As my native Ireland teeters on the edge of bankruptcy and bailout, sections of the British press have taken the opportunity to view Ireland’s difficulty as the Europsceptic’s opportunity.
Some of the comment has centred around the idea that British taxpayers will be asked to ‘bail out’ their feckless neighbours, as, apparently they were with Greece last year.
This article aims not to explore that argument further, as it is a debate too reliant on uncertain future events, and is framed within a Britsih nationalist context which it is not appropriate for me to explore.
Instead I want to focus on another aspect of the Eurosceptic press’ comment, typified by the Daily Mail, which takes the view that the Euro currency has led Ireland to this point of malaise, and that Britain should take Ireland’s troubles as a cue to rule out entering the single currency. Advocates of this view draw their battle lines along old fashioned parameters, with gallant Ireland, like gallant Belgium in 1914, trying to hold out against a great malignant European force.
The central economic argument made by these commentators is that by joining the Euro, Ireland forfeited control of its own interest rates and monetary policy, the bubble conditions created by the ‘Celtic Tiger’ era could not be reversed or tamed by restricting demand in the economy through interest rate rises, and neither could demand be reignited by a programme of quantatitive easing as the Tiger began to lose its claws.
Not only does this argument show a lack of understanding of the particular conditions and circumstances which created the boom in Ireland, it shows a basic lack of understanding of economics.
As a country, the Republic of Ireland attracted international investment through pursuing a policy of low corporation tax. This delivered many benefits, but it did not address Ireland’s profound infrastructure deficit, with a lack of roads, of industrail/retail units, and of housing stock combining to mean that the country’s capacity to grow in an organic way was severely restricted.
The low interested rates policy allowed for the domestic Irish economy to grow in conjunction with the growth achieved by the arrival of multinationals, allowing domestic demand to increase and domestic consumption to rise benefits indigenious Irish businesses.
Being part of the Common Market helped to deliver the access to markets which a small nation like Ireland needed; being part of the Euro delivered access to the credit which allowed the domestic market to expand.
The whole economic model was constructed on the basis of low interest rates. Any abandonment of that policy would have created a supply side bubble much earlier in the economic cycle and at a point when much less of the infrastructure gap deficit would have been addressed.
That Ireland collapsed anyway was because the government took the easy options in relation to domestic expansion, allowing a bubble to develop in the housing market. Interest rate rises, would have alleviated this bubble, but would also have stunted the much needed expansion of the rest of the domestic economy. That the housing bubble sucked in all available demand anyway is indicative of other areas of government macroeconomic policy failing to deal with it.
If the great crash of 2008 was evidence of the fallacies contained in the neo-liberal economic model, the fallacies within the classical economic solutions proposed by those such as the writer in the Daily Mail article above, were outlined by JM Keynes many decades ago.
If Ireland were to abandon the Euro now and restore its own currency, the Irish punt, would floating freely be hammered in the money markets, making the yield required on bonds more expensive and imports dearer, taking demand out of the economy on the supply, as well as the demand side, causing an even worse crisis, being part of a large currency and wider trading area means that those dangers are less than they would otherwise be.
There are many merits and demerits to Britain joining the single currency in future, but Liberals should not allow the debate to be tainted by the situation in Ireland.
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Malcolm Bruce: Cutting overseas development aid would be unconscionable
My tweets
Two-speed liberalisation: LDN #143
Home Office broke equalities law
Maghull – The 1955 opening of its County Secondary School (Ormonde Drive)
Love Dundee Local!
Covid Watch: Call to Shropshire businesses: have you applied for your lockdown grants yet?
55 Comments
‘This article aims not to explore that argument further, as it is a debate too reliant on uncertain future events, and is framed within a Britsih nationalist context which it is not appropriate for me to explore.’ I would be interested to know why this is the case and why you are happy for British nationals to be increasingly disenfranchised through our political union with the EU.
Nice try but completely wrong headed. Why assume that Ireland would not have had access to capital markets if it wasn’t in the Euro? What evidence is there for that?
Euro interest rates are set mainly accordingly to the needs of the German and French economies; why assume that those interest rates will also be right for Ireland.
Because Ireland is in the Euro is can’t devalue it’s currency. If it could imports would certainly become more expensive, which would cut Irish living standards, but they are being cut anyway. If could devalue, businesses like call centres, skilled manufacturing and financial services would all be attracted back. In the UK we would be going on cheap weekend breaks to fill some of Dublins many empty hotels : instead at Dublin airport a few months ago try were advertising cheap breaks in London. This is madness.
Of course Ireland has gained hugely from membership of the EU, but that is very different from being in the Euro.
Nothing that’s happened in Ireland has been in any way shape or form an argument against the euro – quite the opposite in fact. But if it rained on a Wednesday the Daily Telegraph would say it was proof that the euro was dead. Ignore them.
john
the british states realtionship with the EU should be for the Britsih people to decide, I have no opinion on it, I do just want to present facts about the EU, as Im not a british citizen I wouldnt and dont urge britian to do anything.
It is not approriate for me to explore british nationalism as I am not british
@ Chris
The wider world community seems to believe that it will be very difficult to hold together a currency used by such divergent nations. This includes Angela Merkel, whether it is raining or not! Her concern is not so much the Euro, but her recognition that the EU project will fall apart if it fails.
This returns us to ‘why is it important for Britain to belong to such an undemocratic body which increasingly disenfranchises the British people?’ Surely a simple explanation is possible apart from ‘I am a politician that believes in dictatorship.
John
I dont want to excplore arguments about what is in britians nationalistic interest because I am not british, and I dont advoacet britain, for nationalistic reasons, doing anything.
I want the british people to decodie their own fate, and as I am not british, I wont have a part to play in the decision
@ simon
Irish consumers may wells till have had access but not nescessarily on the same scaqle, the reasons for that are documented very well by an economist called david mcwilliams in his book, the pope’s children which outlines the reasons for Ireland’s boom.
Its not that the euro enhanced access to the markets, its that the common market did, the euro allowed for this access to be easier as volaitle excahnge rates made it cheaper
@ simon
skilled manufacturing would leave quickly as the supply side inflation caused by ireland having its own currency wouold make doing business in ireland ridiculously exoensive
@ simon
the financial services heartland in dublin is the IFSC, coimpanies there contributed 33% of all the corporation tax collecetd by the government last year.
skilled manufacturing operations leave because of the cost of labour, they go to countries that have lower labour costs, but still have access to the common market.
i.e. dell left for poland when poland entered the eu, it didnt leave for even lower wage economies which are not
Your argument is just wrong. You just state that the euro had nothing to do with the crash without providing any evidence.
You claim low interest rates had nothing to do with pushing up the bubble of credit and assets that have caused such trouble in Ireland. You give no evidence for this. Economists universally agree that low interest rates increase and encourage access to credit and heat up an economy. This is accepted by Keynesians around the world.
You basically admit this by saying that “The whole economic model was constructed on the basis of low interest rates.”
Yes and when you have an economic model that collapses in a massive asset and credit bubble then that means your economic model was wrong!
In this case assuming that low interest rates could be sustained forever regardless of economic circumstances or the risk of building up a bubble in the domestic economy.
“Any abandonment of that policy would have created a supply side bubble much earlier in the economic cycle and at a point when much less of the infrastructure gap deficit would have been addressed.”
What possible evidence do you have for this? In what economics does increasing interest rates lead to a supply side bubble? Is that why we have been increasing interest rates in this recession to increase to help combat the collapse in supply?
“If Ireland were to abandon the Euro now and restore its own currency, the Irish punt, would floating freely be hammered in the money markets, making the yield required on bonds more expensive and imports dearer, taking demand out of the economy on the supply, as well as the demand side, causing an even worse crisis, being part of a large currency and wider trading area means that those dangers are less than they would otherwise be.”
Yes a refloated Irish Punt would be hammered, but that is because the Irish economy is such a basket case now after ten years of the Euro.
At least an Irish punt would allow Ireland to increase its exports and sell its way back to prosperity, rather than giving it no choice but to rely on painful austerity and massive loans from other countries.
The Euro was a massive error, for Ireland, for Greece, and for other countries on the EU periphery. If we had joined it, it would have been a massive error for us. The Lib Dems were totally wrong about the Euro. It was a political project designed without consideration of the economic issues, always a recipe for disaster.
Iceland was in a very similar situation to Ireland at the start of this crisis, but its freedom outside the Euro in interest rates and exchange rates means it has been able to bounce back where Ireland is still sinking ever deeper into the morass.
@ stephen
i DID NOT SAY THAT the low interest rates policy had nothing to do wiuth the bubble, in fact I said the precise opposite, they had everything to do with the expansion of the economy, and that this was a good thing which freedom to change the rates shouldnt change.
The problem was when all of the expansion concentrated on the housing market, of course the expansion provided the money to do this, but economic policy could have prevented it by directing the extra capital created by euro access into different areas.
You dont enegage with any of the points I make regaridng the alternative and if you think Iceland has bounced back I despair.
Sorry David – I hadn’t realised that was the case.
I too believe it is for the British to decide their own fate. There can be no development for Britain within the EU until a referendum is held – and every indicator suggests the British would pull out.
A more fundamental point is that Ireland’s government, banks, corporates and households all have liabilities denominated in euros (government debt, bank borrowings, corporate loans, mortgages, etc). So if Ireland quit the single currency and devalued, everyone’s debts would grow as the new Irish currency weakened – it’s been suggested that a floating punt would initially depreciate 50% or so versus the euro, i.e. the economy-wide debt burden would double, meaning there would be widespread defaults across all sectors and the country would be pretty much crushed.
This is similar to what happened to Iceland, which, not being a member of the euro, couldn’t prevent its currency collapsing and its euro-, dollar- and sterling-denominated external debts ballooning…
Considering that Ireland is suffering a concentrated form of the problems most other developed economies have suffered in the financial crisis, with the difference that it is more concentrated and they are hobbled by the euro. It seems frankly unlikely that Ireland alone could have successfully negotiated this bubble and “economic policy could have prevented it” when it couldn’t anywhere else.
An economic model that basically involves just permanently pumping up a credit bubble further and further is a bad one, it will always fail.
Just accept it. The Euro has a considerable degree to do with Ireland’s present problems. It is not the only cause and I don’t doubt that it has helped Ireland’s economic expansion over the last ten years, but in a totally unsustainable way. A bubble will always burst, that is basic economics, Keynesian or otherwise, consistently maintaining low interest rates will cause a bubble. Not being able to manipulate interest rate policy, or having a currency that devalues, has made it harder for Ireland.
Having adopted the Euro would have made it much worse for the UK. We wouldn’t even have the specious reasoning of needing the Euro to suck in capital. We would have just enjoyed the full force of the bubble. The Euro, in its existent form, was an error, pure and simple.
@David Thorpe – but if Ireland had high inflation it’s currency would depreciate, so costs of export would stay broadly the same.
Not sure I follow your point about firms like Dell leaving because of labour costs. If they were not in the Euro the currency would depreciate and thief labour costs relative to other countries should be lower.
@chris perhaps rather than simply saying the crisis has nothing to do with the euro you could actually discuss the arguments against and why you don’t agree with them.
This article makes a good point, however, it overlooks the simple fact that single currencies work best with a single economy. Otherwise, the currency and economy are far less able to adapt to difficult times. This, incidentally, is why I oppose the UK joining the euro.
@Simon McGrath
You’ve got some arguments against?
UK to Ireland via Jay Z – “If you’re having money problems I feel bad for you son, I got 99 problems but the Euro ain’t one”
.
The Euro isn’t the cause of Ireland’s problems. Their problem is they responded to the economic crisis with a programme of sudden cuts – and no stimulus – just as George Osborne would have done.
@richard where do you think they would get the money for a stimulus from?
@Simon McGrath
By having reasonable levels of taxation. Ireland has courted the tax avoiders. They’re now experiencing capital flight. What a surprise! George Osborne would have taken us down the same course.
Osborne on Ireland before the economic crisis:
“I think that Britain can learn from how Ireland is prospering in the new global economy…”
“Ireland stands as a shining example of the art of the possible in economic policy-making.”
“We in Britain would do well to listen and learn from our Irish neighbours.”
David you say
“this argument show a lack of understanding of the particular conditions and circumstances which created the boom in Ireland, it shows a basic lack of understanding of economics.”
Evidently it you who does not understand economics. The euro can / could only work with fiscal integration. I admit that Ireland’s politicians also played their part in this debacle. However, the important economic levers were not available to them.
Ireland’s only sensible course of action is to exit the Euro and redenominate all liabilities @ 1 punt = 1 Euro and then let the Punt float – haircut achieved without destabalising other countries. Simplistic explanation.
@Richard but if they increase corporation taxc companies will simply go elsewhere and their overall take from tax would go down.
@Richard SM
“The Euro isn’t the cause of Ireland’s problems. Their problem is they responded to the economic crisis with a programme of sudden cuts”.
The reason they had to respond with cuts was because of the straightjacket the Euro has put them in. They couldn’t float the currency down. That’s what those who lent ridiculous amounts to Ireland relied upon. Bailout from the EU, Germany in particular. As a result, we are subsidizing speculators.
Makes you proud, doesn’t it?
@Simon McGrath
Exactly – that’s what happens when you court and actively facilitate tax avoiders, as Ireland has done. If you build an economy on tax avoiders, you’ll get sudden jolts when circumstances change. Good businesses, not these tax-hopping businesses, want stability in the environment in which they operate. A gently, gently approach to growth – and contraction – is far more sensible. These sprints, jolts and shocks don’t benefit the people of Ireland or other businesses in Ireland. The beneficiaries are the distant shareholders of these tax-avoiding companies. They’ve generally bought into the shares long after the company became established and want minimally taxed easy money in their dividends.
@David Evans
I’m glad you agree – the Euro wasn’t the cause. But the rest of your post is nonsense. Ireland declined to take part in the EU stimulus.
http://www.rte.ie/news/2008/1126/eurozone-business.html
David Thorpe
Your argument is economically illiterate, Without membership of the Euro, Ireland could have devalued its currency as the UK has against the Euro. That would have made all the difference. Even now it would be best for Ireland to leave the Euro and let a new Punt devalue down to somewhere near the Pound Sterling.
@ john
Countries dont have independnet monetray policies, as you say.
But they do have indepednece on areas of fiscal policy.
The point I was making was that the solution to ireland’s problem wasnt going to be achieved with monetary policy solutions i.e. the stuff you and I agree isnt available to Ireland, but would have been available on fiscal policy solutions, which the Irish government made a mess of.
@ David Evans #
Your mixing up debt and deficit,
even reverting to punt would mean they would still have to borrow in future, and that would be more difficult with their own currency, which would take a bashing adding supply side inflation to the demand side inflation which is already present, thats more than a haircut, thats a crisis.
@ Richard ]
They are experiencing capital flight, partly due to tax, and partly due to wage levels being lower elsewhere
@ Simon
The currenmcy would deprecaite, making imports dearer, which is what would cause the supply side inflation, yes the exports would get cheaper, but thats not enough, at the moment Irelands export side is booming, its the most successful bit of the economy, but its not stopping the IMF coming.
Dell left because the costs of doing bsuiness in ireland, across, wages, and operating costs were very high in the boom, and much lower in poland, they went to poland because poland was in the common market, the euro doesnt come into it either way.
@ stephen W
You make a good point, but there is oen difference.
The level of latent demand, of udnerdevelopment, meant that expansion of capital was needed and nescessary in ireland as it wasnt elsewhere in europe which were more advanced in terms of infrastructure and economic development.
Ireland had room to develop without it having to be a bubble, it was a bubble in housing, the government could have used fiscal policy to dampen that, wihtout damperning economic expansion in other areas, but they didnt.
@ TD
Good post, and the point I was making when referring to the supply side inflation which would result from ireland leaving the euro.
@ stepehn w
iot would have led to a supply side bubble as the rest of the economy was booming and people wanted to consume and without the expansion in things for them to consume you would have a problem, classic in economics of too much demand chasing too few goods,
I know the rising interest rates would have dampened demand as well as supply, but the level of latent demand, of people who were genuinely cash rich was very high in the early years and the dampening of demand would not have been enough., nor would it have allowed the infrastructure gap to be brecahed
@ stephen w
I guess what Im saying is that their was room for the real economy to expand, and low interest rates allwo this, but a failure of government fiscal policy meant that instead of a natural, organic expansion of the domestic economy throughout the economy, a housing bubble happened.
ASnd the methods to prevent the bubble without causing the rest of the economy to contract, were fisacl, not monetary policy based
and in consequence
not terribly relevant to the currency.
If you want the answer to the Irish question, ask Keynes or Vince Cable. Keynes said when private borrowing goes up, government borrowing should go down and vice versa. The Irish government should have taken advantage of the Euro by increasing taxes in those areas it did not want and cutting tax in those areas it did want. As politicians, they really liked the latter but shied at the former.
Gordon Brown, adopted Keynes and called it his ‘golden rule’ Sadly it was only Vince Cable who had the courage to point out that he had broken it. Result, no money in the bank when the bank crisis started.
As for the Euro. Are Belgium, the Netherlands or Slovenia going down the pan? Out of the Euro, the markets would pick off debtor countries one by one and make a killing.
@ david pollard
well said sir.
The irish government continued to maintain tax incentives on property way beyond equilibrium point…….and didnt use its fiscal policy powers as it should have done.
the euro and currency issues are largely monetary policy, and therefore seperate to the fiscal policy failings which led to this problem.
But if ireland wasnt part of the euro then there would be serious monetray policy probklems right now, ina ddition to the fiscal policy problems
@Stephen W
“Just accept it. The Euro has a considerable degree to do with Ireland’s present problems. ”
Ireland’s problems were cause by corrupt politicians, corrupt banks and a greedy section of the population who kept taking out higher loans to outbid each other for the same houses in the hope that the symptom of the bigger loans (rocketing house prices) would continue forever. The politicans, as in this Country, bribed the electorate with the revenues from the bubble by unsustainably increasing government spending and slashing taxes (the only difference with this Country being that Brown just increased spending). The low tax rates were a bribe and were enabled by the bubble economy. Interest rates had precious little to do with it – look at the UK – base rates remained almost constant throughout 2000-2007 yet house prices rose by ~150%.
The Euro clearly had nothing to do with the cause of Ireland’s problems (obviously, as there are Countries in the eurozone that do not have the same problems) and it can be succesfully argued that membership of the Euro has prevented the corrupt politicians from trying to prop up the mal-investment (the credit/housing bubble) that caused the problems to the same extent as in the UK. House prices have corrected substantially in Ireland, which means they have addressed their problems to a greater extent than the UK, where the MPC have intervened to prop up the pack of cards and prolong the agony.
The argument about the sovereignty of governments in relation to managing their own economies rather falls down when you consider the actual behaviour of the Irish government (and other governments). It assumes that a government will act in the best interest of the national economy. Please give me an example of such behaviour?
It’s quite clear that our current Chancellor is equally clueless as Brown, given his adoration of the Irish economy four years ago. He simply didn’t understand that Ireland was in a huge bubble (that enabled the unsustainable the tax cuts). Osborne didn’t understand the problems in the UK economy either, as neither he nor any member of his party made a single reference to our own credit/housing bubble despite the fact that it was blatantly obvious to a large proportion of the population. I’d quite happily join the Euro if it meant Osborne/MPC had less influence over policy.
“US Multinationals Overseas Profits: Ireland’s patent income tax-exemption may fund over 5% of Irish Government annual spending in 2006”:
http://www.finfacts.ie/irelandbusinessnews/publish/article_10003995.shtml
“Steve”
You speak as a true LibDem.
“Join the Euro”!
Thank goodness the LibDems will now never be in a position to do so.
Besides, membership of the Euro isn’t preventing the Irish government from implementing looney austerity measures. It is the austerity drive that is driving Ireland into the ground, not membership of the Euro.
@David Thorpe.
You have yet to say precisely what fiscal policy the Irish government should have taken to prevent the bubble, and I no know economists who have suggested this is the problem. The Monetary conditions, i.e. low interest rates, led to an inevitable bubble of credit. This merely found an outlet in the housing bubble. The underlying structural problem was the bubble of credit though, not the housing issue. Due to Euro interest rates effectively being set for the benefit of Germany and other core EU manufacturing countries. Over the last few years though the issue has been the Euro cannot devalue enough to allow Ireland to price itself back into the global market because again it is largely set by Germany and other core EU economies. I’m not saying these were Ireland’s only problems or even that leaving the Euro would now help overall. But to out and out deny these issues did not contribute to the mess Ireland is in is ludicrous.
@Steve
“Ireland’s problems were cause by corrupt politicians, corrupt banks and a greedy section of the population who kept taking out higher loans to outbid each other for the same houses in the hope that the symptom of the bigger loans (rocketing house prices) would continue forever”
The reason they could do this was that interest rates were too low making an expansion of credit too easy far past the point where it was sustainable or useful.
“Interest rates had precious little to do with it – look at the UK – base rates remained almost constant throughout 2000-2007 yet house prices rose by ~150%”
No they weren’t. They were slashed by 2% from 6->4% in early 2000’s and then left there. They should have been gradually raised throughout the latter half of the decade.
“The Euro clearly had nothing to do with the cause of Ireland’s problems (obviously, as there are Countries in the eurozone that do not have the same problems”
This is just silly. The reason the problem emerged was that the Euro was set to support core eurozone countries such as Germany, with largely manufacturing surplus, export based economies, but that this exchange and interest rate was unsuitable for Ireland and other periphery countries with trade deficit, less-manufacturing based economies. Of course this means that the problem has only emerged in some Eurozone countries but not others. It is instrumental though that similar problems have emerged in a number of countries, not just Ireland. The issue is (partially) the Euro, not just Ireland’s fiscal policies.
Stephen W
“No they weren’t. They were slashed by 2% from 6->4% in early 2000′s and then left there. They should have been gradually raised throughout the latter half of the decade.”
Were you living in this Country during the last decade?? The house price bubble was at its peak (rate of inflation) in 2002 (or am I right in assuming you think our bubble has fully deflated?!). What good would raising interest rates in the latter half of the decade do??? There is no correlation between interest rates and the house prices if you care to look at the figures. The land price bubble was enabled by reckless lending by the banks that simply did not adequately take into account the risks. Nothing to do with interest rates. The causes were deregulation, banks that were too big to fail whilst providing essential utilities that governments couldn’t allow to fail, so they knew they could get away with murder.
“This is just silly. ”
Well that settles that one then. I’m sure you’re very happy projecting your prejudices onto Ireland’s problems, but it’s not backed up by the evidence.
I forgot to mention artificial scarcity of land through speculation – a key component of land price bubbles. Ireland’s problems were simply caused by a land price bubble enhanced by unsustainable lending; nothing else.
Ireland’s problems have been caused by their failed banks, not by their underlying economic model or their austerity drive. AIB was too big not to fail, frankly, but at least their debts are cyclical, not structural. It’s going to be a bit of a bumpy ride, but people aren’t going to be starving in the streets.
Also, it doesn’t really matter if Ireland goes back to the punt or moves to a form of cowrie shell currency, when their debts are denominated in Euro’s. Good luck convincing the world that their revalued currency is on a par with the Euro.
@’ david evans
Irelands exports are improving and growing anyway its a verys trong serctor of the economy at present
so what devaluation would have achieved is happening anyway,….but without the chronic inflation which would resutl from an exit from the euro
@ dale
I know Ireland could have devalued, but that would be to benfit exports which as I have alreday said are not in need of assitence as Irelands exports ector is flying at the moment. so the benefit you highlight is happening anyway.
And devaluarttion would lead to higher borrowing costs and supply side inflation, taking domestic demand out/
at stephen W
Of courrse their was an expansion of credit, but that wasnt a problem, in order for an economy as underdeveloped as Ireland’s to expand organically their needed to be a genuine expansion.
What differentiated Ireland from britian and others is that their were two phases to Irelands boom, a real growth period which added significant wealth and value added.
This began to dissipate around 2002, and was replaced by the same credit bubble on the housing sector which was evdient everywhere else.
But if interest rates had been raised across the board to early it would have killed the genuine growth phase, as the people who now had jobs and wanted more consumer goods would be entering a market which hadnt expanded to meet their increased demand with increased supply.
This would have led to demand side inflation.
As for the fiscal policy instruments.
Well as I say it was important to maintain low interest rates in the general economy, but if, for example stamp duty on properties had been increased, especially on ‘investment properties, if their were tight controls on the amount of land which would be zoned residential, then the interest rates could have stayed low, while demand was directed away from housing.
Those solutions would have had an effect, and are nothing to do with the euro
@ thomas
well said
@ steve
thats correct.
the fact That ireland has so few large urban areas concentrated demand in certain areas, causing a bubble
@David Thorpe.
Okay, let’s take it once step at a time.
“his began to dissipate around 2002, and was replaced by the same credit bubble on the housing sector which was evdient everywhere else. But if interest rates had been raised across the board to early”
I’m not saying interest rates should have been raised earlier than 2002 to be sure, not even necessarily before 2005. The point is that within the Euro Ireland could not ever raise its interest rates at any point nor will ever be able to again. This is a significant disadvantage. Fiscal policy solutions could have managed the housing bubble, could have reduced it. But the underlying credit bubble would have just got out somewhere else. A bubble will always break out somewhere. The point is that if Ireland had its own interest rates it could have used them to manage the expansion of credit more sensibly. If it had its own exchange rate that could have absorbed some of the pain of readjusting economically, rather than having to rely on deflationary austerity.
@Steve
“Were you living in this Country during the last decade?? The house price bubble was at its peak (rate of inflation) in 2002 (or am I right in assuming you think our bubble has fully deflated?!). What good would raising interest rates in the latter half of the decade do??? There is no correlation between interest rates and the house prices if you care to look at the figures”
Yes I do live in this country. No I don’t think the bubble has fully deflated. House prices rose strongly right up until 2008, that’s what I call a bubble. Raising interest rates would have helped slow the bubble down, due to making it more expensive to get ever larger morgatges. This is not a complicated idea.
““This is just silly. ”
Well that settles that one then. I’m sure you’re very happy projecting your prejudices onto Ireland’s problems, but it’s not backed up by the evidence.”
I’m not sure what you think you are referring to. I note you totally fail to actually respond to what I said.
“Steve”
Do I detect a LibDem quasi-religious attachment to the Euro, which shall be blameless regardless of the arguments or the evidence?
@ steve w
there is no such thing as a credit bubble per se, the wider availability of credit doesnt have to be a bad thing, if the new fcapital is spread across various sectors of the economy. In irelands case for cultural and other reasons it was all pumped into residential property.
But counter cyclical economics would show that if the market is all swarming toward property, then the government can redirect the market away from property.
The point Im making re interest rates is that, ireland needed, in order to get full value for its economic growth, a model which relied on low interest rates, i.e. it would not have been in irelands macroeconomic interests to lwoer interest rates at the time you are talking about.
The reason I believe this is that,
the massive increase in employment, and in wealth, meant that there was a consequent increase in purchasing power.
But this happened quite quickly in economic terms, and the sonsequent increase in demand for consumer goods needed to be met.
The only way this could be met was for the expansion of the retail network, of the roads netwrok etc.
While the major UK and european stores did come to ireland, they needed to have the retail space developed, for this to happen Irish developers needed access to capital. and their incentive to invest would be effected by the rate of interest.
The problem arose when the irish government introduced tax incentives for the construction of hotels, and of residential propertyy.
Now every two bit town and village has a hotel it doesnt need because under section 28 the construction costs could be written off agianst tax on other projects.
Thats why I think the problem was at the fiscal policy side
@ dane
at least 40% of the lib dem membership and a couple of our minsters are definably eurosceptic. and the current party policy is aginst joining right now
@ David Thorpe.
I just don’t think that tax incentives for housing were the sole cause of Ireland’s bubble and then crash. Especially since you basically claim that massive construction was necessary, so fiscal policy couldn’t have been that far out. If construction needed to be incentivised, but not too much, you are left claiming that Ireland’s entire crisis was solely caused by a relatively precise misadjustment of fiscal policy in relation to construction, but had, and now has, NOTHING to do with Ireland’s ability to deal with its problems through its interest rate or exchange rate altering. And that it would never be useful for Ireland to be able to control its own interest rates and exchange rates or implement its own QE or anything. This seems to be straining out a gnat to swallow a camel to me.
@ stephen w
yes construction was absoluetly nescessray and is not the cause of the crisis, lots of the firsm gone bankrupt owing money to banks still generate plenty of revenue from their cvommercial property arms, or from their contruction firm working on infrastructure.
But the amount of land zoned for residnetial rather than industrail was a rpoblem.
Even today new retail outlets are opning, a chain called TK Maxx just opened one fot heir first irish stores in my rural home town creating 60 jobs, which shows that demand still exists.
making it cheaper and easier for industry to open, and harder for developers to buold ghost estates would have made a huge difference, as of course would proper regualtion of the banking sector
That was needed.
The cause of the problem is the tens of thousabds of empty residnetial unit, the fact that a friend of mine who has a realtively low grade public sector job, yet has five houses bought on buy to let mortgages, yet deosnt own a single share in a stock excahnge listed c ompany is an example of how the cycle was going one way and the government took the easy option of going with that cycle rather than trying to achieve equilibrium.
iceland wasnt in the euro and ended up in a mess
@david thorpe
“iceland wasnt in the euro and ended up in a mess”
Sound logic like that isn’t going to penetrate some on here!
It completely dumbfounds me that people don’t understand that the bubble in Irish and British residential property was simply caused by the banks lending more money to people (that went way beyond the increased ‘affordability’ created by slightly lower interest rates). The reason the banks thought they could get away with it is more complex, but there clearly isn’t a shortage of residential property in Ireland (the old chestnut that morons come out with to justify the housing bubble in the UK), so house prices could only have gone up by credit outpacing GDP growth. In the UK it was possible to borrow x5 joint salary, compared with the old rule of thumb of 10% deposit + x2.5 joint salary (plus all the fraudulent self-certified liar loans, 125% LTV loans, etc). It doesn’t take a genius to realise that UK property at its peak was overvalued by 50% and will continue falling for a good while yet to get back to sustainability.
Besides, our problems are worse than the Irish – they owe us £147bn (and our property bubble was as bad). It’s just another variation on the old saying about owing the bank £1000 and you have a problem – owe the bank £147bn and they have a problem. The British taxpayer is underwriting the Irish economy with Osborne’s below market-level loan. British taxpayers dumped on again to prevent the banks and bond-holders from taking a loss. Meanwhile, ideologists promoting their own ’cause’ blame it on whatever they can find: the Euro, or anything else that fits conveniently with their opinion.
@ steve
ireland probably did have a shortage, firstly because employment rates rose, and secobldy because irish people abroad moved back and people from other countries begant o move there.
but certain the equilibrium point was recahed and passed probably around 2007..
britain was a different case in that there wasnt a real gebuine shortage in the country, but there may have been in the greater london area because the economy was too focuse don that
Good article – and I speak as a resident of Ireland who has seen it all happen.
I will ignore the tiresome “Eurosceptics” who have made comments on in response to your post, motivated soley by their wish to bash the Euro and the EU.
Ireland’s problems were self-inflicted. The Government had a range of property tax shelters and incentives and it’s Finance Minister of the time, upon joining the Euro, actually reduced capital gains tax from 40 to 20% – in a rampant speculative market awash with investors.
The Irish government could have introduced domestic fiscal measures to negate the new lower interest rates, but it chose not to. It did the very opposite in fact, and stoked capital asset prices even higher.
Once again – well done on the article. An exit from the Eurozone would be a disaster for Ireland.
Take it from one who would live with the consequences.