New ECB Rate hikes to hit Ireland's growth. Are we now part of a 2 tier Europe?

With the announcement of an ECB one quarter of a point rate increase this morning in response to inflation concerns in Germany and other European countries experiencing strong growth, Europe has just wiped away a large part of any growth which the EU/IMF package for Ireland was basing it's hoped-for recovery on by taking more money out of the available consumer spend needed to rejuvenate our flailing economy.

Irish businesses and consumers will now have less cash in their pockets to fuel a recovery, as they will be paying more every month to service their financial commitments. This also effectively wipes away any benefits to the economy of the recent VAT rate reduction, which was hard-won from the EU, not seven days after it came into effect. Europe has given with one hand and taken back with the other.

Is this a macro-economic case of "the rich getting richer and the poor getting poorer" and should we just learn to deal with it, or is their a fairer solution to controlling interest rates and inflation within the EU?

Is Ireland on the bottom tier of a two-tier Europe?

careca11

shyte , another €36 a month added to my mortgage thats €36 a month less I have to spend (are you listening Mr ,Noonan)

later12

Surely the problem is that we are not part of a 2 tier Europe.

If we had had the dreaded 2 tier Europe (I struggle to find anything scary in a second tier), we would have a lot less to complain about when it came to monetary policy. Inflationary divergence would be less of an issue.

So no; we are very much in a single tier Europe.

hinault

MackDaddi wrote: »

With the announcement of an ECB one quarter of a point rate increase this morning in response to inflation concerns in Germany and other European countries experiencing strong growth, Europe has just wiped away a large part of any growth which the EU/IMF package for Ireland was basing it's hoped-for recovery on by taking more money out of the available consumer spend needed to rejuvenate our flailing economy.

Irish businesses and consumers will now have less cash in their pockets to fuel a recovery, as they will be paying more every month to service their financial commitments. This also effectively wipes away any benefits to the economy of the recent VAT rate reduction, which was hard-won from the EU, not seven days after it came into effect. Europe has given with one hand and taken back with the other.

Is this a macro-economic case of "the rich getting richer and the poor getting poorer" and should we just learn to deal with it, or is their a fairer solution to controlling interest rates and inflation within the EU?

Is Ireland on the bottom tier of a two-tier Europe?

Our economic cycle was not aligned to interest rate policy during the "Celtic Tiger" but very few in Ireland complained about this at the time.

Interest rate policy is, we are told, implemented by an independent body.
This being the case, it is tenuous to suggest that V.A.T. decrease and the ECB interest rate increase "is a case of giving while also taking".

Of course none of this will matter to the punter in the street. All he sees is that he has to allocate more of his/her dwindling income to service their mortgage repayments.

Godge

later10 wrote: »

Surely the problem is that we are not part of a 2 tier Europe.

If we had had the dreaded 2 tier Europe (I struggle to find anything scary in a second tier), we would have a lot less to complain about when it came to monetary policy. Inflationary divergence would be less of an issue.

So no; we are very much in a single tier Europe.

Yes, and it is being in a single-tier Europe that caused part of our problems. Low interest rates at a time when our economy was growing strongly meant that the economy went beyond normal growth into a bubble. The interest rates were low because Germany and France were sluggish at the time.

The question is, do we want a two-tier Europe (and I don't believe that it is a good thing) or are we mature enough to adapt to a single-tier Europe which could mean running large budget surpluses at certain times in an economic cycle.

later12

Why would we want to run a large budget surplus? I wouldn't call that mature at all.

I don't have a problem with a two tier Europe. It could work within an overall framework of integration, along the lines of a European Treasury which onlends capital to the member states at various rates depending on their position.

The idea was discussed in a paper here
http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf

(see blue bonds vs red bonds)

Scofflaw

Godge wrote: »

Yes, and it is being in a single-tier Europe that caused part of our problems. Low interest rates at a time when our economy was growing strongly meant that the economy went beyond normal growth into a bubble. The interest rates were low because Germany and France were sluggish at the time.

I can't really agree that that was the problem. After all, that was one of the main points of the euro, well-flagged in advance. And other small euro economies seem to have adapted to it OK, while we and a couple of others didn't.

Looking at the 'couple of others' in whose company we find ourselves suggests that the explanation of our failure to adapt economic policy to the economic framework we consciously entered is less than flattering, which is perhaps why so many people are inclined to simply say "interest rates were the problem". To me, it's a bit like blaming gravity as the cause of a plane crash.

cordially,
Scofflaw

cavedave

Scofflaw
To me, it's a bit like blaming gravity as the cause of a plane crash.

In that a plane designed for one force of gravity will crash if they are flown in a different one?

Godge

Scofflaw wrote: »

I can't really agree that that was the problem. After all, that was one of the main points of the euro, well-flagged in advance. And other small euro economies seem to have adapted to it OK, while we and a couple of others didn't.

Looking at the 'couple of others' in whose company we find ourselves suggests that the explanation of our failure to adapt economic policy to the economic framework we consciously entered is less than flattering, which is perhaps why so many people are inclined to simply say "interest rates were the problem". To me, it's a bit like blaming gravity as the cause of a plane crash.

cordially,
Scofflaw

Oh, I agree, the failure to adapt our fiscal and other policies in light of the constraints on our ability to control our monetary policy is our fault and as I hinted in my previous post we were probably not mature enough as a society to do that - think of all the calls on McCreevy from the opposition and from the social partners (not just the unions but the likes of CORI and NOU) for more and more spending. Also think of the behind-the-scenes lobbying that was done by the big developers (in the Galway tent).

The difference between blaming gravity and blaming the interest rate environment is that we chose the interest rate environment and weren't smart enough or mature enough to adapt. BTW, I still believe that out best chance for the future is inside the euro despite the many many policy failures since we joined. I just despair sometimes at how slow at learning we are.

ardmacha

And other small euro economies seem to have adapted to it OK, while we and a couple of others didn't.

There are objective reasons for this. The likes of Belgium, the Netherlands and Austria were already Deutschmark satellites. Finland had a bust in the 1990s, whereas we had boom conditions in the 1990s and had considerable monetary forward momentum at the time that we joined. Ireland was always more vulnerable, something that people chose to ignore, but the others were not particularly aware of the implications of a single currency, it just suited better at that point in time.

Scofflaw

ardmacha wrote: »

There are objective reasons for this. The likes of Belgium, the Netherlands and Austria were already Deutschmark satellites. Finland had a bust in the 1990s, whereas we had boom conditions in the 1990s and had considerable monetary forward momentum at the time that we joined. Ireland was always more vulnerable, something that people chose to ignore, but the others were not particularly aware of the implications of a single currency, it just suited better at that point in time.

How was Ireland "more vulnerable", though? And how were Belgium and the Netherlands "Deutschmark satellites"? And Finland's bust was in the early Nineties, a time we could regard ourselves as pretty well busted too.

I think that looks - on the face of it - like a bit of arm-waving special pleading. A bit short on proof, and long on "Irish exceptionalism". What policy instruments were available to those countries to cope with the externally determined interest rate that wasn't available to Ireland?

cordially,
Scofflaw

ardmacha

And how were Belgium and the Netherlands "Deutschmark satellites"?

I am suggesting that their economic cycles were more closely aligned with Germany than ours and had been for longer.

And Finland's bust was in the early Nineties, a time we could regard ourselves as pretty well busted too.

Not really. Finland had a credit boom in the late 80's followed by economic problems in the early 90s leading government intervention in the banks, among other things. Ireland had a dismal 1980s followed by economic takeoff in the 90s. When the Euro started, Finland had recent memories of a credit bust. Ireland hadn't got used to the idea of a boom, never mind the concept of a bust afterwards.

What policy instruments were available to those countries to cope with the externally determined interest rate that wasn't available to Ireland?

I am not suggesting that there were any. I am suggesting that the need to use them was less and the awareness of the need to use them greater.

Scofflaw

ardmacha wrote: »

I am suggesting that their economic cycles were more closely aligned with Germany than ours and had been for longer.

Yes, I can see that - but (a) what does that actually mean; and (b) how do you show that it is the case?

ardmacha wrote: »

Not really. Finland had a credit boom in the late 80's followed by economic problems in the early 90s leading government intervention in the banks, among other things. Ireland had a dismal 1980s followed by economic takeoff in the 90s. When the Euro started, Finland had recent memories of a credit bust. Ireland hadn't got used to the idea of a boom, never mind the concept of a bust afterwards.

Mm, but by the mid-Nineties, both were in similar positions and on the road to euro convergence, while their performance during the last decade has been very similar (see here for GDP)

I also can't help but notice that this is a different explanation than that given for the "Deutschmark satellites", as well as being one that implies that Ireland failed to learn anything from booms and busts in other countries.

ardmacha wrote: »

I am not suggesting that there were any. I am suggesting that the need to use them was less and the awareness of the need to use them greater.

In other words, they were there, but weren't used as required - leaving aside the question of whether Ireland was really in a very different place from, say, Finland, which I don't think you've really shown to be the case.

I'm suspicious of explanations that involve Ireland being in some way fundamentally economically exceptional (as opposed to the political failures we're all aware of), because it was a mantra during the bubble.

cordially,
Scofflaw

ardmacha

I also can't help but notice that this is a different explanation than that given for the "Deutschmark satellites",

Not everywhere in the Eurozone is the same.

as well as being one that implies that Ireland failed to learn anything from booms and busts in other countries.

There is no doubt that Ireland failed to learn anything from booms and busts in other countries. It seems to me clear enough that Finland learned more from their bust than Ireland did. Sadly we seem to need to learn from our own mistakes and are remarkably resistant to learning from outside.

I'm suspicious of explanations that involve Ireland being in some way fundamentally economically exceptional (as opposed to the political failures we're all aware of), because it was a mantra during the bubble.

Suspicion is proper. However, one can propose a timing difference in events without implying that Ireland breaks all of the rules of economics. Ireland's rapid economic growth in the late 90s was possible because of the limited growth in the 80s. It was largely a timing difference rather than some new economics in Ireland. That timing difference framed attitudes to the low interest environment in the Eurozone. Interest rates in 2024 may be similar to 2004, but Irish people may respond quite differently to them.

Scofflaw

ardmacha wrote: »

Not everywhere in the Eurozone is the same.

No, but when every comparable economy is dismissed with a variety of explanations, it looks more than a little like special pleading.

ardmacha wrote: »

There is no doubt that Ireland failed to learn anything from booms and busts in other countries. It seems to me clear enough that Finland learned more from their bust than Ireland did. Sadly we seem to need to learn from our own mistakes and are remarkably resistant to learning from outside.

I'm not sure we're even learning from our own.

ardmacha wrote: »

Suspicion is proper. However, one can propose a timing difference in events without implying that Ireland breaks all of the rules of economics. Ireland's rapid economic growth in the late 90s was possible because of the limited growth in the 80s. It was largely a timing difference rather than some new economics in Ireland. That timing difference framed attitudes to the low interest environment in the Eurozone. Interest rates in 2024 may be similar to 2004, but Irish people may respond quite differently to them.

They may...but we're still lacking a good explanation of how Irish exceptionalism meant we were "particularly vulnerable" to the externally determined interest rate of the eurozone. So far, what you seem to be saying is that we were stupid about it because we hadn't ever had a boom & bust of our own before...which isn't a million miles from my point that we could have adapted, but didn't.

cordially,
Scofflaw

johnnyskeleton

later10 wrote: »

Why would we want to run a large budget surplus? I wouldn't call that mature at all.

To stop the economy overheating and at the same time build up reserves in the event of a recession. It's a fairly basic economic concept of Keynsian economics (and, indeed, of good household management).

RichardAnd

later10 wrote: »

Why would we want to run a large budget surplus? I wouldn't call that mature at all.

For the same reason I like to put away 60-70% of my earnings at the end of each month...

later12

I think it is inaccurate to liken personal savings choices to what the Government does with private sector revenues. You might be happy to put away 60% of your salary, but I'm sure you wouldn't be happy for the government to put it away for you.

There are a number of problems with maintaining too great a surplus over a long period of time. One problem is The Tobin Dilemma, whereby a surplus in the hands of the state is a deficit in the hands of the private sector, since all that is happening is that money is shifting from one part of the economy to another, less productive area.

And I don't know about you, but quite apart from the Tobin problem, I worry about the idea of the state accumulating lots of cash from the private sector. As the surplus accumulates, union and voter pressure to increase government expenditure increases, and politicians are very open to this kind of persuasion.

I'm not against minor surpluses nor minor deficits, I'm opposed to large and chronic surpluses and large and chronic deficits.

lmimmfn

later10 wrote: »

I think it is inaccurate to liken personal savings choices to what the Government does with private sector revenues. You might be happy to put away 60% of your salary, but I'm sure you wouldn't be happy for the government to put it away for you.

There are a number of problems with maintaining too great a surplus over a long period of time. One problem is The Tobin Dilemma, whereby a surplus in the hands of the state is a deficit in the hands of the private sector, since all that is happening is that money is shifting from one part of the economy to another, less productive area.

And I don't know about you, but quite apart from the Tobin problem, I worry about the idea of the state accumulating lots of cash from the private sector. As the surplus accumulates, union and voter pressure to increase government expenditure increases, and politicians are very open to this kind of persuasion.

I'm not against minor surpluses nor minor deficits, I'm opposed to large and chronic surpluses and large and chronic deficits.

you seem to be describing the boom lol

The whole euro is based off the German and French economies and everyone else has to tow the line unfortunately. As for the 2 Tier Europe, i really dont see how thats going to work? a devalued Euro 2 currency for the Piigs means less exports for Germany and France due to the high cost of goods.

waitingforBB

good discussion, but define "Irish exceptionalism"

johnnyskeleton

later10 wrote: »

I think it is inaccurate to liken personal savings choices to what the Government does with private sector revenues. You might be happy to put away 60% of your salary, but I'm sure you wouldn't be happy for the government to put it away for you.

They are not identical, but since so many people insist on spending and borrowing as though there was no consequence to it, it is important to re-establish the analogy. A government cannot run indefinite deficit spending programmes, any more than a household can.

later10 wrote: »

There are a number of problems with maintaining too great a surplus over a long period of time. One problem is The Tobin Dilemma, whereby a surplus in the hands of the state is a deficit in the hands of the private sector, since all that is happening is that money is shifting from one part of the economy to another, less productive area.

The idea that the private sector will always spend money productively and the government unproductively is a byproduct of dogmatic belief in neo-conservatism, nothing more. There are instances of misallocation in both public and private sectors, the most obvious private sector misallocation of resources is the property bubble that we have just seen.

The purposes of running a surplus are to increase a government's reserves (to be kept in the event of a recession) but also to dampen unproductive spending bubbles. Good government requires an active watch to ensure that where there is sudden vast expansion in certain areas that could amount to a bubble, taxation policy acts as a disincentive to such activity.

later10 wrote: »

And I don't know about you, but quite apart from the Tobin problem, I worry about the idea of the state accumulating lots of cash from the private sector. As the surplus accumulates, union and voter pressure to increase government expenditure increases, and politicians are very open to this kind of persuasion.

On the contrary, it is governments who subscribe to your view that a surplus is bad who are more likely to cave into union and voter pressure and thereby "spend while they have it" as McCreavy did. A government who has the strength of will to run budget surpluses will not cave into demands for spending as easily. The money that the government accumulates is not destroyed, but simply kept for times when government spending is needed most.

later10 wrote: »

I'm not against minor surpluses nor minor deficits, I'm opposed to large and chronic surpluses and large and chronic deficits.

I doubt anyone is in favour of "chronic" surpluses and deficits, but your suggest that surpluses/deficits are either minor or "chronic" is without foundation.

johnnyskeleton

lmimmfn wrote: »

The whole euro is based off the German and French economies and everyone else has to tow the line unfortunately. As for the 2 Tier Europe, i really dont see how thats going to work? a devalued Euro 2 currency for the Piigs means less exports for Germany and France due to the high cost of goods.

It is based on ensuring a stable currency and that inflation doesn't destroy its value. That this dovetails nicely with the aims of the French and German governments but jars dramatically with the spendthrift peripheral member states says more about the management of each country than it does about the currency.

thebman

later10 wrote: »

I'm not against minor surpluses nor minor deficits, I'm opposed to large and chronic surpluses and large and chronic deficits.

The problem with this is if you have to make drastic cuts immediately when things turn bad to ensure you don't have a massive deficit.

Governments have shown they are incapable of doing this or sticking to debt ceilings.