So now we are the ‘poster boy’ again. Do we ever get sick of being the poster boy?
A few years ago, we were the poster boy for deregulation, low taxes and free capital movements. Our politicians went around Europe advising the rest of the continent to copy Ireland. Just be like us and it’ll all be grand, they said.
Having fallen so sharply, we are again the poster boy, but this time for austerity. Our politicians are now advising the rest of Europe to be like us. If you – Greece, Portugal, Spain and Italy – can just do austerity like Ireland, it’ll all be fine, they say. Sound familiar? The problem with austerity is that it has never worked anywhere in the world without either being preceded, or followed, by a massive devaluation or massive credit injection. Our ‘successful’ period of austerity from 1987 to 1990 was preceded by a devaluation in 1987 and followed by another one in 1992, and all the while interest rates fell dramatically.
Likewise, Reagan and Thatcher’s massive fiscal contractions of the early 1980swere accompanied by the most rapid injection of credit either economy had seen since the 1920s, leading to a bubble and two housing busts in the late 1980s.
Without a massive injection of credit or a massive devaluation, austerity can’t work. It will lead to long-term, higher levels of unemployment and emigration. This is what is happening in Ireland right now.
In many ways, economics is really very simple. If you try to do something that isn’t governed by the basic rules, you will fail. If there is one thing most sensible economists can agree on, it is that too much money in circulation causes inflationary booms which, if not checked, will crash. Too little money in circulation will cause deflationary depressions which, if not checked, will lead to social upheaval.
The way to stop an inflationary boom is to take money out of the economy; the way to stop deflationary busts is to add more money to the economy. Simple. Deviate from this at your peril.
One other thing most economists also agree on is that wages and prices are ‘sticky’. This means that it is very hard for wages and prices to fall in response to a fall in demand. Typically, if there is a fall in demand, it will be felt much more in unemployment and emigration than in falling prices.
This is because of what is termed in labour market economics the insider/ outsider dilemma, which examines the dynamics of the labour market when demand changes. When demand falls, those with jobs stubbornly defend their own pay rates, which keeps wages from falling. But those who have lost their jobs need general wages to fall, so that they can look attractive to potential employers.
But if this doesn’t happen because the ‘insiders’ in a job are keeping wages up, short and long-term unemployment rises.
This is what is happening at the moment in Ireland. Figures last week revealed that unemployment is still rising, as is emigration, while wages and prices have remained stubbornly high. They are ‘sticky’.
The implication of this is that it is nearly impossible to get a competitive edge via austerity – or it is possible, but the cost to society in terms of unemployment and emigration is horrendous.
As a result of the stickiness of wages and prices, and the need for depressions to be offset by injections of new credit, all austerity programmes are destined to fail because they can’t succeed mechanically.
This is why all slumps are ultimately followed by massive falls in the currency of the country, with the new exchange rate repricing everything downwards.
This is what happened in every Asian tiger in the 1990s.This adjustment makes everything in the country cheaper and all imports more expensive. Once the economy has found a new price level to match its fundamental position, money floods back in.
Some of that money is new, looking for investment opportunities at the new lower price level, but most of the cash tends to be domestic money that has fled the country because it was afraid of higher and higher taxes as the ‘austerity with no growth’ madness took hold. Once this cycle of dogma is broken, the economy can prosper again.
This is why there is so much talk in Europe of the euro breaking up. It is not driven by ideology or politics, but by basic economics. If you don’t have a single budget to dole out cash in a slump, then the exchange rate has to adjust downwards.
If you don’t have an exchange rate, you get no adjustment, growth stops and austerity fails. It is not hard to understand, is it? Countries need away out. There is a choice. One is fiscal federalism for all. This would need a referendum in many countries, and would never pass. Think about it, three of the last four referendums seeking greater integration in Europe have been beaten by electorates as diverse as the Dutch, the French and the Irish.
So this is not a runner and, if it were put to a vote in Germany, it would be blown out of the wasser. So what is left is some break-up of the currency, and Greece is the first candidate. Yes, there would be huge capital flight in the months after Greece left, but a major European crisis might give us the opportunity to move back to our own currency.
Back in 2007, this column argued that one of the upshots of the financial crisis that was coming, but not appreciated by many, was that we would leave the euro, not just because it was inappropriate for Ireland, but because it would implode as it was half-baked.
We are now close to this moment. A new currency and a massive devaluation will make us no friends in Europe, but by that stage they will be scrapping with each other so viciously that what we do won’t matter. Such a bold move will accelerate a recovery, just as the same policy has done everywhere else in the world – Iceland being the most recent example.
Otherwise, the poster boy will trip up, having exalted everyone to follow his example as he waltzes himself up a financial cul-de-sac of unemployment, emigration and asset-stripping.
This is really just populist tripe. Fact …we are in the euro, fact …..we are reliant on handouts from the EU/IMF/ECB. Austerity is working , it makes sense and its the right thing to do . There will be no breakup of the euro , we will all just muddle along, this is the new normal ….get used to it . There is nothing wrong with emigration , I spent most of my working life outside Ireland and it did me no harm . Those kids going to australia or canada are having the time of their lives . as… Read more »
As a longtime reader/lurker, if I may ask – if someone overseas has a chunk of their savings in Euro in anticipation of a return to live in Ireland (don’t ask why, it’s a long story!), should they be holding onto that or moving it into another currency? Will holders of Euros be initially offered a 1:1 exchange for Punt (or whatever it may be), but only those resident in Ireland, for example? The ever-changing, ever-worsening state of affairs at home over the last few years has scuppered a few plans to return as it’s always been hard to know… Read more »
I agree with you David But what is happening in the meantime is the utter destruction of the middle class , 10 suicides per week on average. Up to 800 people emigrating every week and unemployment at 450,000 and rising. This Government does not have the courage to be so bold , it would rather be “loved” by strangers in Brussels than take care of its own people. Is it possible that Europe could invoke some special decree to bypass a referendum… ? As you are all too well aware I am in the trenches on a daily basis and… Read more »
I agree with you David But what is happening in the meantime is the utter destruction of the middle class , 10 suicides per week on average. Up to 800 people emigrating every week and unemployment at 450,000 and rising. This Government does not have the courage to be so bold , it would rather be “loved” by strangers in Brussels than take care of its own people. Is it possible that Europe could invoke some special decree to bypass a referendum… ? As you are all too well aware I am in the trenches on a daily basis and… Read more »
DmcW makes a msssive contribution to economic and arguably political discourse in Ireland, he is the voice of clarity amidst all the official nonsense, we can discuss all the economics but until an Irish person can vote for an executive seperate from a vote from a local representative, those who conceed to such a charade will be the ones that lead the country, we can debate the issues all day long until an Irish person can directly vote for the executive the nonsense will continue and the inevitable cots of same will continue to be exetered
inevitable costs of same will continue to be exerted
Spelling
inevitable costs of same will continue to be exerted
spoken like a true gombeen paddyjones
Paddy I appreciate your view but Ireland is the nly country in Northern Europe where it is acceptable for a generation to emigrate every now and again, alot of people in Ireland don’t seem to appreciate how primitive that is, what other country could dismiss its youth from generation to generation with such candour, immigration by choice sure but by economic neccessity is hardly something to defend let alone advocate, its embarrasing
What govt would make any decision other than the easiest one at the time, (default on unguaranteed private debt or go along with the ECB) Govts chose decision easiest in the short term , clearly there is no real leadership in Ireland because if there was the case for short term upheaval but long term independence would have been made
David: I accept most of the points in your Sunday column; they are well researched and clearly put. It would help your readers further if you addressed the possible mechanics of transition to the Nua Punt.
– Will the defunct Euro still be valid tender in shops?
–For how long?
–What effect will it have on deposits entrusted to Irish banks by American companies with investments here?
–How long will it be before said American companies depart our shores for pastures nua?
–What would ?president McGuinness’ s attitude be to re-entering the Sterling zone?
During the boom years, Ireland was held up as the example to follow – the ‘poster boy’ for Europe, Bertie flew around the world boasting his methods to the world. Today, Ireland is like a dog that has lost his master. It’s constantly looking back at the ‘good ole days’ with rose tinted glasses. There is no acknowledgement of the mistakes that were made and no realisation of the root causes of the problem. Our politicians just love to be patted on the head and told they are a ‘good boys and girls’. However, the Irish ‘elite’ are caught in… Read more »
Dont fool yourselves if the Euro collapes (a real possibility) there will be no notice and the certainty of consequence some are searching for will not be realised it will be sudden and incalcuable, the EU will not be making announcements on that
OMG paddyjones, don’t you know that the “new normal” (as you call it) is that anything can happen at any time, we are in free-fall with nobody at the helm.
Clearly depicted diagram of the econ 101 mechanic levers and pulleys.
Unfortunately those at the switch are operating it to suit ideology.
Subscribe. However, we are also being told that the costs of a Euro break up would be several trillion, whereas the costs of bailing out would be and few hundred billion: http://www.economist.com/node/21529049
What’s the easier bill to stomach …?
subscribe.
Think of those quisslings already rewarded for good behaviour eg developers on ¢200,000/annum paid by NAMA, the huge salaries/pensions of our political class and members of our semi states and public service doing very well. There’s a proposal for no cuts to income tax to ensure those scammed by the mortgage property bubble can pay their mortgages. Think of farmers fed by cheques from Europe and 20% increase in prices last year. In the broader scheme of things, Irish austerity as with Greece is a no brainer and is looming closer and closer on the horizon, it will lead to… Read more »
In a nutshell.
Beatings will continue until morale improves.
Roubini sees the light – it has taken 3 years of a rapidly growing financial/economic/social crisis to come to this conclusion. Isn’t it amazing how the glaringly obvious crystallises so clearly when there are no options left! Who is next Portugal, Ireland, Italy? The problem is one of simple mathematic’s, once that is understood then the endgame can be viewed as a natural conclusion to a monetary system that has failed. The notion that a sovereign nation must go to a bond market (and thus indenture its citizens with promises and debts it cannot cover)to finance it day to day… Read more »
“But those who have lost their jobs need general wages to fall, so that they can look attractive to potential employers.”
They may think that, but it would be a classic fallacy of composition. A general fall in wages won’t price them into the market, because it will result in a general fall in demand – and an economic death spiral.
Are there any examples where a growth in GDP (national income) has coincided with a generalized fall in wages (national income)?
paddyjones is, of course, essentially correct, in the core of his argument: the standard of living is totally unsupportable by the wealth generating capacity of the country, so the standard of living will fall. This is absolutely inevitable, and is nothing to do with governments implementing ‘austerity programmes’. The only question is: how is this to come about? We could look at the economy, and decide where the cuts in standard of living should go, to a greater or lesser degree. We might argue that teachers and engineers get a lesser cut, while politicians get a greater cut. However it… Read more »
David, Wages cannot really be sticky for the long period of time without government intervention, laws, pumping money and so on. http://mises.org/daily/4906 I am not sure I like Irish austerity way coupled with raising taxes. But not sure what it means austerity in general are bad ? Are you saying we should increase public spenditure or what ? The government needs to reduce the size and remove their inefficiencies from the economy, many things should be privitized, including healhtcare, welfare, education and … or at least should be think of It is not normal to pour so much tax money… Read more »
David, You are right. Basically, we are going through the motions of a long running official denial. Brussels and the local political elite [what is left of it after FF collapsed – and FF were the main proponents of increased EU centralization (“integration”)] have treated the people like a bunch of wayward children. This is particularly evident in EU Referenda, when teacher promises us all a big sweet lollipop if we pass the test. And it is always presented to us as a test of our merit and standing. It is never seen as a test of the actual project.… Read more »
A lot of what David says is right; in the way a textbook might be right; theoretically right. Specifically what he says about busts and booms and fiscal controls seems right…but…the problem is, the ‘fiscal control’ bit is out of control. That is, it is out of the control of sovereign nations; and under the control of global bankers, financiers and speculators…aka The Market. These people do not adjust their fiscal policies to produce balanced stable economies. They are not interested in stability; they make more money from instability. They adjust fiscal policies to produce unstable economies — booms and… Read more »
The Financial Times reports that Siemens has withdrawn half a billion from a French Bank and deposited it directly with the ECB.
The Ft goes on to report that siemens took this action as a precautionary measure amid concerns over the “financial health ” of the French bank and also to avail of slightly higher interest rates….which was the more pressing concern for siemens?
If anyone missed Yanis Varoufakis on ‘Tonight with Vincent Browne’ last week – here’s the link. Well worth a watch and he was equally as impressive the following night at the Shelbourne Hotel, at which I was lucky enough to attend:
http://www.tv3.ie/shows.php?request=tonightwithvincentbrowne&tv3_preview=&video=40072
In theory Ireland could make a solo run. David often suggests and seems to want that. In actuality I don’t think our elites would do it; I don’t think they would permit it. It would require the emergence of an extraordinary leader. I don’t see anyone. Do you? So under present leadership we will be staying in Europe — like it or not. The question of whether we should or shouldn’t be in Europe is another matter. I think we should be. I think Europe is a step forwards in the right direction for humanity and human civilisation. I say… Read more »
Adam & Dwalsh I agree with both of you but Adam makes the point of finding a “Leader” As you know , this is were the problem is. How do we find someone who is strong enough but is not influenced by “big business”? George Lee may have entered politic’s with great ideals and ambitions , but even in opposition , I suggest he could not put up with the terrible dithering that goes on. I believe Corporations and large lobbying groups have too much power and influence across politic’s in the U.S and Europe including Ireland. They may operate… Read more »
It seems these defaults and exits from the Europe are coming closer…I have one big question… When will these massive breakouts/exits from the Euro or defaults occur? Personally I’m guessing that it will be Spain not Greece that will be the log that breaks the camels back – sometime around the Spanish general election which is slated for next year. I think things will limp along as they are more or less until something so big to be unable to stop occurs and the game will be up. I’m not convinced the old core countries ( Benelux, France and Germany… Read more »
Paul Krugmans 2nd generation theories of currency crises says that when the incentive for as government to leave a ‘fixed exchange rate’ is much higher than staying, speculators will short the currency and cause the country to leave long before it would have happened naturally. Speculators shorting the currency will cause the Central bank to sell its foreign reserves and raise interest rates to combat it. This will cause further pain and unemployment making the incentives to leave the ‘fixed exchange regime’ higher. So according to this theory the argument for Greece to leave seems pretty strong. If Greece leave… Read more »
I think the insider/outside argument is key in currency crises and this kind of crisis. Devaluing the currency and monetary easing generally hurts the insiders in the short term and helps the unemployed. The insiders are close to policy makers and lobby them strongly not to let the currency devalue, as happened in the U.K. After the U.K. devalued many people in the City of London may have lost international balance sheet value, however the unemployment decreased. Interestingly when Insiders in Ecuador got wind of a currency crisis there they all took out/gave themselves large loans in Sucre, bought something… Read more »
paddyjones is correct- Mr.McWilliams is nuts. I will admit that on occasions he has spoken some sense however he was incorrect on the most important decision the country had to make- the bank guarantee. I believe I am correct in saying that he proposed the famous blanket banking guarantee in the Sunday Business Post 28th September 2008: “The only option is to guarantee 100 per cent of all depositors/creditors in the Irish banking system. This guarantee does not extend to shareholders who will have to live with the losses they have suffered. However, it applies to everyone else”. (www.sbpost.ie/archives/2008/0928/state-guarantees-can-avert-depression-36245.html). Including… Read more »
@JusMc
I accept in principle the general theme of your letter which is mostly your own current agenda and not part of what paddyjones jibe as above namely ”austerity measures made to work ‘.You do not address that .What you have said has been written here before by others .
Nevertheless you are thinking very well and I will watch others comment on the rest about what you have said.
“I’ve been noticing many indicators of hard times: empty houses, thousands showing up for a handful of job openings, New York’s mayor worrying about job riots, stores closing, empty parking lots at malls, unpatched highways, debt-burdened graduates not getting jobs, downward mobility. Every one of these indicators is a sign of human suffering. Meanwhile, the wealthiest 5% of Americans grabbed 82% of all economic growth since 1983. If that doesn’t preach, nothing will.” ~Tom Ehrich
It seems to me that we better keep being the poster boy in the EU until they finally tell us no more cash we are fed up loaning you money to pay some of the highest civl servant salaries in Europe. I am not atacking the lower paid workers and I am talking about the lecturers and consultants etc who are just too expensive. We have a serious problem of the higher paid workers hiding behind the lower paid ones.So what if we run out of money for a while and we have no wages for the civil service. In… Read more »
Morning,
Thanks for all the comments and the vigerous debate. I see Roubini is now advocating Greece default and leave the Euro. If this happens, and it is a distict possibility, it changes the game entirely and I believe, gives us the opportunity to leave too. Its not a panacea, but its the first step to recovery.
Best
David
“Without a massive injection of credit or a massive devaluation, austerity can’t work. It will lead to long-term, higher levels of unemployment and emigration. This is what is happening in Ireland right now.
…
The way to stop an inflationary boom is to take money out of the economy; the way to stop deflationary busts is to add more money to the economy. Simple. Deviate from this at your peril.” D. McWilliams
There you have it. The accurate “I told you so” of the future.
Sounds like this could all happen over the Oct bank holiday weekend, this year. http://myfinancialwindow.ie/ireland-to-leave-the-euro-what-if-part-2-19th-september-2011/
Is this the future of home construction in Ireland and elsewhere in the EU?
http://www.good.is/post/guatemalan-schools-built-from-bottles-not-bricks?utm_campaign=daily_good&utm_medium=email_daily_good&utm_source=headline_link&utm_content=Guatemalan%20Schools%20Built%20from%20Bottles%2C%20Not%20Bricks
Well, the latest news is that the debt rating of the Italian state has been moved down a peg. As a result we get a predictable response of commentary from the Italian government. This is nothing new. We had it when it happened to this country. We seen it in August when the US lost it’s sterling triple A rating. And we will see it when other Western governments lose rating points. Who is next ? France ? the UK ? (our main trading partner, by the way), Spain ?, Belgium ? Too big to bail (out). Is Italy too… Read more »
Euro Domino ‘The demise of the Dinosaur’ remains a cold case but will the aftermate of ‘the demise of the euro’ remain a cold case too and for how long ? We know the Dinosaur became extinct does that mean the Euro will follow too or is that a conclusion already arrived at ? More animals filled the Earth after the Dinosaur to fill the vacuum left behind and where was man then ? What will pay the bills after the Euro and which man survives and what happens the rest ? The Demise of Man is upon us now… Read more »
Fine Gael showing who really runs the country…..
http://www.breakingnews.ie/ireland/kenny-income-tax-pledge-depends-on-imf-re-negotiation-521280.html
And another example….
http://www.breakingnews.ie/ireland/socialist-higgins-slams-disastrous-austerity-policy-521279.html
Same can be said of Ireland, the balance the book brigade may well cost us what little we have left, we need job creation.
“The United States’ most significant economic problem is mass unemployment, not its current deficit or its long-term debt. This is something that both mainstream economists and the general public overwhelmingly agree upon. And yet, for more than a year now, talk about deficits has dominated our politics”
http://english.aljazeera.net/indepth/opinion/2011/09/201191693552821572.html
Unless Ireland does what DMcW suggests, the game is up for all of us…someone on this blog said “car crash in slow motion”…excellent anology.
Austerity comes in 2 ways… 1) External imposition by someone lending to you and you rape the taxpayers for the billions to pay the interest. You just churn the money, no one gets a penny except the ECB and their partner churners who charge interest. As long as the illusion of money is around, nothing happens and we all boil like frogs. Books never get balanced…ever (remember that Mr Paddyjones – the idea is never to balance the books)and generational wipeout occurs. 2) Cant pay so fck off and default…now there is no money whatsoever, austerity is the default –… Read more »
My money is on the following.
Europe will not dissolve; nor the Euro.
But things will have to (be let) get a lot worse before the elites will present their solution (which is already prepared).
What they have in mind will require extreme leverage.
Nearsourcing ?
http://www.rte.ie/news/2011/0921/aviva.html
Sounds like the Talk-Talk debacle in Waterford. Still not clear about the exact results of this latest rumour. Supposedly started by Miriam on twitter….
Wonder will the media still grovel in search of the advertising revenues…..or provide a sharper assessment. Talk-Talk was not a big media advertising spender, so Talk Talk got it on the chin from the media.
Seems like an exceptional documentary on China, the internet has well surpassed State maedia, which is pathetic
http://www.youtube.com/watch?v=qSFcAK5s4nU&feature=related
Desmond LAchman was on Morning Ireland, amazingly Pravda RTE must be beginning to acknowledge the inevitable as well. Desmond joins growing list of economists forecasting breakup of the EMU possibly towards the end of this year:
http://www.aei.org/scholar/72
http://en.wikipedia.org/wiki/Martin_Feldstein
Surprisingly Stiglitz is in favour of euro bonds so unlike Roubini, Stiglitz seems to have lost the plot
Unless we get an orderly breakup the problems and chaos will escalate
http://gfs.eiu.com/Article.aspx?articleType=gef&articleId=1928440777&secID=1
Perhaps in preparation DmcW should issue a Kilkenny currency denominated in notes that return 120% on face value to the user in return for beer at his conference this year…:)