Anyway, noses are out of joint because Barroso wasn't invited to Ireland to mark the occasion of Ireland's exit from the bail-out.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 26th, 2013 at 05:08:32 PM EST
Emigration to fall as economy improves, says ESRI
The number of people emigrating from Ireland is believed to be falling significantly as employment figures continue to improve, the Economic and Social Research Institute has said.

The institute expects 78,000 people to have left the country in the 12 months to April 2014, a 14 per cent drop on the previous year's figure of 89,000.


Net migration
Although the ESRI also expects immigration into Ireland to drop to about 52,000 from 55,900 the previous year, the predicted net outflow of 26,000 is still 27 per cent below what it was in 2012-13, and the lowest net migration figure since 2008-09.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 27th, 2013 at 09:47:57 AM EST


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