says Paul De Grauwe in his yesterday's post on Vox - a worthy reading.
What this means is that, as predicted in my earlier posts, Ireland is now a prime candidate for an ECB-led rescue. De facto, De Grauwe's proposition implies Irish Government issuing (near-)worthless bonds and placing these with ECB in return for loans - a scenario that is indistinguisheable from an actual lender-of-last-resort rescue or equivalent to IMF lending money to Ukraine, Latvia, Hungary and Iceland.
De Grauwe offers a rather conventional - but not necessarilly wrong - view of the bond markets as being gripped by a speculative panic:
"My hypothesis is that the widening bond spreads within the eurozone are the result of panic in the financial markets. The panic that followed the banking crises has led investors into a stampede away from private debt into assets that are deemed safe. These are mainly government bonds of a few countries. The US, Germany, and possibly France are a few of these countries that, for some strange reason, have been singled out as supplying safety. Other countries do not profit from the same 'panic flight to safety'."
This statement prompted, yesterday, a rushed welcoming from a member of the officialdom of Irish ecnomics (see here). And yet, had Irish econocrats read through De Grauwe's article in full, they would have arrived at the following statement:
"Only Greece and Ireland saw their bond rates increase significantly over the last year, suggesting that the increased spreads of these countries are not only due to panic."
Needless to say - I agree with De Grauwe. Irish (and PIIGS in general) spreads are fundamentally linked not to those of the other Eurozone states but to the lack of national competitiveness (see De Grauwe's chart on unit labour costs reproduced below), economic diversification, cumulative wealth of society, infrastructural and human capital and indeed many other economic fundamentals which determine the resilience of economy in a downturn. In short - not a panic, but a low productivity of the PIIGS economies drives the crisis.
Relative unit labour costs in Eurozone
Source: http://www.voxeu.org/index.php?q=node/3009In short, our econocrats, so keen on pumping public sector investment into building up Ireland's capital base, infrastructure, education etc somehow managed to convince themselves that our deficit in these areas, alongside our vast and widening Exchequer shortfall, uncontrollable public spending growth, massive banks guarantees and recapitalization commitments by the state and macroeconomic management that requires raising taxes during a severe recession, all matter little to the bonds markets. Instead, the panic - that deus ex machina of economics - is the answer.
No need to panic then...
That graph of the relative labour costs is a red herring. It is normalised (they all start at the same point - 100%) and so states only the obvious; that countries which experienced strong growth saw increased labour costs. What would be of real value is a true side by side comparison of labour costs. Ireland still has a low unit labour cost, yes it has risen 25% but because we started from a low base we still remain cheaper than France and Germany.
ReplyDeleteThat is a good point, often raised about such comparisons. However, couple counter-arguments apply:
ReplyDelete1) I pointed on numerous occasions in my Business & Finance articles predating this blog - I will post some of the relevant results once I am back in Dublin next week - that Irish labour productivity, in absolutely terms - in domestic and public sectors is well below that in the majority of EU15 states;
2) the chart above is nonetheless telling in so far as it plots deterioration of our competitiveness since 1998.
To your comment above, the second point is crucial. By 1998 Ireland has traveled far up the productivity growth curve. The Celtic Tiger effect was some 3-4 years in the making already, so much of growth has already been factored in:
Between 1988 and 1997 Irish GDP per capita (PPP terms) relative to that of Germany grew by 39%. From 1998 through 2007 it grew by 30%, so at least half of the Celtic Tiger adjustment took place prior to De Grauwe's normalization.
This implies that comparison for Ireland stands as De Grauwe uses it, although with a caveat that the figure is somewhat imperfect...
I do encourage all reading this blog to play with the numbers: http://www.indexmundi.com/ireland/gdp_per_capita_(ppp).html is good source of basics.
I promise to return to this once I am back from the snow-covered Alps of Italia...
First rate, Dr. G. Especially the fact that our lack of productive depth - to coin a phrase - is what's driving the perception of our situation. Last night on RTE's Q&A Journalist Sarah Carey said that the Government needs 'brilliant' economists like Alan Ahearne of Galway University to advise it. Alan Ahearn's only memorable contribution to the same debate was that taxes would possibly 'have to rise' to over 50%. Yes he really is that brilliant. If he were a surgeon his solution to blood loss in a patient would be to draw more blood it out of his leg and pour it down his throat until it chocked him. Any 'solution' to Ireland's crisis that includes taxing productive actiity because you haven't got the guts to stop lavishly funding unproductivity is no solution.
ReplyDelete