Head over to our T
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There is a set of very interesting charts with this Wall Street Journal article (should be free access via Google News) about investor expectations of the likelihood that EU countries could default on their debt. The shocker: for Ireland, the probability is 10%. That’s huge for a rich country. We’re joined at that level by Greece, with Italy, Spain, and Austria in the chasing pack. So despite our surge to the top of the EU per capita income tables that seemed to have us on a par with Germany, France, and the UK, the debt markets look now and see a fragile economy sitting outside the safety of the EU core. The good news is that it’s not yet reflected in public sector funding costs (see the chart on the left). Instead, the default expectation reflects the banking system liability guarantee. Sarah Carey has an interesting quote from Brendan Keenan in which, amongst other things, he expresses amazement that the guarantee has kept the banking show on the road as long as it has. Hopefully our luck has some time to go.
P, we were on the brink of defaulting on our debt in the late 1980s; and previous to that in the mid-fifties and in the early twenties. Another century; another time. Not now, thankfully, irrespective of what happens to our banks in the short term.
The Wall Street Journal hasn’t the remotest understanding of what’s happening in Ireland, or what the real problems are with our economy. I think it’s a ‘don’t believe what you read in the newspapers ‘ scenario, to say the least of it. To take an example closer to home, the Guardian’s Will Hutton was on Pat Kenny’s radio programme a couple of days ago: in the middle of his interview – castigating our government of course and the banking guarantee that we introduced – it became apparent that he hadn’t a clue what the banking guarantee actually involved.
But as for the ‘rich little country’ tag, I always was suspicious, if not downright cynical, about this “wealthy country” nonsense in which all our politicians indulged throughout the 1990s and the early years of this century; e.g go back and have a look at the economic projections and the promises this delusion gave rise to from ALL parties prior to the 2007 general election. It was always bull; but then people believe what they want to believe, don’t they?
When it comes down to comparisons with old Europe, the difference between us and France and Britain and Germany and Italy too, for that matter, is that they have ‘old’ wealth, that passes from one generation to the next and is reflected in their infrastructure, social systems, culture and traditions. What wealth we had in the so-called ‘celtic tiger’ years was always new and ephemeral. All we’re finding out now is how flimsy was the foundation on which delusions of grandeur and a ‘rich country’ were based – a housing bubble.
The property market pulled us neatly out of the 2002 downturn. Our problem is that there is no possibility of the same thing happening this time around
I think the government’s banking guarantee was a good decision and that it may hold for as long as we need to ride out the storm. That seems to be the hope, also, of serious economic commentators like Brendan Keenan, though nobody can be sure in the present environment. If Hungary’s IMF bailout sends the right message to currency ‘scavengers’, the chances are that the European region will survive currency pressures that would otherwise inevitably have an impact on weaker economies within the eurozone, like Ireland, and that risk endangering the whole system. We have to wait and see though, I think, and the next few weeks should tell a tale.
I agree with you; hopefully our luck will hold in the meantime. But watch out for currency problems in EU countries that are not in the eurozome in the weeks ahead and the pressure this will place on us and other weaker euro countires if it spreads.
I would agree with Veronica above except for one very simple thing. In the past we had a fairly balanced economy, low costs and low incomes or average costs and average incomes. That has all changed. Now we have a high cost/debt/spending and an incomes race to the bottom exacerbated by imported cheap labour adding to the burden of costs/debt/spending especially on the State.
As jobs follow money and a market the idea that cheap labour will keep jobs in the country is a fallacy because we now have neither money nor a market.
Another problem is that we are now more than ever dependent on foreign companies serving foreign customers and foreign shops selling foreign goods with foreign staff. To put it simply we have very little we can call our own except the land and the sea around us and even here we have allowed ourselves to be ditated to from abroad.
eddie
There’s a difference between ‘simple’ and ‘simplistic’ and your analysis is dangerously simplistic. For example your last sentence states that when it comes to land and sea ‘we have allowed ourselves to be dictated to from abroad’. When? By whom?
If you’re referring to the deal made on our fisheries when we joined the European Community back in 1973 – a grand old chestnut that’s regularly cited as an example of the European conspiracy against us by the Robinson Crusoes who conflate living on a island with the possibility of isolating ourselves in perpetuity from the rest of the planet – it’s worth bearing a couple of points in mind. Nobody dictated the terms of our entry to the European Community to us; we negotiated them. Then in a referendum the people endorsed the deal made by our reprepsentatives by a majority of something like four to one.
True, the fisheries element was controversial, but our negotiators reckoned that it was fair enough since (a) fisheries were not as important to us as agriculture and (b) the agricultural support allowed Ireland, for the first time, to fund agriculture without crippling the rest of the Irish economy in order to do so as had been the case since the foundation of the State. So, no-one ‘dictated’ our accession deal to us; we went into it with our eyes wide open and it was overwhelmingly endorsed by the majority of the people.
The decision to allow unfettered access to Ireland to all citizens of the then ten accession states was an example of Bertie Ahern at his bonhomie best. That decision was based on the premise that no more than 5.000- 6,000 Eastern Europeans would come to Ireland; a reasonable assumption at the time given previous experience of EU expansions to the South of Europe. It was a miscaculation certainly, but the real problem is that we didn’t gear up our social and educational infrastructure to cope with the actual numbers who came, although there is plenty of evidence that in economic terms there was a net benefit to our economy from the influx. Again, all the mistakes that were made were made by us alone; not anyone else.
Veronica
Your answer talks about “miscalcuations”, “mistakes” etc and then you say everything is perfect. What is your solution to an unsustainable economy based high costs/debt/spending and low incomes?
Eddie,
I’m not so sure there is a solution to the problem as you put it of ‘high cost/debt/spending and low incomes’ because I’m not so sure as you are that your description of the problem is correct. Relatively speaking we do not have a high debt- GDP ratio and also we are far from being a low wage economy.
I never said anything was ‘perfect’ – I would never use that word. Perfection does not enter my vocabulary.
Perhaps because my background is in history I’m more inclined to the view that you should judge things in their own time, not retrospectively from the vantage point of present day value-judgements.
If you judge things in their own time you may achieve a better analysis of where a problem originated and avoid unworkable and plainly daft solutions to your current problems. It helps when it comes to working out the best options to deal with either economic or other issues affecting us as a society now.
In any situation, in my view, if you can work out what was the first mistake, then it usually goes some way towards avoiding repeating it. That doesn’t mean that you go around pointing fingers in blame at those who made the mistake or a misjudgement in the first place, unless they were wilfully culpable in their judgement, since they may have made their decisions with the best will in the world and the best intentions. Since none of us, as human beings, have the benefit of foresight, the quality of our analysis of past events and the objectivity which we bring to bear to that task is extremely important in helping us select the right options for the future.
As for having ‘solutions’to any problem, Eddie, would that I had! I’d bottle and sell the formula instantly and make a fortune and be in great demand. I tend to be very suspicious though of snake oil salesmen in religion, politics or medicine or any other field of human endeavour.
For a while this past summer I got the impression that there were a lot of people in government circles (and among the opposition too) who wanted to believe that everything could keep going on as it had been and that it would be all right on the night; that if we could come up with some magic formula for boosting productivity in the public service, via IT or whatever, then there would be no need for cutbacks or job losses or any of the other unpleasant things that we will now have to do. In business circles I heard that it wasn’t going to be so bad really and that the problem was being overstated. Well, the global credit crunch has put paid to all that self-delusion.
I think it is perfectly reasonable that people in education or the over ’70s or people who work with the real disadvantaged groups in our society or farmers are all desperately worried about the effects of the budget cutbacks on their area. I have every sympathy with them but…
I got married in the 1980s and it was a terrible time – 15% interest rates; massive inflation; 20% unemployment; unaffordable house prices, tax at almost 80p out of every pound you earned, huge emigration. Whether people want to believe it or not we’re in a far better position now to weather any economic storm than we were then. I’ve also learned one other thing; cutbacks may be unpleasant, and some may even be horribly unfair, but they’re the only way out of this mess. I don’t think the budget has gone far enough and I believe there will have to be a mini-budget early in the New Year, probably by June /July next year at the latest. Budget 2010 to follow will be even more drastic than this year’s effort. There’s no point in people dividing themselves up into ‘victims and oppressors ‘ either; social divisiveness won’t help us at all.
So I guess that politically it all boils down to one question: who do you trust? The government have done one or two good things – the banks’ guarantee being one good thing and their belated realisation of the scale of the economic crisis we are dealing with being another. The opposition – God help us – they make me want to tear my hair out!
Every night I fall asleep praying “Lord, please send us a good opposition!” But that’s like praying for political infantilism and populist mongering and a myopic pre-occupation with ‘the next election’ to fade out of the present opposition parties ‘ and government backbenhers’ consciousness. Perhaps that, Eddie, is the best solution we could crave for. Or that they might just actually get on with doing the job that we, the taxpayers, are paying them to do.
Veronica: In my opinion there are two solutions to a unsustainable high cost/debt/spending and low income economy. (1)Change the balance by printing money – inflation. Obviously this would not suit the Germans or the French who cannot see why their hard earned cash should be devalued. So that is out. (2)The painful solution which I will leave to your imagination.
P.S. If you believe that we are not an economy firmly rooted in high cost/debt/spending and a race to the bottom in incomes you musn’t have been living here for the last 10 years.
On a personal note I bought a house in 1972 and sold it 5 years later for 2.5 times what I paid for it. So I probably gained from the recession you suffered from in the 1980′s
Eddie,
Since virtually every economic commentator from the Central Bank to the ESRI to the ECB to the OECD, and every serious political and media commentator over the past ten years has been howling about the eroding impact of our spiralling wage costs on Irish competitiveness I just don’t get where this ‘low income’ argument is coming from. We are a high cost, high wage economy. There is no evidence of any general ‘race to the bottom’ in wages. From 2005 onwards the influx of immigrants has affected wage rates in certain sectors, including construction and the lesiure industry, but that appears to be about it. Certainly we have some of the highest paid public servants in the world, especially from the middle grades of civil servant upwards and amongst the professional public servqants and as for our overpaid politicians, relative to others in Europe… low income economy, my foot!
Though it is by no means the ultimate guide, the Global Competitiveness report, is instructive. Basically it ranks countries by how competitive they are. In the year 2000, Ireland ranked 4th. That year, or perhaps 2001, is seen as the time when the real Celtic Tiger died, and the phantom Celtic Tiger took over. The real Tiger was marked by increasing exports, rising productivity, and increasing participation in the workforce – by Women and also from the unused pool of unemployed when the rate was high. Sometime between 2000 and 2001 it began to change. Productivity growth stalled, export growth too. The main engine of the economy became construction, and through the wealth effect and increased borrowing, consumption. The the latter part then was pure fantasy. Ireland’s competitiveness was ranked 11 in 2001 and has fallen to 22 in the recent report for 2008/9. The measures they look at are a useful reminder of what really matters: sound institutions, infrastructure, macro-economic stability, health and primary education, higher education, technological readiness. There are other measures too – but I think this list, when we think about it for a moment, is quite a useful pointer. In particular Ireland performs badly on technology and infrastructure. But also now on macro-economic stability.
I think Veronica is right – our public debt situation is good, and it is crucial that we keep it that way. If we fail to make the right adjustments now to the path of our public finances, we could spiral back to a high debt GDP ration in a few years. Three to five years of bad government (how likely is that ?) could leave us heading towards dangerous levels. That is why cuts now are essential – and why I agree that we need to cut even more, the first attempt is not nearly enough it would seem. But we’ll see by next spring.
But on private debt, Eddie may have a point. Our private debt levels are shockingly high. This may be manageable if the overall bank crisis can be curtailed and if we don’t have large scale defaults on home loans. If we can hold the line for a couple of years, then the large private debt levels will burn off over time. But they are a worrying exposure, though not by any means the main problem.
The main problem, again back to that list, is our real economy. We have done badly at building up world players among our indigenous industry. We certainly are addicted to high levels of FDI, which are unlikely to be sustainable as capital seeks and finds more profitable locations – whether China or Hungary. We need to be more serious about our infrastructure, technology and the institutions and conventions we use to get savings to investors. Over the past decade the path from savings to investment, a crucial crucial artery of the economy, meant pumping billions into property. At the same time, even at the peak of the boom, Irish startups and medium size companies, struggled to get investment.
And our tax base needs to be rebalanced and upgraded. Under the FF / PD governments it became badly distorted, narrow, regressive, and horribly dependent on unsustainable sources like property. Aspects of it are also – pro-cyclical, they accelerate the direction of the GDP growth, and are not spread out over time. One example is stamp duty. Suppose housing is booming, we are collecting huge stamp duty. Then if there are two bad years where supply overshoots, the market stalls and stamp duty collapses. Far better to tax property the way most countries do. No lump payment at the start (or a lesser one), instead, you pay an annual tax directly proportional to your square metres. If property sales collapse for two years, the tax base is more robust and you don’t get the slump in taxes we saw. (Of course, in a recession all other taxes fall, so you cannot avoid a drop in tax take, but you don’t have the same step function effect as stamp duty. VRT is another example.)
In short, I think that Ireland’s economy is in for a prolonged period of adjustment. The whole thing is in flux. And in these situations, leadership and courageous decision-making are crucial. Failing to take tough, bold measures now could cost us massively and for a long time.
The recent budget was ineptly cobbled, and was insufficient. But it did suggest there are some who are wiling to take fairly hard decisions. It’s only the start. I hope they don’t bottle it now after the reactions.
Tomaltach,
Really informative post. Bears out my point that the housing boom bailed us out after 2001 (and the US and the UK and others too; we’re not the only culprits), but the consequences have been near disastrous.
I hope you are right that the government don’t bottle it. But one presumes that Cowen has learned a few hard lessons in the past couple of weeks, especially about his prized commitment to and therefore expectation of loyalty from his backbenchers and Cabinet colleagues. Hopefully, he now realises that they would hang him as quick as look at him if it suited their own electoral ambitions. That realisation might just stiffen his spine.
Perhaps the next big test will be whether or not we have a mini-Budget early next year? The assumption is that one will be required because this budget does not go far enough, but will the government wait until after the Euro and local elections even if circumstances dictate that they should move to take corrective action on the public finances before that? I guess we’ll have to wait and see.
Perhaps it would be a good idea to see breakdown figures comparing cost/debt/spending and production/service/public-purse wages and how they compare with other countries. Then I am sure we will see the hole we have dug for ourselves. I am sure these figure must be available somewhere.
Hi all, a fascinating set of posts, I was swinging from agreeing to not agreeing all the time. I want to comment on one particular aspect – our entry to the EU and the consequences. I have to admit a bias, I worked for the EU in various capacities for 20 years, but never as a functionairre, an important proviso.
Yes, we negotiated our entry, yes we had/still have the opportunity to participate in decisions. However, all such negotiating is about reaching compromise.
We used the funding we got in the early years to bolster a weak agricultural system, it is only since the WTO changes that we have had to actually analyse the economic effects of rational investment. Even then we took 15 years to implement the nitrates directive, for purely political motives, an early implementation would have required a more efficient farming system. The result? we have not used the only asset we actually have, land and enough rain and climatic conditions to be a quality food supplier, not a mass market supplier at the whim of the supermarket chains.
Of course it was easier to use cheap credit to buy and build on land to provide housing for foreign direct investment wage earners. Long term we must invest in our own resouces, food production and spin off businesses from our education system – typically software. For that we need courageous banks…..
Crazy? too late?? I hope not