The other week, when in Henley in England, I spoke to an English couple from Exeter who had recently visited Dublin. They loved the city but said that they didn’t do any shopping because the place was far too expensive. They couldn’t understand how a country suffering from 14% unemployment and emigration, while the domestic economy was on its knees could have such expensive retail prices.
They put it down to the Euro and they were mostly right. If we had a currency commensurate with our weakened economy, that currency would have weakened dramatically from 2008-2013 to reflect the collapse in the domestic economy. This devaluation would have helped Ireland to become more competitive again quickly. Wages and prices would have fallen dramatically making Ireland a fantastic place to invest. But that didn’t happen.
The English tourists had a good time, but didn’t spend what they had intended to because the country is too expensive largely as a result of trading in a currency, which is far stronger than the weak Irish economy can sustain.
If the tourists had been Japanese and found Ireland expensive that wouldn’t be too bad, but they were English and the English are our biggest source of tourism. This is why the exchange rate with Britain matters hugely.
The currency any country trades in matters enormously because it sets the price for everything. If a country want to bring local prices down Vis a Vis foreign ones, the quickest way to do this is via your currency. Otherwise, a country will face years of girinding down wages and prices in order to achieve something, which can be attained easily via currency devaluation. This grinding down of prices and wages is exactly what peripheral Europe and Ireland are involved in now.
Given that, ridiculously, our political and policy-making elite has tied us to the Germany economy, the single most important price in Ireland is the sterling/euro exchange rate – over which we have absolutely no control.
Therefore we should pay very close attention to what happens in the UK economy not least because Ireland and Britain do €1 billion a week in trade together.
The big question this week from the UK, is whether Britain on the cusp of a new housing upswing, which will boost consumer confidence and kick on into retail spending, driving down unemployment and pushing up tax revenue?
A housing recovery may seem like an unusual question particularly as many of its banks are still extremely fragile, some are still owned by the State and when the memory of the last housing boom and bust is still fresh.
But the signs are there.
UK banks advanced over £5 billion new buy-to-let mortgages in the second quarter of the year – 21 per cent up on the previous quarter and nearly a third higher than a year ago. This was the highest level since the third quarter of 2008 and significantly this was before the policy change announced by the new Bank of England governor Mark Carney last Wednesday.
The Carney revolution at the Bank of England has been quite spectacular and last week he said that UK interest rates would stay low at 0.5% until unemployment, now at 7.8% hits 7%. This is a massive change in central banking policy because in the past ten years the Bank of England only really worried about the rate of inflation.
Now we have Carney, taking the Bernanke line and linking interest rates to unemployment. This policy of picking a target in the future and saying that interest rates are linked to the achievement of this target at some stage in the future is now know as “forward guidance”.
The Bank of England doesn’t expect unemployment to fall to 7% until the end of 2016. Interestingly the Bank said that even if the rate of unemployment fell below 7% it didn’t automatically man that interest rates would rise.
Interest rates in the UK are at the lowest in the Bank of England’s 300-year history. And because the recovery is so shallow in the UK, the Bank is happy to keep them there for a number of years. Now obviously if inflation were to increase dramatically, all bet are off. But this doesn’t look even remotely likely.
The Bank also said that it would continue to fund the British government’s borrowing by buying gilts in whatever quantity it saw fit as long as unemployment remained above 7%.
So people now know that interest rates will be low for a considerable length of time, and the banks are lending again and on top of that the UK government has put in place new tax incentives for the buy to let machine to crank up again
Regular readers of this column will know that I am no fan of housing market driven upswings in activity, however, what is interesting from an Irish perspective is what this new policy will mean for us. Lower interest rates should push down sterling, particularly against the dollar. Against the Euro, sterling mightn’t fall too much because the Euro crisis is far from over. Indeed, the likelihood of another volatile chapter in the on-going Euro saga is extremely high.
The implication is that Ireland will remain very expensive for English tourists.
From a macro-economic perspective, what is interesting in the response of the UK is that fact that their policy makers are prepared to abandon all sorts of rules and regulations and throw the kitchen sink at the economy because the rate of unemployment is 7.8%. The British top brass find unemployment above 7% absolutely unacceptable.
In stark contrast to the Irish elite is doing nothing much when the rate of unemployment is almost twice the British level. The contrast between our policy makers and those in the UK is extraordinary.
Our central bank which controls the monetary response to an Irish crisis – a crisis which was largely of its making given the terrible financial regulation of the banks and housing market in the Noughties – should be actively engaged in adopting policies aimed at reducing unemployment.
If that means changing the currency, to allow Irish costs to fall on international markets, admitting that the Euro adventure was a monumental mistake and reverting to the Irish Punt, then so be it.
If it will not entertain this – and this is not something we should consider lightly – it behooves the central bank to tell us exactly how our unemployment queues will be shortened by the present monetary policies. What exactly is the mechanism and what exactly will be the catalyst?
In the UK they are taking risks when faced with 7% unemployment, in Ireland we sit on our hands when faced with an unemployment rate of twice that! It is quite unbelievable.
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I’m aware the following is anecdotal. But it would really stick in the craw were I to come across an English couple complaining about prices in Ireland – because I have been obliged to holiday in Southern England this summer and last summer (including Devon) for family reasons and I never will again given the cost of eating out and the appalling quality of hotels that feel justified in charging £100 per night for rooms that would be 60 euro here. I even distinctly remember being charged money to go into the park in the centre of Bath, which we… Read more »
Staying with anecdotal. What I am noticing is that there are more and more young people going on holidays outside Europe and in particular Asia. Many are sick and tired of the hidden costs for a holiday in Europe in general. A two week holiday somewhere in Asia is often much cheaper than in Europe. I personally have given up holidaying in Ireland for the last 12 years. Going abroad has always been much cheaper in my opinion. Having said that I found restaurants and food in general in Ireland much better as in price, quality and variety. In the… Read more »
Ok I’ve joined the elite club….Where do I sign to collect the keys…
The war of competitive devaluations is in full progress. If only we can reduce the value of our currency we will gain a trade advantage. All major trading blocks value each others currencies against themselves. There is no measuring stick to show how all drop simultaneously against tangible assets. This is why everything gets more expensive; it is called inflation. When government massages statistics to report lower inflation than is the case we are all duped. (see http://www.shadowstats.com for example). Better the case to look for ways to increase productivity and quality and compete with the world that way. Nobody… Read more »
The € Euro project is long dead, it was doomed from the start but as with most everything else it will be artificially supported indefinitely because one quality totally missing from politicians is the ability to say – we got that one wrong.
I’m clueless but curious when it comes to economics, but just some thoughts on your article: if the Central Bank is not going to consider leaving the Euro – an action which would have massive implications above and beyond the positive factors you rather selectively highlight – what other steps are available to them to “take risks” to tackle unemployment? You detail some of the actions the UK have taken but then immediately suggest you disagree with their policies (“Regular readers of this column will know that I am no fan of housing market driven upswings in activity”). It’d be… Read more »
When an English couple cannot spend money, it is indeed an indictment of the cost base which is driven up by state quangos, and insidious extortion of business. Perhaps the English couple brought their own food to avoid ripoff joints like Dublin airport, or Dublin city centre. However, what happens when a UK multinational has to send a van full of booze to avoid buying it here. As a present for the gardai, in Belmullet, involved in the Rossport saga. This was reported in the UK observer. http://www.theguardian.com/world/2013/aug/10/shell-pipeline-protests-county-mayo No coverage from Pravda/RTE. Zero. Not a mention. And they are part… Read more »
When “presents” for the police are purchased outside the state, you know you have a cost problem inside the state….
“– it behooves the central bank to tell us exactly how our unemployment queues will be shortened by the present monetary policies. What exactly is the mechanism and what exactly will be the catalyst?”
First of all, the Central Bank here doesn’t have a clue what they are doing.
Secondly, the couldn’t care less about the unemployment situation – as far as they are concerned it’s not their problem.
[…] do touted by most austerity monkeys here) Mac Wiliams has been proposing it for a long time now. Sitting on our hands or facing facts | David McWilliams we need to strongly consider doing the right thing here and taking one in the chest for the […]
There would likely be many disadvantages if Ireland was to leave the euro; My tracker mortgage is linked to the ECB base rate. What would happen if Ireland was to leave the euro?. What about the billions of euro of debt?.
Hi,
Your piece is more of a political rant than anything else. The central bank will do SFA. They answer to the govt not the people. We have to do it for ourselves.
“The other week, when in Henley in England…” I wish McWilliams would take his anglophile ass to Henley permanently! And let us mere Irish sort out our problems, in or out of the Euro but definitely not Sterling, without his constant lecturing us about how wonderful the Brits are and how slow we Oirish must be not to imitate them in every way. We know how wonderful the Brits are David – for themselves. They exploited us every way they could for as long as they could and would do it all again if we let them. It makes me… Read more »
The primary cause of our cost/ competition problems is a complete dissociation of officialdom from the real economy. Taxman has no problem shutting a business down – and they are very joyful and upbeat about it as well, various quangos (sorry, I mean certification bodies in health and safety no less etc) have no problem destroying a business for any misdemeanor – we are not talking about accidentally poisoning anyone. Tax advantages are biased towards incoming investment rather than anything locally grown. Did you know for example that due to the staffing overload in the driver testing, the company that… Read more »
“In the UK they are taking risks when faced with 7% unemployment”
According to Keiser this is going to blow up in their faces.
Visiting Ireland earlier this year I found ok deal online for a good-quality hotel, but the ‘non-negotional incidentals’ such as taxis, pints and meals out to be as annoyingly expensive as they were in 2007 – no different to London. To take the family would cost a lot more than going to South Devon- which has been the family holiday destination for the last 3 years.So it’s unlikely to happen. Unless they have Irish ‘ancestor’ issues, I can’t see why most English people would stump up the premium to visit Ireland when the same kind of Celtic-kitsch fiddles’n’whiskey malarkey is… Read more »
We don’t even have to change the currency. We have to change our mentality, and cut the cloth according to our own measure. . We still have in the Public Sector, and in the Professional classes, people being overpaid. And with more holidays, benefits, lump sums, than their counterparts in most of Europe and Germany; the steam engine of Europe, and one of the leaders in the World Export Market, and in the technology field. In the meantime here we talk about leading the World with a smart economy, but are unable to produce even an indigenous bicycle. So no… Read more »
David, nicely provocative article which it amuses me to respond to. I note you applauding diaspora-Canuck Carney and his ‘Forward Guidnace Wonkster Initiatives’ …I’ve taken a sedative so let’s begin debunking his egregious Boomer Lifeboat QE / Student Loans / “Help To Buy” chicanery by antrhopologically observing this dimwit Central Bankster ‘in the field’: “The new Bank of England governor topped off a week of managing expectations about monetary policy with a trip to the Wilderness music festival in Oxfordshire…” http://www.bbc.co.uk/news/blogs-magazine-monitor-23671661 Barf! Pass the sick bag. Eew! Central bankers should only ever be seen in suits and brylcreem at times… Read more »
” If a country want to bring local prices down Vis a Vis foreign ones, the quickest way to do this is via your currency” Devaluation of a currency is a two way street. Sure it makes ones domestic products easier to export. Does this employ more people. Debatable. It makes travel abroad more expensive and makes imports more expensive. It may increase the costs of production because a lot of the inputs to the economy are imported and these become more expensive. Currency devaluation generally is seen to have more negatives than positives. It may increase tourism where all… Read more »
We lost our independence when we sucked up to the Euro, an island nation trying to be what we can’t be .
It’s a fallacy that the republic of Ireland is the 15th richest country on the planet.
Did I see an add for teaching economics across borders (CNN might have some issues with that)would that included an punt nua?
[…] full article at source:http://www.davidmcwilliams.ie/2013/08/12/sitting-on-our-hands-or-facing-facts […]
The UK experiment in inflating the property bubble even further is based on the direct intervention in the market by the government – rather than the buy-to-let people, who are merely responding to that. The UK government will take on all the risk of a personal residential mortgage – leaving the mortgagee and mortgager with no risk at all.
As far as I know, this is a global first, and it now seems that investors are pointing to this as a sign of strength in the UK property market.
http://market-ticker.org/akcs-www?post=223536
@50 E each, 51,000 tickets for the celtic / Liverpool game sold out in 10 minutes. Springsteen shifted 150,000 tickets for a similar price in 3 days. There seems to be plenty of discretionary cash available . Unemployed Brits can’t migrate in vast numbers to OZ Canada, around 140,000 Brits emigrate each year and 100,000 return. On top of this , there is a net gain of 200,000 foreigners .The UK doesn’t have the luxury of exporting surplus labour, hence wages have to be restrained, similar to America where the min wage is a laughable $ 7.25 an hour. You… Read more »
The model for growth in a modern economy in recent times seems to stem from an idea of obtaining credit based on the value of your fixed assets. If people are in positive equity, they can borrow more. If not, they must dig into savings (which depletes deposits) or do nothing. It seems we are in negative equity everywhere we look. Low interests rates not only reduce the risk of credit, but they can pull assets into positive equity which comes from market speculation due to cheap credit. So the UK push to more property investment will likely have this… Read more »
[…] doppelt so hohen Arbeitslosenquote zu tun haben! Es ist ziemlich unglaublich." (12.08.2013) +++ http://www.davidmcwilliams.ie/2013/08/12/sitting-on-our-hands-or-facing-facts +++ Superzug löst Polens Bahn-Probleme nicht Polityka Online – Polen. Die polnische Staatsbahn PKP […]
Only Our Rivers Run Free Michael McConnell When apples still grow in November When Blossoms still bloom from each tree When leaves are still green in December It’s then that our land will be free I wander her hills and her valleys And still through my sorrow I see A land that has never known freedom And only her rivers run free I drink to the death of her manhood Those men who’d rather have died Than to live in the cold chains of bondage To bring back their rights were denied Oh where are you now when we need… Read more »
Living the life of Riley
Please have a look at:
Part 1
http://www.youtube.com/watch?v=WrUp8eAR2T0
Part2:
https://www.youtube.com/watch?v=MPbNF1q_6tg
PLEASE NOTE THAT IF YOU DON’T UNDERSTAND THE DUTCH LANGUAGE, YOU CAN CHOOSE TO ENABLE ENGLISH SUBTITLES
What comes to mind reading the above article is the following:
The definition of insanity of ‘doing the same thing over and over again and expecting different results’.
In this case – house prices – and been told by media increase in house prices is good sign for the economy.
God help us all.
“it behooves the central bank to tell us exactly how our unemployment queues will be shortened by the present monetary policies. What exactly is the mechanism and what exactly will be the catalyst?” The major assumption in all the above discussions and in our fearless leader as quoted above, is that the Central bank(s) should be involved in doing something or other. The Central banking system forced itself into a position of unelected governance. All the questions revolve around what the central bank of this or that country will do. Implicit in this is the vague thought that the banking… Read more »
Great Article David, You are stating the obvious of course, yet it riles some people. As someone living in London, I hear people at work this week say the cost of groceries in Ireland is massive compared to that in London. And a round of drinks in the pub, way off the scale, but we all know the pub trade is a rigged game in Ireland, so no surprise there. But I will say pub dinners in London are inferior to those in pubs in Ireland, so a wee pat on the back there boys and girls. Anyway, the difference… Read more »
Some musings on David’s piece and the commentary beneath: Ireland used to be widely admired across here in the UK for its “can-do” attitude and motivation to get things done. When I worked in Ireland it was really refreshing and frankly was a real drag when I moved to Scotland just how much more bureaucratic and unwieldy it was. Getting things done took so much longer…. This Irish can-do attitude and relaxed attitude to regulation was one of the contributory factors to the subsequent crash but it was also a massive influence in the very real gains of the Celtic… Read more »
27 August 2013 will be the global equity peak. Ultimately all of the leverage in the system by London and Wall Street is based on the consumer citizen. Britain’s lowest ever interest rates will have sucked the last of the able debtor population into the global dysequilibrium. The total valuation of the global asset-debt system is about one quadrillion equivalent dollars. As the last of the citizen debtors is sucked into the debtor population by the low interest rates, system saturated bad debt which represents a substantial part of that one quadrillion system will implode and the valuation of all… Read more »
Terrible News!!
Europe is out of its recession.
Total debt levels per household is at its lowest level since 2006. Still double earnings on average. Stands at 50k per adult over 18.
China will not crash
We are revving up again. Start buying more property.
Oh…and weather is still amazing.
I expect tourism numbers will totally debunk DMWs little anecdote.
Heading to (London)Derry for the fleadh ceoil.
Hi everyone,
The following video is jim rogers speaking in plain straight forward language what he is doing with his own money and how he sees world economic developments for the foreseeable future.
It’s a must watch for those of us wondering what to do with our spare few bob if lucky to have it.
http://www.youtube.com/watch?v=MrmB5_l9ojo&feature=youtube_gdata_player
Tangential to UK macroeconomics but fascinating to observe the societal & cultural clashes between UK versus Germany.. “Make Me a German” http://bbc.in/13HA6iV & reaction: http://www.bbc.co.uk/blogs/tv/posts/Make-Me-A-German
Now, where is Ireland in this spectrum; to whom are we more culturally related?
Mr/Miss Moderator.
I am a bit tired of people on the blog having a pop at people who are not participating.
Particularly the example of Mr John Mullins who dosen´t even comment but has been attacked three times by hiberian 56 ( see comments after the current article ). Some of it is bordering on defamation. Whatever about Colin.
Very unfair!
Joe.