IRELAND TEETERS ON THE BRINK
OF A FINANCIAL AND ECONOMIC CATASTROPHEK
pdf link: Eurofacts. Vol. 14, No. 8 (p.4), published 30 January 2009
Anthony Scholefield shows how membership of the euro has weakened Ireland’s capacity to deal with the credit crunch. Some europhiles have exploited the economic crisis to call for the UK to join the euro on the grounds that, at least temporarily, the single currency is holding its international value better than sterling. It is fortunate, therefore, that it is possible to analyse the situation in the other English-speaking EU country, Ireland, which opted for the euro in 1999, in order to examine how its fortunes have fared.
Contrary to the prognostications of the euro-enthusiasts, the situation is far worse in Ireland than in the UK, despite the fact that prior to the credit crunch the Irish record on controlling public spending was superior to that of the UK. It is currently verging on the catastrophic. In December, the Central Statistical Office in Dublin (CSO) published new data up to 30th September showing GNP fell by 4.9 per cent in the quarter (comparably 0.6 per cent in the UK). Economists, such as Austin Hughes of the Irish Bank, have suggested that these figures underestimate the extreme seriousness of the situation. “We are likely to see even worse figures before things get better and it will be the end of next year before interest rate cuts and other stimulus packages begin to have an effect,” he said.
The recent quarterly report by the Irish Economic and Social Research Institute (ESRI) has published more detailed forecasts. These indicate that GNP is likely to fall 4.6 per cent in 2009, bringing the total decline in GNP over the two years 2008/9 to more than seven per cent. With a rising population the fall in GDP per head is over nine per cent (Irish Independent, 19th December, 2008). The ESRI expects unemployment to be over ten per cent by December 2009 which means there will be 117,000 more unemployed (equivalent to an extra 1.8 million in the UK).
A fall of national income of this magnitude has serious add-on effects since it swells the government sector relative to the wealth-creating private sector, increases the tax burden and the proportionate weight of debt vis-à-vis GDP - even without government action to increase public spending.
The rise in debt to GDP ratio is quite astonishing. With a government deficit of ten per cent of GDP in 2009, the combination of rising debt and falling GDP means the debt will reach 47.5 per cent GDP in 2009, up from 25 per cent in 2007, and is likely to be over 60 per cent GDP by 2012, according to the employers’ body, the IBEC. Such a debt would quadruple the share of tax revenues required to pay interest on the debt to 20 per cent.
In the wider economy, bank shares are down 90 per cent, housing stocks down 50 per cent, all of which makes it clear that the housing and immigration bubble based on artificially low interest rates imported from Frankfurt has well and truly burst. The ESRI expect net emigration will be 50,000 next year (comparable figures for the UK would be 750,000) with immigration down by 70 per cent.
Easy Money
Of course, not all the damage can be laid at the door of the artificially low interest rates imposed by euro membership. The Irish government was running a budget deficit like the British government at the top of the boom - this was not mandated by Frankfurt but was certainly made easier by lax monetary conditions as were the inadequate capital ratios of the banks. The Irish government could have tightened budgetary policy and capital ratios but the flood of easy money made it harder to take the necessary actions.
The dreadful situation that now exists in Ireland has at least caused an injection of reality into public debate, something which would be welcome in the UK. The ESRI has called for all pay increases in government to be stopped and for a pay cut to be imposed on all government workers.
Citing the imbalances above and the fact that government employees earn 20 per cent more than private sector employees, it says, “Cutting public sector numbers through redundancy or natural wastage takes too long. Wage cuts get on top of the situation much quicker and that is what we need”. It points out that these are quick, fair and keep necessary public services in being while pushing some of the financial pain off the private sector. Irish politicians have also agreed to take pay cuts. Brian Lenihan, Finance Minister, announced a ten per cent cut for ministers in October and others, such as Mary McAleese the President, John Hurley the governor of the Central Bank and Pat Neary of the Irish FSA, have followed suit. Whether the politicians have the will to follow through with pay cuts for government employees is doubtful. However, the measures taken so far show that politicians are taking matters seriously.
One of the europhiles’ historic arguments has concerned the presumed benefits of the low interest rates imported from Frankfurt. But low interest rates are not necessarily better than high. The correct interest rate is that which clears the market without government distortion. The theory of the benefit of low interest rates for no reason has been tested to destruction in Ireland (and Spain and Portugal), economies with different trade patterns to the core EU members and which, for that reason, should never have joined the euro.
Perhaps the last word should concern another of the europhiles’ favourite arguments, namely that a single currency provides the means to compare prices simply and quickly.
Here they are on strong ground. It is undeniable that the single currency enables the cappuccino drinkers of Dublin to compare simply and quickly the price of their cup to that of a similar cup in Frankfurt. Some consolation!
Contrary to the prognostications of the euro-enthusiasts, the situation is far worse in Ireland than in the UK, despite the fact that prior to the credit crunch the Irish record on controlling public spending was superior to that of the UK. It is currently verging on the catastrophic. In December, the Central Statistical Office in Dublin (CSO) published new data up to 30th September showing GNP fell by 4.9 per cent in the quarter (comparably 0.6 per cent in the UK). Economists, such as Austin Hughes of the Irish Bank, have suggested that these figures underestimate the extreme seriousness of the situation. “We are likely to see even worse figures before things get better and it will be the end of next year before interest rate cuts and other stimulus packages begin to have an effect,” he said.
The recent quarterly report by the Irish Economic and Social Research Institute (ESRI) has published more detailed forecasts. These indicate that GNP is likely to fall 4.6 per cent in 2009, bringing the total decline in GNP over the two years 2008/9 to more than seven per cent. With a rising population the fall in GDP per head is over nine per cent (Irish Independent, 19th December, 2008). The ESRI expects unemployment to be over ten per cent by December 2009 which means there will be 117,000 more unemployed (equivalent to an extra 1.8 million in the UK).
A fall of national income of this magnitude has serious add-on effects since it swells the government sector relative to the wealth-creating private sector, increases the tax burden and the proportionate weight of debt vis-à-vis GDP - even without government action to increase public spending.
The rise in debt to GDP ratio is quite astonishing. With a government deficit of ten per cent of GDP in 2009, the combination of rising debt and falling GDP means the debt will reach 47.5 per cent GDP in 2009, up from 25 per cent in 2007, and is likely to be over 60 per cent GDP by 2012, according to the employers’ body, the IBEC. Such a debt would quadruple the share of tax revenues required to pay interest on the debt to 20 per cent.
In the wider economy, bank shares are down 90 per cent, housing stocks down 50 per cent, all of which makes it clear that the housing and immigration bubble based on artificially low interest rates imported from Frankfurt has well and truly burst. The ESRI expect net emigration will be 50,000 next year (comparable figures for the UK would be 750,000) with immigration down by 70 per cent.
Easy Money
Of course, not all the damage can be laid at the door of the artificially low interest rates imposed by euro membership. The Irish government was running a budget deficit like the British government at the top of the boom - this was not mandated by Frankfurt but was certainly made easier by lax monetary conditions as were the inadequate capital ratios of the banks. The Irish government could have tightened budgetary policy and capital ratios but the flood of easy money made it harder to take the necessary actions.
The dreadful situation that now exists in Ireland has at least caused an injection of reality into public debate, something which would be welcome in the UK. The ESRI has called for all pay increases in government to be stopped and for a pay cut to be imposed on all government workers.
Citing the imbalances above and the fact that government employees earn 20 per cent more than private sector employees, it says, “Cutting public sector numbers through redundancy or natural wastage takes too long. Wage cuts get on top of the situation much quicker and that is what we need”. It points out that these are quick, fair and keep necessary public services in being while pushing some of the financial pain off the private sector. Irish politicians have also agreed to take pay cuts. Brian Lenihan, Finance Minister, announced a ten per cent cut for ministers in October and others, such as Mary McAleese the President, John Hurley the governor of the Central Bank and Pat Neary of the Irish FSA, have followed suit. Whether the politicians have the will to follow through with pay cuts for government employees is doubtful. However, the measures taken so far show that politicians are taking matters seriously.
One of the europhiles’ historic arguments has concerned the presumed benefits of the low interest rates imported from Frankfurt. But low interest rates are not necessarily better than high. The correct interest rate is that which clears the market without government distortion. The theory of the benefit of low interest rates for no reason has been tested to destruction in Ireland (and Spain and Portugal), economies with different trade patterns to the core EU members and which, for that reason, should never have joined the euro.
Perhaps the last word should concern another of the europhiles’ favourite arguments, namely that a single currency provides the means to compare prices simply and quickly.
Here they are on strong ground. It is undeniable that the single currency enables the cappuccino drinkers of Dublin to compare simply and quickly the price of their cup to that of a similar cup in Frankfurt. Some consolation!