Travails of the Celtic tiger

[bigbadwolf]

A perspective in NLR:

Ireland is heading towards a sovereign default, as independent analysts at home and abroad have already noted.The only way out of the current mess, for both the Irish and the European economies, is to impose a loss on the bondholders who engaged in speculative commercial activity yet expect unlimited compensation for their gambling losses from public funds. If the losses incurred by private banks were excluded from the national debt, Ireland would have a reasonable chance of stabilizing its finances over the next few years. Until this step is taken, the prospects of recovery are negligible. Had they been fortunate enough to possess a modicum of courage and insight, the current power-holders in Dublin would have beaten a path to Lisbon, Athens and Madrid, urging their fellow PIGS to form a bloc within the EU that could challenge the ruinous appeasement of bondholders. Instead, they have spent the last year assuring their citizens that ‘Ireland is not Greece’—until the point was reached when the Greek prime minister felt obliged to state that ‘Greece is not Ireland’. It is getting very late in the day for such alliances to be formed. But in their absence, the list of those hanging separately will surely extend far beyond the periphery of the Eurozone.

 

[Stuart Truax]

Thanks for posting this. The cited figures and thorough analysis make this a good read.

 

[DominiConnor]

The article seems to assume that Ireland is part of Britain, something that has not been true since the early 20th century. I was particularly taken with the idea that any part of the Irish political system is "Thatcherite". Thatcher is uniformly despised by people in the septic Isle, even though she never did anything to them, indeed barely seemed to interact with Britain's nearest neighbour.

The writer of this shallow article seems to think that Ireland can impose losses on people fool enough to fund the European Nigeria.

Ireland has a big structural deficit, getting bigger.
If it defaults, it loses the ability to borrow on the markets, except at ruinous rates.
Depending upon how you do the numbers, it might have to make cuts in government spending of around 25-30%, immediately.

If Ireland were to leave the Euro, it's debts would be still in Euro, and it's easy to expect that the new Ouugiohou would decline quite rapidly, making servicing them either extremely painful or maybe just impossible.

On top of all that is an almost uniquely Irish problem. Emigration.
Most countries have some right wing nuts who want to keep "the human wave" of coloured people out. Irish people have a long tradition of getting out, and being white and with the ability to work anywhere in Europe, Oz, Nz and the USA that's really quite easy. Irish people (as opposed to Northern Irish people), speak a form of English that is not only easily understood everywhere, but to most ears is one of the most attractive accents, so working elsewhere is easier for Irish people than any other nationality anywhere.
Their tax system favours people who have wealth over those who create it by a serious margin, which as rates rise, and economic opportunity declines many will leave, indeed we seem to be seeing the beginning of a serious outflow already.
That's going to make things worse, and one can easily see a seriously vicious circle starting to form.
Like most countries there is a pensions issue, losing a major chunk of younger people could turn a crisis into a nightmare, as tax revenues fall away and entitlements increase.

Ireland did well for a while as international corporations, often American, used it as a base for cheap labour in the EU, supported by EU subsidies. Imagine if a US state could subsidise companies to locate there, but have the Federal government not only pick up the bill, but provide extra money to the state governments to cover the effort of looking after them.

Irish people are cheap compared to Brits, Germans, French, etc, but more expensive than many East Europeans, and very much more expensive than Chinese or Indians, so now the subsidies are gone, who would choose to out their new European base in a country where personal tax rates are vicious, and the government has stopped repairing the roads or staffing the hospitals ?
Also, Ireland is on the edge of Europe, fine for a business that deals with customers by web and phone, pretty crap if you have to ship physical goods around.

The only solution is vast subsidies from Germany and France, which frankly serves them right for being crap parents.

 

[DominiConnor]

I fear I'm not being very insightful, their politicians are already talking openly of this.

 

[bigbadwolf]

I fear I'm not being very insightful, their politicians are already talking openly of this.

Same is happening in Latvia. Last year a survey in Britain revealed (if memory serves) that three-quarters of the people would prefer to move elsewhere. So it's not confined to the Emerald Isle. But it does have a history of emigration, where for decades its young have sought greener pastures elsewhere.

 

[Daniel Duffy]

" Irish people (as opposed to Northern Irish people), speak a form of English that is not only easily understood everywhere, but to most ears is one of the most attractive accents, so working elsewhere is easier for Irish people than any other nationality anywhere."

I must say I like the Ulster accent, it's very melodic, the way Liam Neeson and Van the Man speak it. It's very close to Scots as well.

 

[DominiConnor]

I didn't know about Latvia but the European racists don't count them as white, so their ability to move West is still legally constrained. Yes, I know Latvians are white, but they are part of a wave that included Romanians and Hungarians and so there are barriers to them leaving which don't apply to Irish. Racism is not a precise science. Most people here are Americans. so it might seem odd to them that people in a state in a federation aren't allowed to work in other parts because they look vaguely suntanned, but that's European politics for you. The laws even apply to our staff a couple of whom are whiter than than the average Brit.

An interesting thing about the EU compared to the USA is the lack of labour movement.
When Thatcher's henchman Tebbit suggested that people move from one part of England to another, he was parodied for the next 20 years for being brutal and callous, indeed for most people,that's the only thing they remember him for. Also his wife was critppled when American backed Irish Christian terrorists tried to kill him, Thatcher and much of the British government.

Some parts of Italy, such as Sicily are horribly poor, corrupt and with little opportunity for work beyond crime and cleaning the toilets of tourists. They are legally allowed to work and live anywhere in Europe, but don't. We see similar patterns in poor regions of all member states, including Germany where the unemployment rates vary hugely between the west and eastern side of the country

Partly that is language, but as the examples of Germany & England show, can't account for the majority of the inertia.
The US is very different, people move much more to find work or to improve their lives in other ways.
Like most Brits, I'm quite sceptical of the EU, but it does very good things to enable labour mobility, but people seem to not want it.

The Irish situation is a bit like the issues the US has had where a big city provides services that are used by the whole state, but its tax revenues only come from within its borders, meaning a nasty cycle of taxes driving people just over the border, forcing taxes up and quality of life down which forces more people out.
The worrying difference is that death spiral that New York experienced in the 1970s/early 80swas so terrifying that the state and federal governments helped out. That applies to almost any big city, since no state wants that to go too bad for fear it takes the state with it.

Ireland is not like that.
There is a general desire for "European Solidarity", but that's mainly amongst politicians. Unless Irish people started dying on the streets, few German voters see them as a deserving of billions of their hard earned money, especially in a time when they are facing cuts and tax rises.
Also, although they are getting poorer, Ireland's GDP per head is still rather higher than the S.E European countries, so there is stiff competition for aid.

 

[bigbadwolf]

I didn't know about Latvia but the European racists don't count them as white, so their ability to move West is still legally constrained. Yes, I know Latvians are white, but they are part of a wave that included Romanians and Hungarians and so there are barriers to them leaving which don't apply to Irish.

Since 2004 they've been able to move to the UK, Ireland, and Cyprus. Indeed, on the streets of London you will see any number of East Europeans -- mostly Poles, though. From May of this year, Germany will open up as well, and probably the other Western EU states.

Racism is not a precise science. Most people here are Americans. so it might seem odd to them that people in a state in a federation aren't allowed to work in other parts because they look vaguely suntanned, but that's European politics for you. The laws even apply to our staff a couple of whom are whiter than than the average Brit.

Race prejudice may have something to do with it but it's also a matter of them undercutting the local work force. In Britain in areas like construction work the Poles undercut the local work force -- but this is the reason business usually supports immigration. In Germany, Polish recuiting firms and German employers are working together to supply Polish contract workers at between two and five euros an hour once the market opens up in May. No German worker can survive on such wages. When the local workforce complains, it's promptly tagged as "racist."

An interesting thing about the EU compared to the USA is the lack of labour movement.

Language, culture, and lack of acceptance are the reasons. If a Frenchman tries to move to Norway, he will find much of the job market closed to him -- regardless of his qualifications and experience.

When Thatcher's henchman Tebbit suggested that people move from one part of England to another, he was parodied for the next 20 years for being brutal and callous ...

He never practiced what he preached. He cited the example of his father -- who, when unemployed, just cycled asking for work from one part of the same town to another. It's not easy to move in England. If you're unemployed in the Midlands, moving to the congested and exorbitantly expensive Southeast can be difficult -- assuming the jobs are there to begin with. I'm not sure Tebbit was notorious for being brutal so much as a complete idiot. Facile advice like moving from one part of the country to another was merely an attempt to camouflage the lack of any industrial or jobs policy. I remember when Tebbit had a three-part televised debate with Peter Jay in the late '80s on Britain's "economic miracle" under Thatcher, Jay tore his threadbare case to shreds.

Some parts of Italy, such as Sicily are horribly poor, corrupt and with little opportunity for work beyond crime and cleaning the toilets of tourists. They are legally allowed to work and live anywhere in Europe, but don't.

And do what? 30-40% of the working populations of advanced EU states like Germany and France are now "precariat" -- low-wage seasonal or temp workers. If you're a Sicilian and don't speak German or French, you will be looking for unskilled work and assuming you find it you will be no better off than in Sicily.

We see similar patterns in poor regions of all member states, including Germany where the unemployment rates vary hugely between the west and eastern side of the country

East Germans with skills have moved to West Germany, or West German firms have set up shop in East Germany where they employ such East Germans (though probably not at the same wages as East Germans).

There is a general desire for "European Solidarity", but that's mainly amongst politicians. Unless Irish people started dying on the streets, few German voters see them as a deserving of billions of their hard earned money, especially in a time when they are facing cuts and tax rises.

The desire for "solidarity" has come from business and hence, by implication, from their hired stooges, the politicians. The integration of the EU -- including, inter alia, the labor market -- has been a top-down driven process from the get-go. The public just passively acquiesced to something it had misgivings about from the start. This is a big chunk of the reason Germans don't want to bail out what they see as feckless, lazy, and corrupt Greeks.

 

[DominiConnor]

BBW, I apologise, I meant to say they can't work here, without permission, they are quite welcome to come as tourists.

>No German worker can survive on such wages.
I think we know that to be false, a construction worker living in Germany must be able to survive on what they pay Poles. He might not like it of course, but I personally have no reason to believe that Germans deserve to live better than Poles or Hungarians.
I can't think of any reason why I, a very white, fat British male 'deserve' to earn more than anyone else. I can earn more than most people, but that's an achievement, not a right.

I agree that there are lots of soft barriers to labour mobility,but London is France's 4th or 5th biggest city.

You might have guessed that I'm a bit of a Thatcherite, but I know it's tough to move in England, but it's not that tough. My parents lived in really shit accommodation when they escaped from Ireland, so my sympathy is really quite limited.
True, Thatcher had no real industrial policy, it was industrial policy that largely destroyed UK industry. She knew she hadn't a clue, and didn't really try. Her predecessor thought they had a clue and left us barely able to feed people.
Tebbit wasn't really all that bright, he was a henchman, and you do know how Peter Jay got his job ? Jay is personally a classic example of most of what was wrong with Britain, becoming ambassador to the USA because his father in law was Labour Prime Minister.

I agree that much desire for "Solidarity" has come from business, but let's call it by it's proper name, pork barrel corruption. Some businesses do very well out of sweet EU construction deals, and of course vast amounts go into the agricultural policy.

 

[bigbadwolf]

BBW, I apologise, I meant to say they can't work here, without permission, they are quite welcome to come as tourists.

Dominic, they can work in the UK and this has been so since 2004. Legally, not off the books. Technically they have to register with the Worker Registration Scheme (though many don't bother), which is straightforward and no bother at all. This ability to work in the UK is something Phony Tony arranged purportedly in return for Poland's support for the invasion of Iraq.

In Germany, on the other hand, East Europeans often work off the books -- e.g., a French acquaintance of mine who runs a restaurant in Frankfurt has employed a Pole in the past off the books. But this too will change in May, when East Europeans will have unfettered access to German labour markets. I cringe at the political fallout.

 

[bob]

I find it hard to imagine German-speaking Poles being less well liked in Germany than they are now. Unless they play striker for the national team, of course.

There is a lot of talk about the inevitability and even wisdom of Greece or Ireland (or, judging by recent yields, now Portugal) restructuring and letting bondholders share the pain. To me, this seems unlikely to be a real solution since its main effect would be to displace the solvency problem from the sovereigns back into their banking and pension systems, precipitating both a financial crisis and an even more acute crisis of credibility for the governments of the developed world at the same time.

Of course, this may be the eventual outcome anyway, but it still looks more likely to me than not that Europe's core economic powers will be able to turn the situation to their advantage. It would be extremely difficult to force through the political change that gives Berlin a say in how Greece spends the money they don't actually have. By making Greece vitally dependent upon Germany's financing, you can create in fact a system that it presently seems impossible to create in name.

Bond yields have done more to prompt Greece to try getting its fiscal house in order than any number of purported EU "rules" have, and the optics of it in Germany serve the equally vital functions of helping Germans feel like good citizens of the EU while reinforcing their own primacy. At the same time, much of the direct or indirect aid Germany offers to Greece in order to keep it servicing its debt flow back to Germany anyway, so it has some significant characteristics of a domestic subsidy as well.

 

[bigbadwolf]

There is a lot of talk about the inevitability and even wisdom of Greece or Ireland (or, judging by recent yields, now Portugal) restructuring and letting bondholders share the pain. To me, this seems unlikely to be a real solution since its main effect would be to displace the solvency problem from the sovereigns back into their banking and pension systems, precipitating both a financial crisis and an even more acute crisis of credibility for the governments of the developed world at the same time.

Bond yields have done more to prompt Greece to try getting its fiscal house in order than any number of purported EU "rules" have ...

This could be discussed at length, which I'm reluctant to do. The first question is philosophical: what is a real solution for countries like Greece and Ireland? There may not be one and there may only be Hobson's choice of taking what seems to be the least worst alternative.

Greece is not going to get its fiscal house in order, whether in or out of the euro straitjacket. Arguably being within the euro straitjacket makes it even harder, as it rules out the expedient of deficit financing (in drachmas) coupled with periodic devaluations. The present euro arrangement suits the core industrial powers like Germany, France, Benelux, where manufacturing surpluses vis-a-vis the EU periphery are recycled as loans to that EU periphery but it is unsustainable -- in a similar though different sense as recycling China's trade surpluses into US debt instruments is. Among other things it has led to an evisceration of what manufacturing capacity the EU periphery had as it cannot compete -- given the adoption by EU periphery countries of the euro -- with North European exports. Before adopting the euro, periodic devaluations allowed these countries to compete. In other words, their vassal status has been accentuated by adopting the euro. Additionally, of course, the debt of these countries is held by German and French banks and they want their pound of flesh -- at any social cost. The populations of Greece and Ireland will not accept that social cost. Difficult to see a happy outcome as bondholders insist on being paid and populations are furious at being made to shoulder the costs of state corruption, inefficiency and regulatory capture (the case in Ireland and Greece).

 

[DominiConnor]

I sort of agree with BBW, reluctantly.
Greeks haven't suffered enough to make them realise how badly they have run their country, and to a lesser extent the Irish are in the same boat.

To extent his metaphor of a straightjacket, the point of this is not to stop you hurting others, a properly run mental health organisation can stop this, but to prevent you hurting yourself

Both Ireland and Greece are fully formed tier-1 democracies; their governments have done what they did because in free and fair elections their citizens wanted pork, bread and circuses, not good governance. Since both have a free press and access to outside media, their citizens made informed choices about their choice of leaders and picked dickheads. That's not a one-off mistake, and repeatedly Greeks and the Irish chose corrupt incompetents. Anyone really think an political party will stand for office saying "we will cut hard, raise taxes, and make you dumb fucks work for a change" ?


They now blame others for their mistakes.

Greece is more fixable, simply because Greeks have run it so badly for so long that merely calling a halt to the moronic decisions they make on their country would sort it out very quickly.
Ireland is tougher. It has no excellence in any useful area, but it's people's wage prices are really high. It enjoys a roughly British standard of living from an economy that looks more like Hungary, and that is only sustainable for as long as the Germans continue to write big cheques.

But my call is that the German political elite really like Ireland, and Ireland will be a bit like the vegetables I used to grow. If you costed my time each potato or carrot cost around $50, but I just liked growing things and could afford to indulge myself that way.

@BBW I have direct personal experience of that scheme, and yes, it is a bother, not least because it is incompetently executed. Mrs. Dominic is a lawyer, and we therefore have to be squeaky keen on this shit.

But yes, you can work here illegally, which means you can only get shit jobs. You might get some cleaning work "off the books", but try working for a bank see how far you get.

 

[bigbadwolf]

Both Ireland and Greece are fully formed tier-1 democracies; their governments have done what they did because in free and fair elections their citizens wanted pork, bread and circuses, not good governance. Since both have a free press and access to outside media, their citizens made informed choices about their choice of leaders and picked dickheads. That's not a one-off mistake, and repeatedly Greeks and the Irish chose corrupt incompetents. Anyone really think an political party will stand for office saying "we will cut hard, raise taxes, and make you dumb fucks work for a change"?

At root -- and what the average German knows intuitively -- Nordic and Mediterranean societies differ. I won't comment on Ireland as it seems to be sui generis, but Club Med societies -- and by implication, governments -- differ from the Nordic model of hard-working, frugal, and educated citizenry and (at least half-way) competent governments. Sleaze, corruption, nepotism, avoiding taxes, and avoiding work is a way of life in places like Greece and perhaps to a lesser extent in Italy, Spain, and Portugal. But the tacit premise behind adopting the euro was that these countries would also start operating like Germany and Austria. In reality what has happened is that as before Club Med countries have not been able to control their labor costs and government spending (unlike Germany, for example) but being caught in the euro have not had the expedient of devaluations available. Their products have been priced out of both export markets and their own local markets (aggravated by Germany's aggressive mercantile policies), leading to a decline in their manufacturing. North European exporters have had a field day, and North European banks have recycled their surpluses to Club Med to finance deficits.

While there hasn't been any investment in productive capacity (which makes no sense), there has been a speculative property bubble (also in the Baltics), which recycled North European surpluses stoked. That has imploded. The fake prosperity of the early years of this century has come to an abrupt end and the clear division of interest between bond holders and the general population has come into sharp relief as no-one wants to settle the due bill for past fake prosperity. As PIGS citizens see it, their states have been and are controlled by their local elites, who have been in cahoots with North European elites. And as they see it, these elite-controlled states -- nominally democracies -- are forcing the general population to shoulder the costs in terms of increased taxation and austerity packages. As I said before, there's no polite and amicable fix to this. Call it class conflict. I don't know how it will play out. If the past is any indication, it means riots, strikes, mass protests, an undermining of the legitimacy of the state.

 

[bob]

The only structural way forward is to undermine the legitimacy of the state...in peripheral countries anyway. In the US the idea of state sovereignty as an effective concept took a couple centuries to thoroughly kill, and involved at least one rather bloody war you may have heard about. And this was a country where the idea of a "state" was not nearly as culturally entrenched as it is in Europe.

I still think the ideas of Euro exit and / or siginficant restructuring for Greece and Ireland are beyond the pale. If you think Germany dislikes the current situation, just imagine what their response would be if either country tried to take such a course of action unilaterally. I further doubt that Germany would sign off on anything that leaves them open to real risks of devaluation or default.