This can’t go on. The figures from our economy released in the past few days reveal that the medicine is killing the patient and killing it quickly. From July to September, we saw the biggest fall in the number of people employed in two years.
Some 46,000 fewer people we employed in this country compared with the same figure last year and a further 30,000 left the labour force. These figures are particularly worrying because they show significant numbers of people simply giving up looking for work, because they can’t see the point. When people give up hope, we enter a new phase of the crisis.
Tax revenue is obviously falling behind target and will continue to do so because if the number of people working drops, income tax and spending receipts drop. This means more expenditure cuts to hit budget targets.
Last Friday we saw that GDP fell in the third quarter by nearly 2 per cent and consumer spending for the year was down almost 4 per cent. These are called ‘lagging indicators’. They tell us what has already happened. There are other indicators, ‘leading indicators’, which tell us what is happening now and what is likely to happen. One of the best of these is monetary data. October saw the largest monthly falls in both money supply and domestic credit since the recession started three years ago. When there is less and less money around, it is impossible to hit budget targets because you are trying to extract more out of less. Put simply, things in this economy are getting worse, much worse.
Austerity is doing what it says on the tin: making the economy contract. The deal signed up to with the eurozone last weekend recommends more of this nonsense. But on the bright side, the country is now beginning to look like many others in the last months of a crisis, when the population realises that the game is up.
We all know that this can’t go on. Indeed, the great American economist, Herbert Stein, put it succinctly when he concluded that “when things can’t go on forever, they stop”. And the interesting thing about economic history is that when things stop, the rebound can be very quick and very robust, and the new economy that replaces the old one can look like an entirely different beast from anything that went before.
We have ample evidence from around the world that once a self-defeating policy is abandoned, like our euro commitment, a new dawn normally emerges. We saw this in the Scandinavian countries of the early 1990s that abandoned their currency pegs and allowed their currencies to devalue hugely.
Similarly, if we examine the experience of the Asian tigers in 1997, the British economy after the 1992 devaluation, Brazil after the 1998 devaluation or indeed Ireland after the 1993 devaluation. In all cases an old policy – which was practically an article of faith
– was abandoned and, rather than the chaos suggested by the mainstream if the policy were abandoned, the opposite occurred. In all cases the economies grew rapidly.
The reason for this is that economies grow because of the human capital of the societies. This has nothing to do with the exchange rate or the currency. A currency is only the price that a country trades at – an overvalued currency makes the country seize up, an undervalued makes it grow. If you deviate from that ‘golden rule’, you will find that the currency arrangement has feet of clay.
If a country is weak, it should have a weak currency because this allows it to compete. The currency regime can only work if it reflects what is happening in the economy. If a weak economy like Ireland has a strong currency like the euro, the economy gets weaker. Savers are rewarded, but risk-takers punished. Eventually the economy shrinks and
deflation sets in.
Then the argument becomes a battle between those whose living standards are protected and artificially boosted by the overvalued currency – savers, those on government salaries and the already well-off – against those whose prospects are stifled by the strong currency and deflation – borrowers, the young who have no savings, entrepreneurs and exporters.
But the real value in an economy is not whatever currency arrangement you are in, but what the people are doing and whether the people are given a chance to flourish economically.
Companies are created when good ideas are executed by good people who dream of something different. Now, with technology so cheap, it has never been easier to dream and conceive of ideas, and the difference is in the execution.
However, if you allow your people to dream and stop worrying, they cando amazing things. If you make your country competitive overnight, rather than by pummelling the population with years of grinding wage and price falls, the economy can bounce. We see these rebounds all over the world. One economy more than any other exemplifies the idea that countries can turn themselves around in a crisis. It is another small export-orientated country with a huge diaspora. It also has considerable direct foreign investment from US multinationals and a well-educated, small, mobile population. That country is Israel. I am writing today from a small cafe in Jerusalem on the Shabbat. This is a secular little place in an increasingly religious city. It, like the Israeli economy, is buzzing. The economy has transformed itself in the past ten years based on enormous entrepreneurial effort to build
small export companies.
Today there are more Israeli companies listed on the high-tech stock exchange Nasdaq than all companies from the entire continent of Europe. It has the highest density of start-up companies in the world. Venture capital investments – the lifeblood of start-up companies – are 30 times greater than the entire continent of Europe. To put this into perspective, more venture capital money flowed into Israel – a country of seven million people – last year than flowed into Germany and France combined.
Israel spends nearly four times as much as Ireland on civilian (not military) R&D. Today, this tiny country, with all its problems, accounts for 31 per cent of total world venture capital. Money flows to where opportunity is. That is the rule. When I hear people saying multinationals would pull out of Ireland if we changed our currency because they would be uncertain about the future, I ask myself how can you explain the fact that every multinational is here in Israel – a country that has changed its currency, fought wars and
where everything is uncertain?
There is no reason why Ireland could not replicate and even surpass this performance. We have the multinationals, we have the trading links, we have the workforce, the rest of Europe is lagging miles behind in this field and, more than anything else, we have the crisis. The crisis is an opportunity to rethink the country, to re-imagine it with a competitive exchange rate and a business environment that rewards entrepreneurship. Why can’t we copy Israel in high-tech? There is no reason at all.
Looking at the economic numbers in Ireland, it is clear that this can’t go on. We are heading to a depression, our people are leaving and many that are staying have given up hope. Something has to give. It is time for all of us to ignore the scaremongering and see that there is life after the crisis. If Israel with all its problems can turn itself around, Ireland can too.
Thanks David, Without saying it, I assume the implicit point here is that their success has been in some part due to control of their own currency… The question for Ireland is when will the fudge from most recent Euro crisis/collapse talks hit the markets? Its slowly being realised that the idea of a treaty within a treaty will take months and months to tackle which perpetuates the slow decline. Assuming some EU country/EU bank downgrade will trigger a hurry sooner rather than later, a split between core and peripheral Euro seems a realistic aftermath. Ireland may be better off… Read more »
Throw The Baby from the Bath
Our Large Foreign High Tech Industries cannot be depended upon to save our very fragile economy any more and signs are that in the recent two months the trend of imports have reduced and this will reflect itself in these companies exports next year .
A government lacking in imagination put into power by a people lacking in courage. Our current lot are cut from the same cloth as the last lot. Listening to Eamon Gilmore on Newstalk this morning was an like an all out assault on honesty, transparency and logic. Depressing.
Comical Ally If you ever watch the comedians take on Daniel O’ Donnell they usually have to meditate even go to sleep to secure the quiet laid back demeanour to project his unique persona . Somehow in Irish Politics it requires the same effort to enable the ruling parties convince the public that they are in control .And not in control of nothing as the facts really are because that would amount to political failure.Thus more economic malaise is better for Irish Politics cause it keeps the some of the people fooled some of the time and that seems good… Read more »
Military Subsidies The USA, and European states do the following too, but AFAIK Eire is missing this. NATO non-membership also precludes a lot of R&D. Switzerland is a case of its own. The entire EADS-Boeing fight over subsidies is a obviously a farce. —– http://www.vccafe.com/uncategorized/israel-europe-compete-for-vc/ …The Israeli government has indirectly subsidized the tech sector by pouring tens of billions of dollars into defense R&D, and then allowing entrepreneurs to adapt for commercial use–free of charge–intellectual property developed by the military, says Yoram Oron, general partner at Vertex Venture Capital and the current president of the Israeli Venture Capital Association (IVCA).… Read more »
I take it you’ve all read Bill Mitchell’s analysis of Ireland’s current state today:
“How’s poor old Ireland, and how does she stand?”
http://bilbo.economicoutlook.net/blog/?p=17418
Yesterday’s Times said that the “singer” Dickie Rock met Seanie playing golf @ a €130 per round golf course in Spain last week ! In the late eighties 1,000 per wek were emigrating to London, expect a similar figure this yr , Aus and Canada will take the slack.
David’s currency devaluation strategy is in fact taking place. The Euro/US$ momentum is heading toward 1.2 perhaps even parity in the coming weeks. This dynamic alone will give Ireland and the rest of the EZ the “internal devaluation” it needs to support competitiveness but also, and perhaps more importantly from the money markets persepctive, provide the non-EZ investors (US, China in particular) the motivation they need to support any solvency measures needed (aka reprofiling sovereign debt maturity profiles). I suggest David just waits a few weeks and he will get all he is wishing for. I like to think I… Read more »
Another superb article.
There is one thing that may be arguable. David says “Why can’t we copy Israel in high-tech? There is no reason at all.” Actually, there is a reason; Israel has superb cultural and intellectual resources. For instance, we struggle to supply industry with sufficient maths and science qualifications. Why is that?
As you articulate, it is becoming increasingly difficult to argue against devaluation. The issue is the impact on the Irish retail banking as well as the IFSC shadow banking system. Will the ECB cease to provide liquidity? What about ELA? Will it be Argentina overnight? What needs to be in place to preclude this? Or do we just go ‘cold turkey’ and hope for the best….
This government has it’s head so far up it’s back side that they are in total darkness I have said this before ,if this bunch of misfits are left in charge THEY WILL DESTROY WHAT’S LEFT OF THIS COUNTRY Liars they told lies to get into power and now they are still telling the same pork pies I think GDP is down more than 4 percent I spent 400 euros last Xmas on presents for family . This year I spent 200 anybody I talk to is spending a lot less this year. David is the 4 percent GDP based… Read more »
It has not Stopped yet. Here we go again lads! ECB TO PUMP UNLIMITED BAILOUT CASH INTO EUROPEAN BANKS This week, the European Central Bank will be issuing an unlimited supply of three-year bailout cash to the hopelessly bankrupt big European banks. Reuters reported on Friday that “Europe’s intensifying debt crisis has forced the ECB to extend and expand support measures for banks in the euro area which have found it harder to borrow in the interbank market due to their large sovereign debt exposures. A rush by them to borrow the new money could underscore the scale of the… Read more »
Happy Christmas everyone. Let this be the season of Peace and Goodwill to all men.
There are times when one is faced with a choice, to continue following a failed policy, because those that got us here are afraid to admit their mistakes, or we can do the right thing. The World Bank would allow us to burn the bond holders, The world bank would not charge us 8.2% on our borrowings, which our friends in Europe do. We must negotiate with he World bank so as to get out of the Euro, it is finished as a currency, and a unifying force for Europe. As David says we can do it differently to what… Read more »
David is trying to see if we can emulate Israel. The fact is that we have a massive proportion of the state infrastructure on the the job. Plus EU grants. Plus Local government busybodies. Plus an expensive third level sector. And now we even have the Dail telling the banks to lend money to such new enterprises. And the results in terms of numbers employed, are abysmal, compared to cost expended. The IDA is still the principal employment driver. The lifestyle factor has taken over. For most young Irish people the ambition for risk is met by taking a year… Read more »
Now I might be clean stone mad but what if, after leaving the Euro, the Punt Nua actually appreciated against the Euro? Given our natural assets, the similarity to Israel with FDI, aflexible workforce post Croke Park, our assistance with Shannon airport, the Chinese setting up in Athlone etc etc, whats the liklihood of Eire Inc being viewed as a safe foothold onto the continent and thus highly investable. Add in commercially driven business development units chaired and driven by our host, Gerry Kennelly or Prof Gurdgiev (real businesspeople)then what price the Euro? Rather than being cast into devaluation limbo,… Read more »
Unemployment will rise in January.
A lot of small businesses in the retail sector are now going through their last Christmas. They are looking at one more local authority rates bill, and are stuck for cash to such an extent that they are going to close up and not going to stay in business in the New Year.
They simply have not pulled in enough cash in the last three weeks, to stay in business for 2012.
Prediction for Q1, 2012 – unemployment to rise.
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What David is really saying is that we leave the euro ! But he isnt brave enough to say it . For 400,000 people on tracker mortgages this would be a disaster . He wants the pain to stop and wants out. Merkel says it will take 10 years and the current government will continue to impose austerity until out borrowing is .5% of GDP, thats our future . No matter what way you look at it we have to close the gap between income and expenditure. Austerity will continue I promise you that. There is no way out lets… Read more »
Of course there’s another way, but the dickheads who’re supposed to be running the country won’t listen!! Kenny and Gilmore prefer getting ‘pats on the head’ for being the ‘good boys’ of Europe then rolling their sleeves up and they telling Merkel and Sarkozy and the rest of the clowns in Europe to FOXTROT OSCAR!!
I like to keep things simple. Sometimes the less you bury your head in the books, and the more you open your eyes and observe what is right in front of you in your locality, you’ll see and learn a lot more. For example. I was living in North Kildare in the late eighties and early nineties. In 1988, I remember watching Wim Kieft head the ball past Packie Bonnar through the window of a little TV shop in Kilburn as all the pubs were closed during the match ; but all I had to do was walk from the… Read more »
I usually follow your economics and find your articles informative. But it is shameful that you have opted to use Israel as an example of a successful economy while ignoring its human rights abuses and the fact that its economy could not survive were it not for the $3 billion it receives in US aid annually, the stolen land it sits on and the usurped resources of the native population.
It is false to hold Israel up as an example for us to follow. Their tech is driven primarily by the military. Your stat about them spending 4 times more than ireland on non-military simply disguises that fact. The question is not how much in comparison with ireland but how much of their tech in total is driven by military spend both at home and abroad. I have no problem with military spend, it is just that to break into that market takes up to 30 years of application, technologically, politically and diplomatically, building trust and security systems that can… Read more »
Damage Limitations I have no doubt that devaluation will happen next year no later .Germany will not forgive the piggis and France is too big to allow to fail and Merkel will do a deal with Sarkozy. UK already will not cooperate and DSK will arrive in China soon to fake a chinese sting to be seen to give an antibody to the failing Euro .All in Vain. Devaluation will cause greater pain than we realise and will last three years that will seem a lifetime and none of us will be prepared for it . And we thought we… Read more »
http://www.webofdebt.com/articles/bankrupt-germany.php
Well, things must be serious, when even Pravda are open about the EU begging for help.
http://www.rte.ie/news/2011/1219/eurozone.html
Interesting article. However, overly optimistic regarding Ireland’s trading potential. Competition is tough and there are many ‘hi-tech countries’ in this fast-moving industry. There are many drawbacks when it comes to doing business with Ireland. An example. One of the subsidiary companies of the group I work for in Paris recently tried to set up a joint research project with Teagasc in Cork. The whole project fell through for 2 reasons. Impossible to do a return trip to Cork from Paris in the same day. Only mid-afternoon flights. So a 2-3 hour meeting in Cork actually takes about 2 and 1/2… Read more »
Skype is not always suitable for highly confidential science-based research projects. When you pay a lot of money for research, you need to go sometimes to check things out.
Paddy was stuck in traffic outside of the Dail, nothing was moving.
Suddenly a man tapped on the window and said, Terrorists have kidnapped the new Government and are holding them for ransom, if they dont get money they are going to douse them with petrol and set it alight so Im collecting donations.
How much are you getting on average? Paddy asked.
About a litre and a half!
I personally would be very reluctant to click on that link. I have had enough trouble with malware/viruses.
Would it be possible to post a sanitized version?
a) there isn’t a history of innovation or risk taking in Ireland. It is an insider culture which you have been at pains to point out and look at what that has ‘achieved’. There will be no cutting of the Gordian knot.
b) banks are primarily recapitalising, Christ himself wouldn’t get a startup loan.
c) billions of dollars of subsidies and other items from the US help keep the Israelis afloat.
d) saw a documentary where an Israeli owned company was operating out of the West Bank, clearly availing of cheap labour.
The question raised is really “is it possible to take the venture funded growth model from Israel and build something vaguely similar in Ireland”. I don’t suppose that David was suggesting that the Irish army imitate Israeli army, or that they start to build settlements in Wales or somewhere, or any of the rest of it. The point that was being made was that given the funding and will, it is possible for a small country to do very well in the context of a global hi-tech economy. I don’t think that Israel is a good model for Ireland, simply… Read more »
This government and its departments will not lead innovation. They are too old and settled without the personal hunger to do so. I was at a meeting with the Dept of Enterprise recentlty. There were four of them at the meeting, all senior people and all aged over 55. No offence to people of that age on the blog. But Enterprise of all departments should be staffed and managed by young energetic people in their thirties so I rule myself out aswell. Our leading politicians and civil servants are too old and too stale having ground their way slowly to… Read more »
By the way I worked for a while in a semi state. There was a constant work to rule on in some depts and it cost about 25 million to voluntary service about two hundred and fifty people with pension buy out etc. Now extrapolate that accross the civil service and ask why the government are not biting that bullet. But unless they bring radical change to their departments nothing will happen. As an American change consultant once told me. It is easier change people than get people to change
Why not look at Switzerland? Neutral, but the highest military spending-per-head in the world. Highly developed industries, Uni’s, Agriculture very heavily subsidized and a huge bankster sector (United Banksters of Switzerland). Most of the land is vertical, and without agricultural aid, would empty of all people, effectively destroying the country. The EU would never allow this and would smash the country. For instance 1 litre milk in Geneva costs over 11 times to produce. For EU bureaucrats or worse, technocrats, this would drive them into a hissy-fit rage. Unfortunately there also the suicidal nuclear-exit hysteria over the border infected the… Read more »
“Under the commission’s proposed scheme a charge of €188 would be paid on houses valued at up to €150,000; €563 on houses between €150,000 and €300,000; €938 on houses up to €450,000; €1,313 on houses valued at up to €600,000; €1,699 on houses up to €750,000; €2,188 on houses valued at up to €1 million; €3,125 on houses up to €1.5 million and 0.25 per cent of the valuation on houses over that” http://www.irishtimes.com/newspaper/breaking/2011/1221/breaking6.html This property tax looks like the final nail in the coffin of the Irish property market. This would lead to a bigger crash, more losses for… Read more »
ECB only had to lend 489 Billion euro to Banks who requested loans….
We are finally turning the corner !!
Exports are record breaking…
Now,..what was it that I was worried about..? I feel so silly…….