Thursday, March 19, 2009

Reality alert!

The Economist, due to hit the news-stalls, has an important article on the Irish economy. And, no, if you're a banker, a director, or a Big Ball in Cow-town, it's by no means negative.

After the inevitable throat-clearing, there's a bit of observation:
Ireland is having a deeper recession than any other euro area country. The economy probably shrank by 2.5% in 2008 and may contract by another 6.5% this year. Unemployment has jumped from 5% to 10.4%, a faster rise even than in America.
To Malcolm's surprise, the author of the piece largely discounts the banking crisis:
Irish banks may be free of the toxic securities that have poisoned rivals’ balance sheets, but they are blighted by souring property loans.
Huh? Nothing, but nothing, about the corrupt doings around the AIB, and all the way up to the national Central Bank? Oh, well:
C'est la vie, say the old folks,
Which goes to show you never can tell.
Then, the essential passing gloat:
It is easy now to dismiss the rise in living standards in the “Celtic Tiger” years as illusory, particularly as Ireland enjoyed house-price and credit booms that were big even by British standards. But ...
There's a "but"?
But to focus on the bursting of the housing bubble would be to miss the lasting gains that were made.
See what Malcolm means by "no means negative"?

The article segues into a piece of valid, if superficially superficial analysis:

Ireland’s expansion went through two phases. The first, led by exports and powered by foreign direct investment, ended roughly in 2002. Foreign companies, mainly American, provided bags of capital and know-how. Ireland offered in return a young, educated, English-speaking, low-cost workforce. State grants, a low corporate-tax rate and access to the EU’s single market made things sweeter.

Decode that, and, perhaps, it's not quite that superficial. It is saying that the original boost came with the coalitions of 1992 (FF and Labour) and 1994 (FG, Labour and DL): note, there, the leftist involvement.

Then Fianna Fáil, under the Teflon Taoiseach, went rightwards with the PeeDees; and cynical opportunism was the name of the game, or (as the Economist puts it, so diplomatically)
a period of growth on weaker foundations.
The aftermath is mentioned:
  • the deterioration of the current-account surplus;
  • the Big Cats became fat cats, and the young cubs demanded their share at the kill. In other words:
Inflation had picked up and unit labour costs (ie, pay adjusted for productivity) rose sharply relative to Ireland’s main trading partners.
Why is it the Economist never quite gets away from the rhetoric (circa 1912) of coal-owners facing an irate work-force demanding a minimum wage of 12/6d a week? It's all the fault of those greedy, grasping employees, in particular those in the public sector who shamefully lack the entrepreneurial spirit to go out and exploit others:
State workers grumbled that they had been left behind by the private sector. The review led to a hefty increase in pay, a symptom also of a generally lax approach to public finances.
Nota bene: fair wages = "lax approach"

Then the Economist swiftly glides over:
  • the budget deficit, a direct consequence of basing an economic policy on ever-rising house-prices, financed by ever-larger €-loans, dependent on ever-inflated salaries.
  • the consequent increase in the cost of borrowing, particularly because the Irish economy was out-of-kilter with the core Euro-zone.
  • the rash and unlimited guarantee, given last September, on bank deposits. The British Treasury's sense of Omertà means this is a blood-debt still to be exacted; and the Treasury is possessed of an elephantine memory.
  • the Irish 12.5% corporation tax. This is financed by the consumer with 21.5% VAT (see Malcolm's previous post), and maintained by the pensions levy. Leave that one to Frau Merkel: another score to be settled. Curiously (well, perhaps not), the Economist overlooks the health and welfare taxes, including those guaranteed to kill the elderly, and young girls not inoculated against cervical cancer. Ach! they're merely persiflage.
That noted, the Economist goes back into coal-owner mode:
Ireland seeks salvation in lower wages, even though its households are also heavily indebted. Whereas many countries want to lift their economies by fiscal expansion, Ireland is tightening its budget.
So wages must fall in nominal as well as real terms.
The Irish hope for a payoff in improved confidence among foreign investors and at home. Consumers are aware of the gap in the budget and know tax rises are coming, says Alan Barrett at ESRI, a research institute. Spending may even pick up if the uncertainty over taxes is ended.
But, hooray! The workers are compliant! They can be suborned!
... For all its ills, Ireland has form when it comes to retrenchment: it cut debt sharply in the late 1980s. If adjustment within the euro means wage cuts, that is a price Ireland seems ready to pay.

Ah, shucks!

It's the rich what gets the pleasure.
It's the poor what gets the pain.
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