15 April 2009

Two takes on the Irish economy Ambrose/FT print, or not?

Ambrose the Anglo money printer, if the chinese don't buy more bonds nuke them student of Bono and Bernanke on the emerald Isle.

If Ireland still controlled the levers of economic policy, it would have slashed interest rates to near zero to prevent a property collapse from destroying the banking system.

The Irish central bank would be a founder member of the "money printing" club, leading the way towards quantitative easing a l'outrance.....

....its disaster by slashing child benefit and youth unemployment along with everything else in last week's "budget from Hell".

Depression buffs will note the parallel with Britain's infamous budget in September 1931, when Phillip Snowden cut the dole and child allowance to uphold the deflation orthodoxies of the Gold Standard – though in that case the flinty Pennine rather liked hair-shirts for their own sake.

Though few had any inkling at the time, Snowden's austerity drive would soon push British society over the edge. It set off a mutiny – a Royal Navy mutiny at Invergordon over pay cuts, in turn triggering a run on sterling. The pound was forced off Gold within days. Irish deliverance from EMU will not be so easy.

Brian Lenihan, Ireland's finance minister, said the economy would contract 8pc this year on top of the terrifying 7.1pc drop in the final quarter of last year.

But what caught my ear was his throw-away comment that prices would fall 4pc, which is to admit that Ireland is spiralling into the most extreme deflation in any country since the early 1930s. Or put another way, "real" interest rates are rocketing.

This is torture for a debtors' economy. You can survive deflation; you can survive debt; but Irving Fisher taught us in his 1933 treatise "Debt Deflation causes of Great Depressions" that the two together will eat you alive.

Don't blame the victim. Ireland has been betrayed twice in this saga. Once by New Labour, which led Dublin to believe that Britain would join EMU at the same time – covering Ireland's dangerously exposed flank of Sterling trade.

It was betrayed again by the European Central Bank, which opened the monetary floodgates early this decade to nurse Germany through a slump, holding rates at 2pc until late 2005, despite flagrant breach of the ECB's own M3 money targets. Fast-growing Ireland and the Club Med over-heaters were sacrificed to help Germany. They were left to cope with credit bubbles as best they could.

Ireland struggled. Construction reached 21pc of GDP – a world record? – compared with 11pc in the US at the peak. Mr Lenihan hopes to shield banks from the calamitous consequences by creating a buffer agency. It will soak up €80bn to €90bn in toxic debt – or 50pc of GDP.

He borrowed the plan from Sweden's bank rescues in the early 1990s, but overlooks the key point – it was not the bail-out that saved Sweden's financial system, the country recovered only by ditching its exchange peg and regaining its freedom of action.

Without that sort of liberation, Ireland's property slump will grind on for years and more multinationals will join Dell in decamping to cheaper plants in Poland. Ireland risks a deflationary slide into bankruptcy.

Of course, it is not the job of the ECB to set policy for Dublin's needs. But it would at least help if Frankfurt began to set policy for Europe's needs. Has the ECB noticed the collapse of industrial output in Spain (-24pc), Germany (-23pc), Italy (-21pc), France (-14pc)?

Simon Johnson, the IMF's former chief economist, said the ECB is pursuing a "ruinous policy" by disregarding the clear and present danger of deflation. "If they wait until deflation is 'fully in the data', it will be too late," he said.

Spain is already tipping into deflation. Unemployment has reached 3.5m or 15.5pc, and is rising very fast. Finance minister Pedro Solbes – ex-Mr Euro and lately the Torquemada of Madrid life – was toppled last week in a bitter dispute over spending plans. He said the kitty is empty. Quite. But is his fall a sign that Spain is no longer willing to follow the Frankfurt deflation script?

France too is fraying. The over-valued euro – fruit of ECB doctrine – is hollowing-out core industry. This week ArcelorMittal mothballed its historic foundries in Lorraine in what looks like the final demise of French steel. Workers are taking matters into their own hands everywhere, holding managers hostage in what amounts to low-level terror tactics.

No doubt, Germany will recover. Its export machine is heavily geared to the global cycle. Southern Europe will not recover. The cost gap between North and South has grown too wide. Which is why the ECB's deflation policies must prove so destructive.

If the ECB continues to serve as the instrument of German tastes, keeping German inflation near zero, then Club Med and Ireland must necessarily deflate into Hell with all their debts. Unless Germany accepts inflation of 4pc, 5pc or 6pc for a while, the only way the South can claw back lost competitiveness is through outright wage cuts, and that is not a macro-economic option for debtors. Is anybody facing up to this core reality in euroland?

Ireland prides itself on a nimble workforce and flexible practices that make it different from Club Med. It can adjust faster to ups and downs, goes the story. For those of us who feel a duty to Ireland, let us hope this, at least, is true.

Well, there is an entirely different take..

Taken from "Celtic Tiger sharpens its claws for recovery"
By Peter Sutherland

.....While the (irish) housing slowdown and the associated budget deficit has created a major challenge, to focus exclusively on housing-related problems provides a distorted picture of the under�lying health of the Irish economy. The economy has been a phenomenon since the late 1980s. From a relatively poor country on Europe�s periphery, Ireland has risen to become one of the richest economies in the world in 20 years. Even after an anticipated 8 per cent fall this year, its GDP per capita, in terms of purchasing power, will remain significantly higher than that of the UK or Germany. And, while unemployment has risen, there are still 80 per cent more jobs in Ireland today than 15 years ago. Much of its infrastructure has been transformed during this period.

During the housing investment boom, Ireland�s current account balance moved from a long-term surplus into deficit. That deficit peaked at 5 per cent of GDP in 2007, comparable to the UK and US at the peak (6 per cent and 4 per cent, respectively), and much less than economies such as Spain (10 per cent) and Greece (14 per cent). Since 2007, Ireland�s current account position has been rising and, at the current trajectory, it should return to surplus by the year end. To the extent that Irish public sector borrowing has been rising, this is being more than offset by a rise in private sector saving.

The cause of these favourable statistics is export-led growth, led by inward investment in industries such as information technology, pharmaceuticals and private sector services. The fact that Ireland�s economic success has been driven by exports in these areas has resulted in a far stronger basic Irish economy than the one that existed in the 1980s. Because of the nature of these exports the drop in exports anticipated for this year, as a result of recession, is estimated to be only 5.9 per cent. The corresponding Organisation for Economic Co-operation and Development figure for Germany is 16.5 per cent, France 11.4 per cent and Great Britain 9.8 per cent. Some others are considerably worse, such as Japan, forecast at 26.4 per cent.

Another issue on which there has been much comment is the alleged disadvantage to Ireland of being in the eurozone. In reality, Ireland may have been saved by its membership from the possibility of a run on its currency � however unwarranted such a run would have been. The UK, meanwhile, has seen its currency fall by 30 per cent against the euro and this is likely to bring short-run benefits. This option is not, of course, available to Ireland; flexibility has had to come instead from an adjustment in real wages. But � and this is the most important positive for Ireland�s long-term prospects � there is clear evidence that it is dealing with the competitiveness issue in a sustainable manner and one I believe to be unprecedented in the OECD area.....

We have to deleverage and get some actual price signals from actual economic activity, not hire Bono as the new central banker...

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