Business in Ireland is on its knees. Ask anyone involved in the retail trade, the advertising world or, more tellingly, anyone looking for a job, and they will tell you the same thing.
Nothing is happening, absolutely nada. So what are we going to do about it?
The government was slapping itself on the back last week as the National Treasury Management Agency (NTMA) managed to borrow yet more money. The government’s spin aimed to show that, in some way, Ireland has pulled away from the other delinquents in the eurozone. What it didn’t tell you is that we are paying more for money than either Spain or Portugal.
The facts are as follows: not only has our government failed to distance Ireland from the other vulnerable members of the Euro club, but we are still regarded as a greater risk than Spain or Portugal .This is despite the fact that the financial markets have been focusing attention on them, not us, in the past few weeks.
There are a number of reasons for the gap between the government’s spin and the facts, but the one I would like to focus on is the most obvious. Our Department of Finance – which is at least partially responsible for this mess – seems to believe that economic success is measured by whether or not we can borrow on international markets. But when you have a single currency and an EU backstop as good as in place, bond issuance tells us very little about the economy.
The truth is that Ireland doesn’t have a recovery strategy aimed at reigniting economic growth and employment. We have a debt management strategy aimed at pleasing the bond market. The way we can titillate the bond market is by promising that the next generation will pay for the mistakes of the last generation, and that the relatively poor (the citizens) will pay for the very rich (the bank creditors).Why wouldn’t the bond market like to hear that?
It’s win-win for them and lose-lose for us.
Is it any wonder investment banks are patting us on the back? They have managed – together with the mandarins in Merrion Street and Brussels – to turn Ireland into a large debt-servicing vehicle for past debts whereby we are capitalists in the boom, when a few get very rich, and communists in the bust, when we are all responsible. By limply playing this game, rather than thinking for ourselves, we preserve the Euro status quo and no one – least of all the political elite – gets embarrassed.
But what do we, the people, want? Do we want an economy that is capable of growing to reduce unemployment? Or do we want an economy which simply exists to service debts? The choice is pretty simple. If we want the former, we have to act radically to save the day. If we are satisfied with the latter, then a prolonged period of unemployment and emigration lies ahead.
Let me sketch out to you what is likely to happen in the years ahead, if we stay with the present course. Before we do that, let us remind ourselves where we are and how pathetic the government’s misinformation actually is.
The Irish economy has contracted in nine out of the last ten quarters. Unemployment among young men is over 30 per cent and rising rapidly. Emigration is, not surprisingly, increasing. Prices are falling by 4 per cent per year, which means that the real interest rate – the interest rate adjusted for inflation – is close to 10 per cent for most loans.
The banks are broken and are in a competition to get deposits in the door – rather than loans out the door. We are facing a monumental contraction of credit, as banks try to pay back money they borrowed from shortsighted, and ultimately reckless, creditors in the boom. That gap between loans and deposits is €120 billion, close to 100 per cent of GDP.
On the national balance sheet, the asset against these loans is property, which is so worthless as to have ‘‘no market’’ for it. We have over 300,000 ordinary people in negative equity. And the rest of us are underwriting Nama, and God knows how much it will cost.
Despite this vista, Ireland is lamentably uncompetitive. If you take the reality of people shopping in Newry – which is the most common-sense test for Ireland’s lack of competitiveness – we are still way too expensive.
Against this background, it isn’t surprising that the government’s fiscal deficit has ballooned. In fact, it can’t do otherwise. And with prices falling, people are postponing spending and therefore credit is contracting.
This means retail sales and employment are likely to keep falling, which in turn implies that tax revenue will be weaker than expected and government spending higher than expected, so the Department of Finance’s budget estimates will not be met. This spiral is amplified by the fall in the working population as immigrants leave and young Irish people up sticks, pushing down house prices further.
These characteristics are the vital ingredients of what used to be termed by economists in the 1980s ‘‘failed budget stablisations’’. Economic history is full of examples where a government tries and tries again to stick to a budget target, largely at first, by cutting spending. When that fails, it raises taxes and ultimately, when that fails, because it stalls the economy, the government gives up. It comes under public pressure, while the financial markets stop giving it the benefit of the doubt.
Caught in the vice of a public that has got used to a certain living standard which is now slipping away and a bond market which realises that the rhetoric soars way above the reality, the government, or a new one, goes the other way and reverses policy.
This precipitates capital flight, irrespective of the currency regime, because capital is fleeing the twin risks of taxation and default. The entire edifice crumbles in chaos and we start again.
Membership of the euro almost guarantees this outcome, because the state can neither inflate away debts nor devalue to energise the exporting sector and to generate the growth that is necessary to pay the old debts.
Ultimately, in a democracy, something has to give. What gives is the status quo, and normally with it, the exchange rate commitment. This might seem a bit over the top to you, but the story of all crises is that what seems extreme now becomes logical, what is radical becomes consensus and what is termed impossible today becomes probable as events change.
The best historic example of this was the collapse of the gold standard in the 1930s. In the 1920s, the only voice arguing against the gold standard was JM Keynes, and he was regarded as eccentric. By the mid-1930s – in the face of the depression – all countries had abandoned the gold standard as an anachronistic relic and had begun to inflate away old debts to get the economy moving.
The gradual questioning of economic orthodoxies takes time. It might take years of needless underperformance where unemployment remains incredibly high, real interest rates do too and defaults are the norm, not the exception. Ultimately, the old way – in our case, adherence to the euro – is thrown out. The only question economic historians of the future will ask is why didn’t we act earlier and prevent all the pain.
At the moment, even suggesting such ideas is heresy. But so too – back in 2002 – was forecasting that we were in a credit/ housing bubble, after which houses would collapse in value and banks would fail.
I truly wish this wasn’t the case for us. I wish we could avoid having to make the hard decisions, but we can’t. Looking at the trough we are now in, it is difficult to see an alternative. However, if we do what is logical, there is nothing to stop this country growing rapidly again very soon.
That’s the prize. Isn’t it something we should entertain? Or are we going to do what we did in the bubble: attack the dissenters and slap down sceptics with the refrain ‘this time, it’s different’?
Yup, if it’s between us being bankrupted and bondholders. I choose bondholders. If we can’t borrow so much in future it may be a good thing.
David, I agree; we may only have one month left. It is time to act.
Hi David,
I was discussing this very situation with a friend of mine in Cafe en Seine
Having discussed at great lengths he decided to send this open letter to mr.Cowen
And you’re right ‘this time, it’s different’
to read letter follow link http://www.thepressnet.com
what happens to our debts if we do leave the euro, do they be denomintaed in the punt nua or do they stay in euro. Is it possible that we could leave the euro and default?
Thanks David, You mention ‘no market’’ and “Nothing is happening, absolutely nada” which is quite confusing with what I see today. I expect there is absolutely no movement on the property market. However, I just drove home from the airport and a little lunch and on my way home I see a new housing estate of about 100 houses in the process of being erected. This project has been going on for about 6 months and is in full swing. Some walls have been put up, some already have roofs and looking at the remaining land there are more houses… Read more »
Let’s consider a simple scenario, so that we can get our heads around what David is suggesting. Let’s assume that the government is not going to hand out conversion calculators, so the switch back to ta New Punt has to be a simple €2.00 = NP 1.00. Of course the markets will shortly devalue the NP towards parity with the Euro, nominally halving our debts. However as night follows day, devaluation causes inflation both of prices and interest rates and we’ll quickly be back to square one again. After that, if the world economy doesn’t improve, we will experience hyperinflation… Read more »
The retail trade is in many sectors an anachronism. The Irish middleman deserves to be taken out, thank god for the internet. Our debts will still be denominated in Euro in David’s scenario. Only way out will be to default on them. That will be interesting. It will be funny to see the local and foreign pension funds suddenly taking a hit with their worthless commercial paper ; whatever will our future pensioners (some of our resident posters here) think when their pension money has gone walkabout? Some of our posters here then might shout ‘Leave the Euro, default’ and… Read more »
Print, Print, Print! = Hyperinflation
http://www.youtube.com/watch?v=WI1i5yhwOz8
I read this article earlier (SB Post) and I was not sure what to make of it. I think that we should be logical about the entire economic situation. But my logical analysis tells me that the Euro is not the problem. The problem is the cost of production across the private and public sector, and this is high because we have a lifestyle that would make poor old James Howard Kunstler cough up his locally produced muesli. Apart altogether from Kunstler’s critique of modern suburban conspicuous consumerism as being an never-ending chase of “something-for-nothing”. Just to put this in… Read more »
@Deco – If wages are dropped surely there should be an equivalent drop on the debt owed otherwise how would repayments be made?
By the way, the argument that the ECB facilitated the excesses has enormous validity. 1) Interest rates were far too low for Ireland in the period 2002 – 2007. 2) The transnational flow of Euros into the Irish economy was never questioned by the ECB, or the CBoI. The ECB badly slipped up, especially in respect to the flow of capital into the Spanish banking system during the Spanish property boom. The EU enthusiasts in the Irish Times and various pro-Brussels quangos here will not admit this. To survive the boom, you had to know this. Your documentaries provided advice… Read more »
The introduction of Punt 2.0 will place control of the currency in a body that would be even less accountable than the ECB. In Ireland we have this rule concerning paying for access to internal documentation in the state institutions and organizations.
Will we operate the Irish Central Bank any better than any other state institution ? There are institutional consequences. You can bet that AIB, BoI and many other interests will have an interest in rigging the Punt 2.0 to suit their own interests and preserve their existence.
David where do we look while we are held under a captive state :
St Malachi’s predictions
Nostradamus
Mayan Calander ceases in 2012
Book of Revelations
Its worth reading Igor Panarin’s predictions and the break up of USA in 2010
Dun Aengus emulates the real experience of a time of before and and a time after that ended up with a semi circle made by both man and nature.
This is the YOYO a new punt.
Deco, that’s a really good and important point; David’s idea is predicated upon a logical approach to economics and how it can and should be used to serve the people in a society; but we do not live in a normal and logical society. Our leaders are not interested in using a logical approach to serve the citizens. The govt/banking/IBEC/ISME axis is only interested in the illogic of attempting to preserve the status quo at the expense of our society-at-large. In such a country, even the most logical, tried-and-tested solutions that succeeded elsewhere, could well be disastrous for the Irish… Read more »
Folks, this is interesting as context/political milieu:
http://ow.ly/19GyH
Well, I don’t believe leaving the euro will solve any problems. We have tied ourselves to Europe so tight, that even breaking away from the Euro would bring us down. There is no will for this in any of the Political Parties (That might be in Government). All of the advise they are getting from their own is leaning further into Europe. Depending more and more on Europe. The People would not tolerate a move away from Europe now. We are Model Europeans now and for the good of it or the bad, we are hear for the Long Hall.… Read more »
DAVID. You write……………….. “Our Department of Finance — which is at least partially responsible for this mess — seems to believe that economic success is measured by whether or not we can borrow on international markets. But when you have a single currency and an EU backstop as good as in place, bond issuance tells us very little about the economy. The truth is that Ireland doesn’t have a recovery strategy aimed at reigniting economic growth and employment. We have a debt management strategy aimed at pleasing the bond market. The way we can titillate the bond market is by… Read more »
I would like some opinion on this. emphasis below is on currency backed by renewable energy – which may be ill thought through. I would like to hear thoughts on any “also ran” competitive currency solutions. Cheers for reading. Posted first in reply to Tim and cbweb on last article blog. – Can we introduce a second currency to operate alongside the Euro? – Localised currency (Island of ireland or just ROI) – Not necessarily legal tender – voluntary code of acceptance – For such currency to thrive it should have intrinsic value or v. strong backing – Obvious solution… Read more »
David.
You write………………………………….
“Is it any wonder investment banks are patting us on the back? They have managed — together with the mandarins in Merrion Street and Brussels — to turn Ireland into a large debt-servicing vehicle for past debts whereby we are capitalists in the boom, when a few get very rich, and communists in the bust, when we are all responsible. By limply playing this game, rather than thinking for ourselves, we preserve the Euro status quo and no one — least of all the political elite — gets embarrassed.”
I write ………………………………………………..
APPLAUSE APPLAUSE APPLAUSE APPLAUSE APPLAUSE
DAvid.
You write……………………………………
“But what do we, the people, want? Do we want an economy that is capable of growing to reduce unemployment? Or do we want an economy which simply exists to service debts? The choice is pretty simple. If we want the former, we have to act radically to save the day. If we are satisfied with the latter, then a prolonged period of unemployment and emigration lies ahead.”
I write …………………………………
GIVE THAT MAN A CIIIIIIIIIIIIIIIIIIIIIIIIIIGARRRRRRRRRRRRRR!!!!!
If we’re going to exit the Euro, but stay in Europe, nationalisation of critical assets is required. We need fuel for energy so we’ll see Shell in Court. Same for windfarms. Tariffs will be needed on imported food and foodstuffs to bolster homegrown agriculture. If FDI is going to take advantage of a devalued and ttherefore more competitive economy, hard currency windfall taxes are the price, else we’re just laundering money. If the devaluation amounts to say 20%, then thats the bottom rate of tax too, kicking in at 12k. Institutions taking cash deposits invest those funds in Irish domiciled… Read more »
As a student of history, I have to agree with the dangers highlighted in David’s article, I don’t think its an over reaction, to echo Gustav Stresemann ‘we are dancing on the edge of a volcano’ and the unthinkable may yet be our reality…… I am just shocked by the inaction of government and the business as usual approach by all parties, still no mass political meetings, no major address by Gilmore in Cork, I find it astounding, this is precisely the time that these guys should be travelling the country. Its supposed to be a national crisis, but you’d… Read more »
Good evening, fixing systemic faults can always be achieved, but, and I can not over stress that point enough, to expect the very people who caused the mess to be the ones to fix it, with respect, is the very definition of insanity. The people who were in it up to their very necks are still governing us left, right and center, they are still covering up the truth behind this mess and abuse their power to manipulate the situation for the worse, not the better, their motif clearly stated by Cowen himself, the relationship to coalition partners is as… Read more »
David. On the ‘we must exit the euro’ to save the situation I reckon this idea is merely the surface narrative of a deeper problem. A hidden structure of crony networks and elites operating the levers of powers with pinky and the brain imagineering think tanks dreaming up of new fiat paper money scams and focusing in on the euro is missing the point. Exiting the euro will not make the under lying problem which caused the credit crunch to go away. As long as the medium of exchange is weaponized and used to pollaxe citizens into debt bondage the… Read more »
Sadly I have to report to all bloggers that I’m am to be prosecuted by the Director of Public Prosecutions and I will have to attend court (for the first time) shortly. What was my offence you may ask? Did I run a bank into the ground, retire and give myself a 28million pension before handing it over to te state for bail-out? Did I perjure myself by providing, under oath, deliberatley false information to a court of law? Err . . . No. . . . . . . . .I am to be prosecuted for not displaying my… Read more »
On managing the crisis via spending cuts; Here is an example from real life. My Lady works as a personal care assistant, you probably know that people in this job are severely underpaid. I guess you have to have certain qualities in the first place to be able to do a job like this. I freely admit, I more than likely could not do what she is doing. She is daily on the front so to speak and on top has to deal with paper pushing bureaucrats that never in their life experienced this job in the first place, but,… Read more »
The Euro is NOT OUR PROBLEM. , it does not matter what you call our Currency , The Punt, The Pound, The Dollar , The Ying Wang , The Paddy Currency. It is our Mindset that is our REAL Problem , just look at the week in Politics land that has just past , the BIGGEST Airline in Europe wants to bring 300 jobs here and because the Head man wears jeans and trainers , the Beards in Suits refuse to give up their large canteen simply because of personalities !. A little man with a big moustache slanders and… Read more »
Folks, you may find this pertinent:
http://www.guardian.co.uk/commentisfree/2010/feb/21/three-virtues-delight-liberty
David This week pressure should be put on Senor Jose Manurel Gonzalez -Paramo, at the EXceutive Board of the ECB. As if he signs off and gives an all clear Green Light to Nama. it will be disaster- as with lasy weeks decision about the Bank of Ireland loans of 31 Million being valued at 600K well now those naughty donators to the Vatican ( suspicious) expect still only a 20/25% per cent haircut with their Anglo loan book! well that is madness- as if the real values are 70% off – the state / peoples money! etc should not… Read more »
The real problem in Greece is actually getting worse. Currently because of all the strikes, Greece is actually cutting off it’s nose to spite it’s face. In face the Greek is a country in acute paralysis. http://boombustblog.com/Reggie-Middleton/1322-Will-Greece-Set-Off-the-Pan-European-Sovereign-Debt-Crisis.html This is a fascinating and detailed breakdown of the PIGS – and tries to grapple with the question – how bad are things and who will default next. Portugal is left out, because it is seen as the one least likely to collapse. http://boombustblog.com/201002081311/What-Country-is-Next-in-the-Coming-Pan-European-Sovereign-Debt-Crisis.html As you can see Ireland and Spain get lots of Red boxes, and are both in much worse condition… Read more »
Question: What is the reason behind the European commission banning banks to pay back cash, which allegedly prohibited BOI to pay back the 250 millions? They said: the European Commission has placed a “coupon-stopper” on the banks while it considers their restructuring plans. Under Bank of Ireland’s internal regulations, this automatically triggers payment in shares. So, the european union makes a decision on irish banks within weeks, said Lenihan this morning. But I ask, when the taxpayer injected 3.5 billion into AIB and BOI, the deal the public was told was different or do I see that wrong? To me,… Read more »
Almost all of the new private secor jobs were dependant on increased population and rising employment/incomes.With these 2 positives turning negative shiops, restaurants and other domestic service providers will continue to shed labour @ a rate of 100k per annum.Employment in construction is heading for the same level as 1950 by year end!.British supermarkets are cheaper than Irish wholesalers!!.
I agree with a lot of the comments made above about the calamity that we call a government. I saw something in the papers yesterday that caused me even further worry. While it is not directly related to much of what has been discussed above about our exit from the Euro, it does relate to the performance of the government and the future for our economy. I see that 48% of maths teachers in secondary school are not qualified to teach maths. How did we get to this point? How much of this stupidity exists in other areas of the… Read more »
ODE TO PAT NEARY
The day is cold, and dark, and dreary;
It rains, the wind is never weary;
Be still, sad heart! and cease repining;
Behind the clouds the sun is shining;
Thy fate’s the common fate of all,
Into each life some rain must fall,
Some days must be dark and dreary,
Even in D4 and cold Dun Laoghaire.
(With apologies to H W Longfellow)
I’m confused, the government are concentrating on getting Ireland back on track – This is the first thing thats required right!! All I hear is negative comments, should we not be supportive, should we not be positive about our future economic outcome. What are the altenatives if we think Cowen is leading us down a manhole. I would prefer to see a plan to recovery rather than reading all the negative comments.
Hi David, The thing about changing currencies is that its all about timing. As a country that has both government, business and consumers in major debt amounts in euro, its senseless now to leave that currency and work off a newly created nua punt. Leaving the euro would not allow us to default, wipe out our debts to manageable levels and carry on as normal economies should. There is no magic bullet to pay for the cost of the ‘excesses’ and mismanagement of the past. The only ‘magic’ bullet is pain, lots of it for lots of people. You mention… Read more »
Posters.
Banks now paying taxpayers in share s as opposed to cash as promised in lieu of gov buy out last year.
Nationalization by stealth.
I see lots of ideas floating around here, but — call me cynical — I’m not really seeing any viable solutions. Leaving the Euro? … all liquid assets will flee the currently instantly at the first mention of it. There will be serious inflation. People think the cost of living is high now? Wait until the Punt Nua, coupled with the pressure to keep wages down, which after all is the whole point of the exercise in increased competitiveness. All we will see is the actual busted nature of our economy and the degree to which we have been living… Read more »
ps200306,
Interesting points you are making. No matter what it boils down to a new thinking, delete the current GOV, insiders, etc. Reformat the system, reboot and start from scratch with a new operating system.
As much as Day follows Night so should normal economic trade follow a recession.Economics will not solve anything neither will logic so just stop trying to bite your tail . To understand the solution you must understand that banking is not about money stupid. Banking is about TIME . What we all need is TIME . So what is Time .What causes the full moon every month , what causes that day follows night , what causes winter and summer etc etc Where does this lead us to then! We as a people decided one day a long time ago… Read more »
@coldblow,
If you are correct and ordinary tax payers hard currency savings can’t be moved to the resort of least risk then is it Gold (or silver). Or maybe even Chinese government stocks. One things for sure, this crew here aren’t going to invent some clever term like Quantiative Easing to snaffle my few bob. If Davids Euro viewpoint gains currency, my currency is off and me with it.
Enough would be enough in that scenario.
We should earnestly try to re-win ground in the whiskey market. Establish a brand for each county, preferably custom stills, not centralised ones. It would clearly be of huge export potential (let’s subsidise it to the Chinese and Indians and have USA foot the subsidy; after all, they used the same trick on the Native Americans). It would also be a synergistic move to help draw cash here .i.e. tourism. http://www.businessandleadership.com/news/article/18419/leadership/diamonds-are-forever Teeling owns Cooley. My ancestors sold Brett & Codd to Locke’s, back in the day, which of course met its demise in1957, but is now back as a brand.… Read more »
Here’s an interesting article from yesterday’s Observer. http://www.guardian.co.uk/commentisfree/2010/feb/21/will-hutton-economics-recession I’m not trying to provoke Deco, by the way! In fact, I’m just making suggestions and this rambling post reflects my confused thinking. And of course there is the standard health warning that while progressive solutions may seem reasonable in ‘real’ democracies they are even more fraught with risk in a crony state like Ireland (was it Tim who said something similar earlier?). But then you have to ask yourself: what’s the alternative? For me a lot of it comes down to who I trust. I don’t trust most of the economics… Read more »
Imagine Agenda-style online interviews between David McWilliams and John Teeling, between David and Michael O’Leary, etc etc. I’d pay a micro-payment for that. Others?
Seems a move out of the Euro is just another element of uncertainty introduced while all else in and out of Ireland is uncertain. Will the Euro survive the next 18-24 mths? 50/50 Will the world economy recover in 2010/11? Financially maybe. Socially No. It seems pretty bad. Emigration increasing? To where? for who? un trained builders etc. really? Structural Unemployed – ye skilled structural engineers, ye auctioneers etc… What about them? I know there is a lot of negative comment and justly so. But alternatives expressed in traditional terms of leaving the country or expecting a world recovery etc… Read more »
“I truly wish this wasn’t the case for us. I wish we could avoid having to make the hard decisions, but we can’t.” Hi David, Your analysis is spot on but I sense hopelessness in the comments and it seems that fear rules the day. Let’s face it folks, the current path is not working. If you fear leaving the Euro you are missing the point. The alternative is going to be worse. The analogy to the Gold standard is a correct one. The end result will be the same. The more we fight this the harder its going to… Read more »
Eight Financial Fault Lines Appear In The Euro Experiment!
http://www.marketoracle.co.uk/Article17332.html
Closer Political Union is a more likley outcome of this current Euro crisis
Posters.
Dennis the menace gordon brown on the back foot on his ‘bullying’.
His PR stunt on ITV last week now nothing but a jailor stunt to elicit sympathy from the very chislers the system brown runs has imprisoned.
Posters.
Kangaroo court in session above.