WSJ: Can Ireland's Growth Defy Keynesian Wisdom?

darkman2

Can Ireland's Growth Defy Keynesian Wisdom?

By ALEN MATTICH

Never mind the crushing grip of domestic austerity or the ravages of tightening monetary policy, the Irish economy is growing.

Ireland's gross domestic product expanded by 1.3percent in the first quarter over the quarter before, boosted by strong exports. Continued export growth since suggests the Irish economy's recovery is entrenched. In June, Ireland's trade surplus came in at a record €4.08 billion, up 8percent on the previous month.

This means the government's target of 2percent GDP growth for the current year ought to be a reachable target. And that is essential if Ireland is to shake off its financial crisis. Growth is key to Ireland's ability to manage its huge public-sector debt load, which is expected to hit 111percent of GDP by the end of this year.

Investors have taken note. Irish 10-year bond yields have dropped to 8.95percent from a peak of 14.08percent in mid-July. While it's true European Central Bank intervention in the bond market starting July 21 pushed yields down across the board, the Irish sovereign debt market has outperformed its peripheral peers. For example, Portuguese 10-year bond yields have only dropped to 11.18percent from 13.38percent over broadly the same period.

Ireland's recovery has led some economists to question whether the Keynesian orthodoxy that austerity is inimical to growth is necessarily true. After all, if Ireland can grow through such punishing fiscal retrenchments, surely other economies can as well.

This is a debatable point. Arguably, Ireland has a more favorable economic platform from which to rebound than, say, the Greeks.

To begin with, Ireland has a very open economy. Its exports were worth almost 55percent of GDP in 2010 and its imports about 30percent. By contrast Greek manufactured exports were worth just 7percent of GDP, with imports a little more than double that. This openness means relatively small drops in consumption and rises in exports quickly lead to significant shifts in Ireland's balance of trade, which in turn give a boost to its GDP data.

Ireland's trade position is helped by its very low corporate tax rate—roughly half the prevailing rate in core euro-zone countries. This has also helped to support strong flows of foreign direct investment into the economy.

Ireland's trade performance also reflects its economic mix. Industry makes up an even larger proportion of Ireland's GDP than Germany's, while a relatively large agricultural sector—as a proportion of the Irish economy—has been boosted by rising global food prices.

But these advantages have been supplemented by the Irish people's willingness to help themselves by accepting considerable pain as the cost of economic readjustment.

In effect, what Ireland has done is what Asian economies did in the wake of their region's 1997 financial crisis, according to David Vines, an Oxford University economics professor. Like the Asian economies, Ireland has made itself extremely competitive, allowing trade to lift its economy out of trouble.

But unlike the Asian economies, which devalued their way to competitiveness, Ireland has had to do it the hard way. Since, as members of the euro, the Irish don't control their own currency, they've had to accept a more direct depreciation of their living standards.

The Irish have routinely accepted significant pay cuts. As a consequence, Irish labor has recaptured about half the loss of competitiveness it suffered during the previous decade. This is easiest to see in Irish inflation data.

Between the start of the euro in 1999 and the eve of the global financial crisis at the end of 2007, Irish consumer prices rose considerably faster than in the rest of the euro zone, up 36percent over the period, compared with 22percent for the whole of the single currency area, including Ireland.

Since then, the story has been dramatically different. Between the end of 2007 and now, Irish consumer prices have dropped a little more than half a percentage point, while those across the whole of the euro-zone rose a shade under 6percent. By contrast, the two other seriously struggling peripheral euro-zone economies have failed to follow Ireland's example. Greek consumer prices have risen more than 10percent since the end of 2007 while Portugal's rose by 5.7percent.

Ireland's low relative inflation rates mean that the rest of the euro zone is becoming comparatively more expensive, giving a boost to Irish exports and discouraging Irish consumption of increasingly expensive foreign goods.

But notwithstanding the effort the Irish are putting into reviving their economy, the future is not entirely in their hands.

The biggest risk is that Ireland's export performance may be stifled by a global slowdown. Economists have been cutting their growth expectations for the second half of this year, with the U.S. in danger of hitting stall speed. Meanwhile, the U.K., Ireland's biggest trading partner, is struggling to maintain its recovery. A further depreciation of sterling would hit Ireland particularly hard.

But the Irish also face a danger from within the euro zone. France has been particularly keen on forcing the Irish to raise their corporate tax rate and the recent plan launched by French President Nicolas Sarkozy and German Chancellor Angela Merkel made special mention about finalizing negotiations on a "common consolidated corporate tax base."

Were the Franco-German plan to force the Irish to abandon this key competitive advantage, Ireland's economic miracle would risk quickly running aground.

http://online.wsj.com/article/SB10001424053111904875404576530613971799994.html

Seems things are now shifting from what we can do here for ourselves to what is going to happen abroad to stifle the recovery in Ireland. I think the positive publicity Ireland is getting now is long overdue because we all knew whilst things are bad here, largely of our own making, you cannot compare an exporting economy like Ireland to Greece. Hopefully this recovery continues but I am more anxious now about events elsewhere effecting us then what happens domestically. Imagine how bad our exports would be hit if major western economies entered a second successive recession in 2 years. That's a bit scary.

BUNK1982

Perhaps FG should not have moved to reverse the minimum wage reduction???

This would certainly have improved our competitiveness and reduced costs in the tourist industry. I can appreciate that people would oppose from a social point of view but I can't help but think it would have made political sense.

BUNK1982

Another important point from this is the importance of FDI and multi nationals, so any threat to our corporate tax rate should be dismissed out of hand.

I also think there needs to be something done around this 'debt forgiveness' idea to stimulate the domestic economy but it is worrying that this could all be for nothing if the global economy goes into recession.

Slydice

Investors have taken note. Irish 10-year bond yields have dropped to 8.95percent from a peak of 14.08percent in mid-July. While it's true European Central Bank intervention in the bond market starting July 21 pushed yields down across the board, the Irish sovereign debt market has outperformed its peripheral peers. For example, Portuguese 10-year bond yields have only dropped to 11.18percent from 13.38percent over broadly the same period.

I doubt it.
http://www.irishtimes.com/newspaper/breaking/2011/0804/breaking37.html

The European Central Bank signalled today that it was buying government bonds in response to a deepening debt crisis

Godge

Slydice wrote: »

I doubt it.
http://www.irishtimes.com/newspaper/breaking/2011/0804/breaking37.html

That was August 4th. Things have changed since then.

Returning to the OP, a very interesting article, which offers hope for the future. We are regaining competitiveness but it has been done by dampening domestic demand. The next step is to continue to force domestic deflation by addressing the problem of the electricity monopoly, the doctors cartel, lawyers, accountants, pharmacists, etc.

Slydice

Godge wrote: »

That was August 4th. Things have changed since then.

I doubt it as I have not seen any evidence to say that anyone other than the European Central Bank is buying Irish Government Bonds.

randomuser77

Slydice wrote: »

I doubt it as I have not seen any evidence to say that anyone other than the European Central Bank is buying Irish Government Bonds.

No one else is buying them from the state but that's not the point. These yields are from people trading Irish bonds between each other.

Slydice

randomuser77 wrote: »

No one else is buying them from the state but that's not the point. These yields are from people trading Irish bonds between each other.

Nope, the Irish State hasn't sold one of its bonds in a long time now.

It's more likely that the European Central Bank is buying the bonds that you are thinking of. They are way to expensive for people to be trading them between each other. It's usually pension funds or hedge funds which have billions to work with that trade bonds from what I know. That's why only an organisation like the European Central Bank could be bringing the prices down. It has got the billions needed to do it.

ei.sdraob

There were several articles last week of ECB spending about 120 billion buying up bonds, and programme continues at about 20 billion a week, but they will not tell which countries in particular and how much each...


Anyways to get back on thread, how come our resident Keynesians are so silent? If this article has any grain of truth to it then the cutting any fat out of the system is the way to go, the faster the better.

randomuser77

Slydice wrote: »

Nope, the Irish State hasn't sold one of its bonds in a long time now.

It's more likely that the European Central Bank is buying the bonds that you are thinking of. They are way to expensive for people to be trading them between each other. It's usually pension funds or hedge funds which have billions to work with that trade bonds from what I know. That's why only an organisation like the European Central Bank could be bringing the prices down. It has got the billions needed to do it.

If the drop in our yields was down solely to ECB intervention and not the bond markets then how is it that our yields are dropping while Greek and Portuguese yields are still increasing?

Scofflaw

As has been pointed out elsewhere, the volume of secondary trading in Irish bonds began to rise at the beginning of July, while the ECB intervention was only given the green light in the last week of July.

cordially,
Scofflaw

Slydice

randomuser77 wrote: »

If the drop in our yields was down solely to ECB intervention and not the bond markets then how is it that our yields are dropping while Greek and Portuguese yields are still increasing?

Best guess:
http://www.bloomberg.com/news/2011-08-27/greek-notes-slump-on-concern-aid-deal-will-fail-bunds-decline.html

Greek two-year notes slumped, pushing yields to a euro-era record of 45.91 percent this week, on concern Finland’s demands for loan collateral will endanger the nation’s second bailout package and trigger a default.

Scofflaw

Slydice wrote: »

Best guess:
http://www.bloomberg.com/news/2011-08-27/greek-notes-slump-on-concern-aid-deal-will-fail-bunds-decline.html

And the Portugese explanation?

cordially,
Scofflaw

Slydice

hard to tell, a quick check of google news comes back with:
http://online.wsj.com/article/BT-CO-20110805-713736.html

Although the government has been quick in the implementation, yields on Portugal's bonds have been rising on fears over bailed-out peer Greece.

if yer really looking for evidence, feel free to do all this googling yerself.

goto google.ie -> click news at the top of the page -> use the country name and bonds in the search

as I said earlier, I haven't seen evidence to point otherwise to the ECB doing all the buying.

murphaph

What exactly has the government done to help the private sector (note to PS fanatics: the private sector I speak of != "de banks", I am talking about real companies exporting stuff to people that want/need it). The govt rolled back on the minimum wage cut (absolutely stupid decision). They have made no moves on reducing the actual cost of doing business in Ireland. Some councils (SDCC that I know of) seem to be taking a pragmatic approach to rates (but it's not coordinated at national level) accepting that pinning the rates liabilities of a bankrupt former tenant on the new tenant is idiocy of the highest order. The government should be drafting legislation to totally overhaul rates. It's an archaic system that does nothing to promote business in Ireland.

The PS and SW issues need tackling, no doubt, but only the private exporting sector has the capacity to drag Ireland out of the doldrums and provide jobs for the unemployed. So what real measures have been taken to help (for example) SME's to expand and generate employment? I would say very little indeed.

I await with baited breath the 3 year budget plan. Will the govt make the fatal mistake of attempting to tax us out of recession when, despite very little help being thrown the exporter's way, exports are up and we're growing.

ardmacha

CNBC get on message, we are the best of a bad lot!
http://www.cnbc.com/id/44310831

The Celtic Tiger boom years, and the subsequent bust, have made Ireland seem like a basket case, with the recent history of its housing market consigned to economics textbooks forever as an example of a hugely overinflated bubble.

Yet there are some signs that things are looking up for this small euro zone member.

Irish 10-year yields are more than five points lower than their eye-watering peak and are below 9 percent for the first time since April.

"The key message is that because of the very brutal austerity package, yields have come on with no help from the ECB," George Godber, fund manager, Matterley Asset Management, told CNBC Tuesday.

"I think you will start seeing the EFSF (European Financial Stability Facility) turn around to the rest of the periphery and say this is the route to follow."

The reduction in yields is partly caused by the lack of free flow in the Irish bond market, Marc Ostwald, strategist at Monument Securities, told CNBC Tuesday.

"The ECB owns so much of the Irish bond market, so there's so little free flow that you will get a massive bond rally when people start to see it being distinguished from the others," he said.

Interest rates on its bailout loans have fallen and the government is enacting measures to boost competitiveness.

"The non-financial economy has always been very, very healthy in Ireland, but it was brought down by the bust in the financial sector," said Ostwald.

There are even some signs of optimism returning to its seemingly disastrous housing market, with house prices in Dublin rising very slightly in July and the dramatic falls in value leveling off.

Residential property prices fell by just 0.8 percent in July this year across Ireland, compared with a decline of 2.1 percent in June and a decline of 1.3 percent in July 2010.

"Housing was the bubble of all bubbles and that could take 10 years to unwind," said Godber.

"It will continue to be extremely difficult, but every month it becomes less of a destructive force."

Ireland could also be helped by the comparative performance of other peripheral economies.

Greece in particular has moved back into focus this week as Finland argued that the other euro zone economies should receive collateral from the Greek government in return for further loans.

There were also concerns about a letter from the International Accounting Standards Board (IASB) to the EU market regulator, which according to the Financial Times criticized inconsistencies in the way financial institutions have written down the value of their Greek debt.

"They (Ireland) enacted a lot of the reforms that are being looked for elsewhere," said Ostwald.

"There are plenty of opportunities elsewhere. However, people have to have diversified portfolios and, if they want to have one of the peripheral economies, it's Ireland."

Scofflaw

You know, the really disturbing thing about the apparent ability of the State to stand out as the best performer under these circumstances is that it suggests that we're quite capable of competent government, but most of the time we don't want it.

disturbed,
Scofflaw

View

Scofflaw wrote: »

You know, the really disturbing thing about the apparent ability of the State to stand out as the best performer under these circumstances is that it suggests that we're quite capable of competent government, but most of the time we don't want it.

disturbed,
Scofflaw

It also really highlights the questionable wisdom of concentrating (virtually) all political decision making in the hands of the cabinet, rather than dispensing large amounts of it at lower levels of government as well.

It means that we can have politicians who can reach cabinet minister level without ever having to demonstrate any ability at actually governing. By the time we find out they may have little, if any, it is too late to avert disaster...

thebman

Scofflaw wrote: »

You know, the really disturbing thing about the apparent ability of the State to stand out as the best performer under these circumstances is that it suggests that we're quite capable of competent government, but most of the time we don't want it.

disturbed,
Scofflaw

Well most of the measures, good and bad, to bring this about were implemented by FF (FG can't claim the good is theres and the bad FF and not be hypocritical) and those ministers were mostly the same group as the ones in charge during the boom so what I think it really demonstrates is they knew what they should have been doing and consciously decided to inflate the housing market while many politicians invested themselves in the property market.

So I think it shows a much worse scenario TBH. It shows our government is capable and willing to inflate what they themselves are investing in to pyramid scheme levels to the detriment of many Irish citizens who just wanted to own family homes in many cases but have massively inflated mortgages compared to what they would have if the government behaved responsibly.

I consider it to be pretty similar to insider trading though in reality it probably is even worse when you account for the number of people affected by this disaster.

Taxi Drivers

Here's another attempt at putting a positive spin on things.

Reasons to be cheerful parts one, two and three

The Irish economy has taken a battering over the past four years. The unemployment rate has risen to 14%, the banking system collapsed with the crash in the property market and a €20 billion hole opened in the public finances.

These are all problems that will not be resolved easily. However after four years where the news was unrelentingly negative, we have had occasion recently where some positive economic developments leaked into news cycle. Here are nine that are worth recounting.

Read more.

RichardAnd

Taxi Drivers wrote: »

Here's another attempt at putting a positive spin on things.

Read more.

The following caught my eye:

As recent as 1996, the natural increase was recorded as 18,000 per annum. Ireland is set to have a young, vibrant and productive population in the coming years.

I see the logical advantage in this. The young don't draw pensions and are, overall, in better health than the elderly. However, what use are these "vibrant and productive" souls if they are not working? No age group has been hit harder in this recession than the 18-25 year olds, this is even more true for young men. With the public service closed to them, the sheltered professions a closed shop, interships and work for free schemes at every turn and a pretty unremarkable education, I don't see any reason for anyone young to feel optimistic about their future here.

thebman

RichardAnd wrote: »

I see the logical advantage in this. The young don't draw pensions and are, overall, in better health than the elderly. However, what use are these "vibrant and productive" souls if they are not working? No age group has been hit harder in this recession than the 18-25 year olds, this is even more true for young men. With the public service closed to them, the sheltered professions a closed shop, interships and work for free schemes at every turn and a pretty unremarkable education, I don't see any reason for anyone young to feel optimistic about their future here.

Youth generally attracts FDI though which generates employment which leads to those companies needing things in their local area which leads to more employment which leads to all those people wanting more shops and services which leads to more employment.

So I'd still count it as a plus.

RichardAnd

thebman wrote: »

Youth generally attracts FDI though which generates employment which leads to those companies needing things in their local area which leads to more employment which leads to all those people wanting more shops and services which leads to more employment.

So I'd still count it as a plus.

Yes, I know that which is why I said that I saw the logic behind the claim. However, we have plenty of young people around right now and I don't see that it's creating much employment.

ei.sdraob

I am sorry but its the tax regime that attracts FDI not youth, otherwise subsaharan africa would be a magnet for investment

murphaph

ei.sdraob wrote: »

I am sorry but its the tax regime that attracts FDI not youth, otherwise subsaharan africa would be a magnet for investment

I'm sure it's slightly more complicated than that. If a country in sub saharan Africa had 0% corporation tax, I still wouldn't set up a factory there: no infrastructure to speak of (including reliable electricity supply, nevermind internet!), corruption an order of magnitude worse than Ireland, unstable political situation, disease etc. etc.

I'm sure the FDI decision makers have to balance a number of factors in making their decisions, tax code, infrastructure, language issues, proximity to intended market, availability and cost of labour and so on.

ei.sdraob

murphaph wrote: »

I'm sure it's slightly more complicated than that. If a country in sub saharan Africa had 0% corporation tax, I still wouldn't set up a factory there: no infrastructure to speak of (including reliable electricity supply, nevermind internet!), corruption an order of magnitude worse than Ireland, unstable political situation, disease etc. etc.

I'm sure the FDI decision makers have to balance a number of factors in making their decisions, tax code, infrastructure, language issues, proximity to intended market, availability and cost of labour and so on.

I agree its a bit more than tax, and having infrastructure helps

but singling out "youth" as lone factor is silly