The Very Bad Luck of The Irish

By Peter Boone and Simon Johnson

With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.

But the bank’s head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely.

Prime Minister George Papandreou said this week that Greece needs to see strong investment in order for the austerity program to work.  While the government cuts fiscal spending, he said, it needs new private business to employ the dismissed workers so that they are productive, can pay taxes and do not need unemployment benefits.

The problems are strikingly reminiscent of Latin America in the 1980s. Those nations borrowed too heavily in the 1970s (also, by the way, from big international banks) and then — in the face of tougher macroeconomic conditions in the United States — lost access to capital markets. For 10 years they were stuck with debt overhangs, just like the weak euro zone countries, which made it virtually impossible to grow.

Debt overhangs hurt growth for many reasons: business is nervous that taxes will go up in the near future, the cost of credit is high throughout society, and social turmoil looms because continued austere policies are needed to reduce the debt.  Some Latin America countries lingered in limbo for a decade or more.

Mr. Trichet and Mr. Papandreou can look more closely at home to see what might soon be going wrong.  Ireland was one of the first nations to introduce tough fiscal austerity in this cycle — in spring 2009 the government slashed public-sector spending and raised taxes. Despite the cuts, the European Commission forecasts that Ireland will have one of the highest budget deficits in the world at 11.7 percent of gross domestic product in 2010. The problem is clear: when you cut spending you also lose tax revenues from people who earned incomes from that money. Further, the newly unemployed seek benefits, so Ireland’s spending cuts in one category are partly offset by more spending in another. Without growth, the budget deficit still looms large.

Ireland’s problems are, sadly, far deeper than the need for simple fiscal austerity. The Celtic tiger’s impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bills. The Irish government set corporate taxes at just 12.5 percent of profits, thus attracting all sorts of businesses — from computer services such as Google and Yahoo, to drug companies such as Forest Labs — that set up corporate bases and washed profits through Ireland to keep them out of the hands of the Internal Revenue Service.

The remarkable success of this tax haven means that roughly 20 percent of Irish gross domestic product (G.D.P.) is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base. A more robust cross-country comparison would be to examine Ireland’s financial condition ignoring these transfers. This is easy to do: a nation’s gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are near-identical, but in Ireland they are not.

When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected – by our calculation – to be 97 percent, and 109 percent at the end of 2011. These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt.

Ireland’s politicians, rather than facing up to their problems, are making things ever worse. Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before now declining ever more rapidly. The biggest banks grew to have assets twice the size of official G.D.P. when they essentially failed in 2008. The government has now made a fateful choice: rather than make creditors pay some part of the losses, it is taking the bank debt onto the national balance sheet, effectively ballooning its already large sovereign debt. Irish taxpayers are set to be left with the risk of very large payments to make on someone else’s real estate deals gone bad.

There is no simple escape, but if the government hopes to avoid a sovereign default, the one overriding priority should be to stop bailing out the banks. Instead, the government should wind down existing banks in a “bad bank,” while moving their deposit base and profitable businesses into new, well-capitalized banks that can function without a taxpayer burden. This will be messy, but it is far better than a sovereign default.

Second, the Irish must take the tough fiscal steps that will be required under any circumstances. The International Monetary Fund and the European Union have made clear that funding is available to Ireland — so the government should use this to bridge the tough journey of fiscal cuts ahead.

Finally, the Irish need to consider seriously whether being in the euro zone is worth the cost. The adjustment to this awful situation would be far easier outside the euro zone — even though leaving the zone might have adverse repercussions for other nations. Once again, a comprehensive program with European Union/I.M.F. support might make this the least worse option.

Given the depths of Ireland’s problems, it is no wonder the markets are looking with skepticism at the announced eurozone-wide bailout package provided by the E.U. and the I.M.F. Policy makers are still not dealing with the core problems of each nation in the euro zone.  With the debt hangovers remaining, who will want to invest in Europe’s periphery, and so how can Greece, let alone Ireland, grow? One thing we can be sure of: Europe’s political leaders are doomed to be spending much more time at emergency meetings in Brussels over the coming months and years.

An edited version of this post appeared this morning on the NYT’s Economix and this material is used here with permission.  If you wish to reproduce the entire article, please contact the New York Times.

52 thoughts on “The Very Bad Luck of The Irish

  1. Simon / Peter

    I agree with the broad thrust of your article

    However one point is worth mentioning, which is the following

    The Irish boom comprised two distinct episodes; the first from 1992-2000 ws based on a sustainable growth model revolving around productivity increases stemming from huge inward investment FDI, greater labour market participation, tax incentives – with Laffer Curve effects, innovation and prudent fiscal policy
    In other words a dream scenario a sure win win

    Sadly our government and society got carried away on a wave of hysteria and super consumption from early noughties onwards
    This led to an unprecedented property appreciation of some 13% per annum inflation in the price of housing over 1999-2006 incl. (ECB figures)
    The FT gave the cumulative appreciation as some 400% over the entire period from 1993-2006 !! And I agree with this by and large

    The Irish government esp Minister of Finance and Prime Minister stand indicted for several wildly pro cyclical budgets in the early noughties which set us up for the dramatic fall which ocurred from early 2008

    Now the coffers are empty as tax revenues collapsed just like the construction industry itself, and teh country is being kept alive by ECB liquidity, crafty financial footwork and generous guarantees

    As if all that isnt bad enough, the public sector seems to be reneging on pay cuts so the necessary consolidation may be slowed or halted even

    Message is:
    only fiscal councils can prevent government recklessness in booms
    liquidity doesnt cure insolvency
    never ever have overly easy credit with artifically high property prices

    Ireland may or may not make it through its 50-50 at best

    Yours etc
    Kevin Newman
    Independent Finance Policy Specialist
    Brussels BE

  2. Good article!
    95% accurate, which is very high. The Government ignored the effect of lower interest rates despite wanting them! Blindness. The last three years of the boom, the banks went berserk by getting wholesale market money and passing it around as deposits, allowing multiples of lending despite a sound regulatory system.
    What interest rate would all the borrowing attract on the outside of the EZ? Not really feasible!

  3. As my sainted great grandmother said: You can’t take britches off a bare arse.

  4. Yup, pretty much what happened here Kevin.

    Yours etc
    Brad Thrasher
    just a guy who pays attention
    Small Town, USA.

  5. at the same time

    from the IMF site

    “Lifetime pensions are payable starting at age 50 with a minimum of three years of service. The normal retirement age is 62 and any pensions starting earlier are subject to early retirement penalties.”

  6. Central banking and unified monetary policy are not models built to withstand the “trajedy of the commons.” Ireland (or Greece) leaving the euro zone will likely be a moot question. German voters will certainly awaken at some point soon.

  7. the story does not change

    the banks and their political enablers made a mess

    and their camp followers try to pin the blame on social welfare costs

    i love the phrase “early noughties”

  8. Two questions, regarding Portugal: it just had a 1% quarter-on-quarter growth, and 1.7% year-on-year relative to Q1 2009. The latest austerity measures include a VAT increase in 1%, which compared to the -0.7% inflation pretty much cancel out (no increase or decrease in wages). And income taxes are being raised about 1%-1.5% (depending on income), which does not appear to be all that radical.
    All of this to ensure that Portugal meets a 7.3% deficit this year and a 5% deficit in 2011.
    It would appear that the government is trying to take the least nefarious path possible in order to achieve its budget goals, all the while taking advantage of its small growth (which is still the largest in the Eurozone in Q1 2010 – Spain, Ireland and Greece are all at less than -1.3% growth).
    Two questions: 1) is this a viable and credible path to decrease Portugal’s budget deficit in the short term? 2) what options are there for solving the main problem – its long-term, structural issues (namely, its lack of competitiveness and external trade imbalances)?
    Thanks in advance.

  9. The eurozone made a dreadful mistake by bailing out Greece as it did. It should have given Greece a one-time haircut with a condition to leave the eurozone. Now the other countries will expect to have Donald Trump hair.

  10. In everything pertaining to the euro, please do not forget that the aim is to make the mess last long enough to bring the euro down to parity, and this, durably. So the slow reactions of EU institutions is part of a plot.

    Now that Ireland’s business was to be a tax heaven was always obvious. Microsoft used to funnel all its worldwide income through a four person law office in Dublin. Britain itself based her wealth on being a tax heaven for plutocrats and a financial wild west. But this is having an economy. A conspiracy does not an economy make. It is time to reign in the conspirators, and put people back to work.

    Eire was the poorest, and became more than 50% richest per head than the Franco-Germans, thanks to heavy EU subsidies, and, in exchange, produced mostly tax cheating for international plutocratic organizations. time to be whipped into shape.

  11. thats factually incorrect dear Sir – go do your homework

    and we are NOT called Eire either !!!

  12. POR has a combined public and private debt level of 254% of GDP

    unless you can perform teh most impressive budegetary turnaround and reform your labour markets and economy you are doomed

    you are in line to be the next GR
    so my answer is sorry its too late
    get bridging finance from outside get rid of 20% of public sector and reform your economy NOW!

    or else the “wolfpack” will eat you up…..

  13. What’s the difference between your first recommendation to “wind down existing banks,” and the NAMA solution that Ireland is already executing?
    Also, given that Ireland has already tightened considerably on government spending–according to the FT (back in March) “fiscal tightening since 2008 amounts to about 6 per cent of gross domestic product.” How much more are you calling for?

  14. Why should Angela Merkel assist Ireland if it is a tax haven for German companies? Why assist someone if they are responsible for reducing your own corporate tax base?
    Europe coordinated VAT taxes, they also ought to coordinate corporate taxes.

  15. Dear Mr Conveniently Anonymous:

    Éire (pronounced [ˈeːɾʲə] (help·info) in Irish, and [ˈeːɹə] (help·info) in English) is the Irish name for the island of Ireland and the sovereign state of the same name.

    I don’t have accents on my Anglo-Saxon computer, sorry…

    Which fact is factually incorrect in my few little sentences? My Microsoft worldwide income, I implicitly excluded the income in the USA, of course.

    Anyway I want to do my homework at the feet of such a great teacher as you, and I wait to learn about my incorrectness!

  16. Ok, so Portugal’s debt is 254% of GDP. And Germany’s 185%, UK’s is 365%, France’s is 227%, Netherlands’s is 456%, Greece’s is 153%, Spain’s is 151%, Ireland’s is 960% (!), and so on (just to mention the bigger economies and the PIGS).
    This is not new and is common to almost all if not all developed countries, with few exceptions. I would believe that this is not the deciding factor on whether POR defaults or not.
    Ok I get it, it’s quite obvious that the wolfpack has already decided that POR is next, irrespectively of any economic data or the effectiveness of any austerity measures.
    Still, it appears that EU’s new fund Portugal is now temporarily shielded from the wolves. And “teh most impressive budgetary turnaround” is still less daunting for POR (from 9.5% in 2009 resulting from many temporary stimulus measures to about 5% in 2010 and ~3% in 2012) than any of the other PIIGS…

  17. @ Bill:
    Tax harmonization throughout the EU has been the war drum of France for decades. Great progress has been made (EU law has a minimum 15% VAT; VAT cannot be escaped…)No doubt recent events reinforce the French position. France wants Greece to reduce the military spending (apparently decided, with Turkey’s help) and Greece to tax the rich more (especially shippping magnates)… It’s on the way…

  18. Ireland exposes one of the central problems of globalization. The natural and unstoppable urge is to launder profits from taxation. The other natural urge is to use other national’s money to support your profigacy knowing they then roll over forever or lose their money. In the past, powerful lending and investing states in weaker states had means to compel the collection of their loans, profits and investments in weaker states. What better example than Egypt in 1882 with it’s Finance Commission. It worked out rather well for Britain and France for quite a few decades,although France constantly grumbled. It also led to Fashoda and a host of other unpleasantries.

    Say for Ireland, the finance commission ala Egypt is the IMF, World Bank and the EU itself. Ireland created a grifter economic advantage by being a tax haven. OK, end the problem the same way and live with the fall out.

    Put the foreign deposits and other holdings in a bad bank as some suggest. Also put all the bad foreign source based assets ( Like US CDO’s) held in Ireland in the same bank . Of course, the holdings put into the bad bank must be paid for using another asset. The object here is to exchange Irish national bad foreign assets for non Irish national good assets. Surely, there would not be near an offset . The difference needed to make Irish nationals whole here would be a senior collection stake in the bad bank. At least here the loss to Ireland is not laid on Irish taxpayers for foreign stakeholders. Then Ireland lives with the consequences . First step would be leaving the EMU.

    There will be very bad consequences to Ireland no matter what steps are taken. So, deal yourself the advantages by decree to the extent you are able. Then work out the unintended ensuing consequences on Ireland.

    By way of example. US corporate holdings in Ireland wind up exchanged for US paper like CDO’s. Offset at cost too. Will we send the Army and Navy as Britain did in the Egypt Crisis of 1882? No need to worry about this though. Present elites are not military aristocrats. They are global cosmopolitans.

    What a mess. Half joking here because the only way out is for states to settle with other states by transfering back junk assets at cost against the debt to any extent possible. Then, blow off the rest. No state is going to commit suicide to make outlanders whole.

  19. The solution is not to leave the EMU, leave the EU, leave Europe, leave the planet, quit the solar system.

    The solution is wipe the slate clean in as orderly a manner as possible, and change the entire social, economic and fiscal system, worldwide. You go to plush Mediterranean ports, and see all the hyper expensive yachts, with Caribbean addresses… Who defends the Caribbean? USA, France, etc. What industry has the Caribbean, but for tax evasion from USA, France, etc. ? This has got to stop, because it is actually stopping, now.

  20. As Ed Koch, who is credited with restoring fiscal stability to the City of New York in the 1980s, replied to an Irish TV intervier when asked for advice as to how the Irish government could deal with the then enormous Irish fiscal debt “ya can’t spend what ya ain’t got. Didn’t yer mother tell ya”

  21. Wiping the slate clean and orderly do not go together. As I see it, under enough compulsion, some states could readily wipe the slate clean of debt through grants of funds. The immediate problem is the strength of the state to hold together distribution and production while you engage in repudiation to minimize social collapse.

    As for state to state wiping the slate clean, all the states need do is wipe away the debt with direct currency payment or by repudiation decree. The exterior held currency would be limited to purchasing goods and services over a considerable period. Whatever assets of state nationals held elsewhere would be forfeited. Similarly, the repudiating state would seize assets in their jurisdiction. That would be a guaranteed result.

    What is going on now is buying time to flush the uncollectable claims against each other on all sides knowing the majority of claims will survive if the entire system survives. If the system does not survive, then we have universal forgiveness of debt by collapse.

    World wide system change will, of necessity, be nationalist or less. After all, immediate survival is locally constrained. States in survival status do not have the power to compel a global result. In this survival mixture of states will be those that might be able to compel others and as such be able to introduce a new imperial system. But, given worst case collapse scenarios, even these states would simply be aggressive against neighbors.

    Nasty times for a very long time guaranteed. The end result that must fail is that flushing out bad claims does not buy survival time for the system.

  22. SJ and PB:

    The Latin American parallel is not new – right down to the involvement of Citibank – but could you help me understand how well IMF austerity packages worked back then? I recall the literature being mixed. What is your personal view on their success? In considering your narrative, please do keep in mind the global demand for exports now vs. then. Also, what role did debt forgiveness and default have in the recovery of Latin America?

    The neo-classical story I continually hear is one about the necessity of rapid wage adjustment, because median wages have been taking much too high a portion of the social surplus for the last 20 years… Since the central banks are sticking to their guns, wages must come down! How many political examples can you identify where wage adjustment (without debt restructuring or monetary adjustment) have fixed the kinds of debt overhangs we see in Ireland?

    BTW, lovely core inflation and weekly jobless numbers this week. Looks like Bernanke and Trichet will have no trouble hitting their inflation targets. Right up until their sovereign governments default. But as we all know, inflation hurts the poor the most…

    Until the Treasury can no longer finance the jobless benefits and food stamps which are increasingly being used to pay for expenses at WalMart (according to their quarterly report).

  23. As I advocate in my latest post on my site, gentle inflation is a way to make sovereign debt manageable, through nice and easy default compensated by increased economic activity. It was a huge mistake to have inflation targets close to zero, because, once deflation is started, it cannot be stopped, and it only grows. The present austerity packages will only make the situation worse, and are untenable, if not compensated by significant inflation (which may have to be created by government programs, a during the New Deal).
    Inflation can be compensated with subsidies for the poor, as France did in the pre-Trichet era (Trichet was head of the Banque de France for 10 years or so before becoming ECB head, and is an anti-inflation hawk of the excessive type).

  24. I don’t want to be picky but Eire is not recognised internationally as the name for the state that exists on the whole island of Ireland. There are 32 counties on this island, 26 in Eire and 6 in Northern Ireland. The 6 counties are part of the United Kingdom. Eire is a failed state. The same people have been running the country for the last 90 years which is why governance is so bad and systemic curruption so widespread. Outside interests (Brussels/IMF) are now starting to take over the function of governance in Ireland but unfortunately there is no overall plan or sense of direction to what they are doing. At some point Ireland’s independence will virtually cease to exist and we may have to reach some associat status with the United Kingdom.

  25. “because median wages have been taking much too high a portion of the social surplus for the last 20 years…”

    Are people really saying that? What does median wage even mean? It can’t be the same thing as real wages:

    The real cause of this mess we’re in, as I see it, is real wage growth rates haven’t tracked increases in labor productivity over the past twenty to thirty years or so, and the gap has increasingly been filled by an unsustainable private debt binge. This story about median wages “taking much too high a portion of the social surplus (whatever a social surplus is),” is so fundamentally at odds with every piece of data I’ve seen it’s almost comic.

    About Trichet: After reading this interview with the Der Spiegal international magazine I came to the conclusion that he’s basically a self-righteous moron:,1518,694960,00.html

    A moron because he wants to maintain a strong Euro through a tight monetary stance while simultaneously insisting on austerity for the PIIGS. How does he think the peripheral Euro nations are going to grow their way out of this mess without support from the public sector and with a strong Euro putting a damper on exports? Magic? And the worst part is Latvia and Estonia seem to be listening to this madness. In Latvia construction output just fell a mind numbing 43% and what does their Prime Minister think is the answer? Pro-cyclical austerity of course. All so they can meet the absurd conditions of the Maastricht Treaty’s Stability and Growth Act:

    So basically the Baltic nations are going to destroy their economies to get into the Euro for what? So they can end up like Greece and Ireland? Complete and utter madness. I would laugh if it wasn’t so sad.

  26. “Associate status”? To do what? The supranational state in Europe is the EU, not the UK (which may well dissolve, de facto). At this point, the UK has nothing to offer to Eire, except a very bad example, or how to take an advanced industrial state, and turn it into a financial pirates heaven. We will see, BTW what Cameron and Clegg do. They may do well, but it will not be because of pirates, but engineers, inventors and scientists, who the UK used to have plenty of.

  27. Re: @ kevin newman____Ireland has a highly educated workforce, and a willingness to get their hands dirty! Their situation parallels that of the US,…but in my opinion its no where as bad,than the latent auterity soon to befall america’s poor – whom by the way are uneducated, and (some, not all)afraid of getting their hands dirty? I’ve never met a lazy Irishman (being one) ,and they’ll do whatever it takes. Their pragmatic,and realistic, and aren’t known to runaway from their problems! PS. The IMF is a joke,…but the ECB/Germany will take care of their brethren. auf Wiederseh`en ;^)

  28. NKlein1553 wrote:

    “So basically the Baltic nations are going to destroy their economies to get into the Euro for what? So they can end up like Greece and Ireland? Complete and utter madness. I would laugh if it wasn’t so sad.”

    May 19 2010 – Chris Laird – excerpt

    “The evolving Euro crisis is expanding and deteriorating rapidly. In only one week since the $1 trillion EU proposed bailout, the following happened:

    Merkel’s party got creamed in the regional German elections last week. This is paralyzing Germany politically.

    UK’s Brown resigned and Cameron took over.

    France’s Sarkozy threatened to pull out of the Euro and banged his fist on the table, making Merkel blink and leading to their disastrous German elections.

    Now Germany bans short sales on Banks and CDS and sovereign bonds – revealing the panic out there in the EU.

    EU is in total chaos politically, they cannot solve this crisis with their many nations who must approve each major fiscal measure like bailouts. The ECB and EU are not capable of the quick unilateral action like the Fed is capable of – meaning they are always behind the curve on this rapidly EU escalating sovereign bond crisis, which is spreading now to EU banks and CDS, not only sovereign bonds, and spreading to the Euro.

    They say the Euro has never been tested severely like this since its inception in 1999/2000. The test is a huge FAIL. The Euro is falling in an out of control way.

    ECB’s Trichet had to relent and do the nuclear option to buy bad paper (bonds etc) off the Greeks for starters. ECB loses huge credibility.

    Net effect of the political and financial failures is huge uncertainty for the Euro and the EU.

    This all leads to a Lehman like contagion, which is now in process. It’s all out of control.

    EU and ECB are only reacting to this mess and are they not in control at all.

    Contagion is spreading to all financial markets, and appears unstoppable.

    Electronic trading and ETFs cause liquidity to dry up in minutes to zero (means crashes are not controllable whatsoever).

    EU countermeasures are too late and are panicky – (they have lost control of the Euro and debt situation). Derivatives (like ETFs) have made markets highly susceptible to huge flash crashes. Attempts to counteract this only makes things worse.

    Markets are now totally out of control as circuit breaker measures in one market are merely circumvented by others moving to alternative .”

  29. The Next Stop On The Crisis Road

    May 20 2010 – Nouriel Roubini – excerpts

    “…. the recent events in Greece, Portugal, Ireland, Italy and Spain are but the second stage of the recent global financial crisis. The socialization of private losses and fiscal laxity aimed at stimulating economies in a slump have led to a dangerous build-up of public budget deficits and debt. So the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage.

    Indeed, a practical definition of a financial crisis is an event that forces policy officials to spend a long weekend trying desperately to announce a new bailout package in order to avoid national and global panic before the markets open on Monday. In the past years, such weekend all-nighters dealt with the needed bailouts of private firms—Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, AIG, bank rescues, etc…

    While the right medicine needed to avoid fiscal train wrecks is well known, the main constraint to fiscal consolidation and discipline is that weak governments around the world lack the political power and willingness to implement austerity. Political gridlock in Washington and in the US Congress demonstrates the absence of the bipartisanship needed to address US fiscal issues. In the UK, a “hung” parliament has resulted in a coalition government that will have a hard time implementing fiscal discipline.

    In Germany, Chancellor Angela Merkel lost a key state election after the rescue of Greece, and Japan has a weak and ineffectual government that seems in denial of the scale of the problem that it faces. In Greece itself, there are riots in the streets and strikes in the factories; in the rest of the PIIGS (Portugal, Ireland, Italy and Spain), fiscal discipline will be politically and socially painful. So political constraints may prevent fiscal austerity and structural reforms from being implemented.

    As a result, “crisis economics” is likely to be with us for a long time. Indeed, the recent financial crisis is not over and, worse, the medicine used to treat may have been partly toxic. It seems to have made the patient weaker and more addicted to dangerous drugs, as well as more susceptible to new strains of the virus that may, in some cases, eventually prove fatal.”

  30. An article that is, unfortunately, about 5 hours research short of being a perceptive one, even aside from the apparent ignorance of what NAMA has been set out to achieve in the banking sector. Three issues in particular:

    (1) Unemployment. Any sort of analysis whatsoever would have revealed that Irish unemployment is nothing to do with government austerity. It is to do with a cyclical downturn in construction (and retail) and a secular decline in agriculture and manufacturing. Outside this one third of the workforce, hardly a job has been lost in the country, which is – quite frankly – amazing. (

    (2) Corporate tax. Adjusting deficits for GNP is an interesting exercise, but it does ignore the fact that the gap between GDP and GNP is at the very least being taxed by 12.5%, as you point out. In fact, Ireland’s corporate tax as a proportion of GNP is among the highest in the world, so it’s certainly not failing its obligations to citizens on that front. Also, for all the talk of tax haven, Microsoft, Google and IBM – to name but three, all of whom employ thousands of workers in Ireland, which suggests they’re probably not just there for tax – are there because they are in the world’s only English-speaking eurozone member, where labour from across the EU including new EU member states can move without impediment. (It also helps that more 25-34 year-olds in Ireland have degrees than in almost all other OECD countries.)

    (3) Trade. The global recession was, essentially, just a coincidence for Ireland. The analysis above is incomplete without a mention of Ireland’s superlative international trade performance over the past five years. Exports have hardly dropped at all from 2008 levels, at a time when Finland, Germany, Japan et al have seen exports collapse by anywhere between one quarter and one half. Indeed, services exports have grown so much that Ireland is the first economy of reasonable size (of which I’m aware) that has more than half its exports in services.

    None of the above is an attempt to pretend that Ireland’s fiscal adjustment over the next five/ten years will be easy. It will require both significant sacrifices from the public sector, which is among the best paid in Europe, and from the bottom two-thirds of taxpayers, who have been paying next to nothing in income tax over the past ten years.

    To suggest, however, that this in some way necessitates Ireland’s exit from the eurozone because it is an economy “out of control” seems to me to be a poor reading of economics and Ireland’s situation.

  31. Far-Fetched, But This Is A War of Bulls and Bears… Economics of Countries and Debts and The Decay of Mans Choices…



    The World is Asking So Many Questions that has brought about a market on the abyss of true change for the better and/or could be far worse. This could be the signal of the Double-Dip Recession or we may sneak out of all this with just a few bumps and empty bank accounts.

    It will remain a question for many trying to make sense of when does this new word “Austerity” start to affect me and my families if I am still employed or a public worker as a fireman or law enforcement that are seen in Greece being the first affected by Austerity measures.

    I think the Egg management fee has well exceeded its limits. Its much too much now and Oil is the the theme as it will continue going lower due to the deflationary fears.

    The theme for the dollar and the other currencies along with the hedge of the precious metals of GOLD will be a play of making still a stronger dollar emerge due to U.S. holding a lions share of the Gold Reserves. China along with some of the very few players that can hold a bluff at the worlds poker table is no longer able to trump as it once had the leverage before. They will need to be able to keep Yen equal to or near pegged to the Dollar and allow the slow or ease to the EUR and buoy to the EUR and not allow for the YUAN to over heat to over run any of the other currencies to cause their already delicate economic recovery teeters to a full declining recession due to real estate bubble debt collapse.

    The idea becomes plausible to hold this as the current theme for the moment that China may equalize dollar and peg yen to Dollar maintain YUAN…

    Oil will be balanced to lower $45-$55 range being the most likely as the path of least resistance you might see. Why comes from most likely the concerns from oil nations and the Arab Economy as agreed to behind closed doors.

    Why is this really all being done, it is clearly to divert a double-dip recession or that of another depression that would be greater than the one so long ago.

    Reading so many journalist throughout the day, one stuck out and came to the top,. He has a way with words and has made his way and tells it like it is. As Todd Harrison had said, “That last dynamic is perhaps the most daunting. Between the bear market in China, uncertainty in Europe, stateside budget gaps, upward taxation, and austerity measures, it would appear as if we’re on a collision course with an inevitable destination. To that end, I will draw from three of my past columns with hopes of providing some context”. And he also had another good comment that stuck in my head when he wrote;

    “He is Deflation. Painful, all-consuming, watershed Deflation. While the mainstream media continues to monitor inflationary pressures — and yes, this exists in some corners of the economy — this particular Phantom won’t discriminate between victims. The weakness we’ve seen is the probability of this demon being priced into the collective mindset.”

    To be sure, after that column posted and following an additional 15% haircut for commodity prices, asset classes across the board enjoyed a spirited sprint higher. We know now that was the “blow off” phase of the rally, the “panic” portion of the denial-migration-panic continuum that defines all market moves, and we know what happened next.

    In February 2008, we offered that policymakers were navigating Our Wishbone World in a manner that would further crush the middle class. And I quote:

    “Let’s look at both sides of the great debate. To the left is the socialization of markets, nationalization by governments, and a road to hyperinflation. To the right, we have asset class deflation, risk aversion, and the unwinding of the debt bubble.

    If the Northern Rock nationalization is the first in series of similar steps, we could conceivably see the stateside assumption of mortgage debt by the US government. This would hit the dollar and spike equities, at least until interest rates rose to levels deemed attractive as an alternative investment.

    That is the hyperinflation scenario, one that is presumably preferred by the powers that be as an alternative to watershed deflation. The “haves” would fare better than the “have not’s,” which would include the former middle class that suffers as a result of moral hazard as the costs of goods and services skyrocket.

    The other scenario is the draining of liquidity from the system, which would ignite the fuse for a higher greenback as currency becomes scarcer. Asset classes across the board, from commodities to equities, would deflate and impact the top tier of our societal structure that is tied to the marketplace.

    This is, quite obviously, problematic for many policy makers and the constituencies that bankroll them. Deflation in a fractional reserve banking system means that they have, for all intents and purposes, lost control of the economy. It is an admission of defeat, albeit one that may be unavoidable” (Harrison, Minyanville 2010, 19).

    I will still continue the theme that we all need to get the idea that we have gotten off track with our spending habits. The way we look at our friends and our neighbors. How we have pushed the creator out of our daily lives, if you have a religion or faith of belief in the creator of “I am” also know as “GOD” for those that did not know those connected names as he is also known by others.

    To end this article post, you really need to bring this to focus on what made it all happen. This is all about moral, ethical, and morales with the loss of virtues that continue to erode our nation and many other nations around our world. This is the time to stand up and make a change individually first, then within your family, to invite back a calmness of knowing a creator that can be part of your daily life and bring yourself and the ones you love to live within their means.

    It is that simple, it starts first from there; and it goes forward. I call it as certainly a few before me have, “paying it forward”, mentality. A paying forward of helping your neighbor as this builds a village to a nation to a global world of sustainable growth as I think we all seek. As far as investing and winning in the stock market, just try to take risk and make it a smaller portion of what is considered a manageable risk. What is a manageable risk. Great question? Risk is when you feel you are no longer afraid that anything can ever be taken away from you and the house always wins. Its the end of the story in the Bible if its a book you have ever read. The bet has already been set and the hedge is set.

    WE ALREADY KNOW THE WINNER… Best way I know of explaining of being on the side of risk when it comes to the ultimate side of risk. Eternal risks.

    Far-fetched, Not Anymore…

    Peace for now I am out of here…

    James G.

  32. The name of the country in English is Ireland, or if you wish the Republic of Ireland. Eire is the name of the country in the Irish language. Ditto Suomi is the name used for Finland in Finnish, Deutschland in German for Germany, etc.

  33. Re: @ Rickk____Roubini dances with ambiguity. He’s wonderful at explaining why it (past tense) happened, but offers up little substance on how to solve the problem. The United States bailouts – the last twenty-five years have taught many emerging markets what not to do? That is,…don’t follow in America’s footsteps, period! America has dug a hole for itself – never being completly able to free itself from its wholly created,and self inflicted morass. Why? The TBTF should have been let go, period! That’s what bankruptcy courts are for,…and if they (TBTF) precipitate problems in advance they usually will(common sense & survival instincts) merge,or spend down, such is a pragmatic ,and realistic voluntary approach too downsizing, admirably of their own doing. Oh,…but the government says we can’t allow this too happen? The entire country would come crashing down,…hogwash! Let it happen – as it turns out it wasn’t all that bad too begin with, as we have seen all the TBTF’s pay back their loans with interest,..thus growing even larger than their previous status – all from this fixed sordid episode of deception. What happened to the public is they were duped by the “Central Bank” (the US Gov’t)which is privately owned (original shareholders) by the very banks they bailed-out! Amazing. Europe’s problems aren’t the same as America’s – there’s no Lehman,Bear Stearns,WAMU AIG,etc,.etc.,etc.,…its just individual members over extending themselves in the European Community. They (the ECB) just have to explicitly explain too the EU Members – were all in this together, each ,and everyone of us, has to,and must make (very simple,KISS?) sacrifices,period! The United States, and its weak (sisters & brothers)individual states ,such as (just to name a few) Calif.,N.Y.,Mass.,Fla.,Mich.,etc.,etc.,etc., are in crises mode, a much worse state of hysteria – so let’s get out of the glass-house before we start throwing stones, and address the real problems at home in America. These “Two?” crises are certainly not compariable too apples,and oranges, but more like kiwi (EU) fruit too a watermellon (USA)!

  34. It’s the plutocracy, stupid!! (Not you, Simon, but anyone who thinks that the EuroTarp is about someone other than the oligarchies.)

  35. My own knowledge of this subject is confirmed by the WIKI article.

    Europe has been coordinating VAT, particularly with the introduction of the Euro.

    My position remains.

  36. earle,florida write:

    “Re: @ Rickk____Roubini dances with ambiguity. He’s wonderful at explaining why it (past tense) happened, but offers up little substance on how to solve the problem. ”

    Roubini also wrote:

    “While the right medicine needed to avoid fiscal train wrecks is well known, the main constraint to fiscal consolidation and discipline is that weak governments around the world lack the political power and willingness to implement austerity.”

    In my view he is a tad optimistic and the complexity of the current financial situation, beyond simple silver bullet solutions.

  37. The world may be witnessing the oxymoron of imposed deregulation. The dikes in New Orleans might not have failed if they had been maintained at scientific standards. The oil spill in the Gulf of Mexico would not have happened if deep sea drilling were banned. The financial system would not be in this mess if it had been properly regulated.

  38. hmm . . I may be way wrong here but what would happen if states began issuing “local currency” as a parallel monetary system in order to keep essential supply chains functioning while the international financial system went through forgiveness/collapse. This strictly local money could be put in place before the crisis. It would be physical cash which could not be deposited or traded.

  39. . . look up LOCAL CURRENCY on Wikipedia — very interesting. Google “parallel money system” and you can see this has been used during bank collapse and financial crisis in a number of Latin American countries. It is also used for local trade in normal conditions in many areas. And as I remember, Oregon had their own money going not too long ago. Was it outlawed by the Feds?

  40. To say that Ireland’s corporate tax to GDP is high, and therefore it is not failing the world, is a joke.

    If you are a tax haven, you DO collect corporate taxes, but not on the real earnings in your country, just the paper profits that were earned in other countries.

    By this argument, Ireland should become MORE of a tax haven, so it could have an even higher proportion of corporate taxes to GNP.

    Or, maybe we can find an island somewhere with a low GNP, create a tax haven, and it could claim it is “doin’ good work” by having a high corporate tax revenue to GNP too!

  41. Great point about tax capacity! But the point doesn’t extend to implying that Irish growth was a mirage (except perhaps if you’re thinking about its contribution to world output growth). The tax haven strategy was a good one; it just doesn’t allow Ireland to borrow against its future very well. If the government didn’t deficit-spend at all, it could ahve one along very nicely with taxes on the “tax haven sector” at a low level and those on citizens at moderate level. It could even have paid for higher government spending using those low taxes on foreigners who didn’t receive any government spending. But it decided to deficit-spend. Thus, it will have to raise taxes on citizens to an extremely high level, because it can’t get away with raising taxes on foreigners at all.

  42. “the cost of credit is high throughout society”

    EXCEPT for the banks, who get all the credit they want for zero cost, JUST AS LONG AS THEY DON’T LEND IT OUT TO ANYONE OTHER THAN THE TREASURY. Thus the banks force savers to pay for their mistakes. The way out: find a way to get your savings away from the banking sytem into institutions that will actually lend it to productive businesses.

  43. “The Irish government set corporate taxes at just 12.5 percent of profits, thus attracting all sorts of businesses —”

    Fine, set the tax rates low, but be sure to collect the taxes in cash. Don’t allow accounting chicanery to short change the tax collector. A low rate is a great thing, and (as they saw in Ireland) does great things for an economy, BUT BE SURE TO COMBINE IT WITH AGGRESSIVE COLLECTION OF CASH TAXES!

  44. ..and I’m afraid that’s where I have a problem. I’ve come across many Irish people only too delighted to return sovereignty of “the republic” back to the UK, and what makes you think the UK would like to take back Ireland and our debt. We would be the koke of this new (old) UK – even a bigger joke than wales!! (kidding)

    But really, I’d rather we take the Icelandic route – full evacuation from the EU and a return to poverty please. I can’t support what Irish freedom fighters died for. Maybe that’s what all this ‘Queen to visit the republi’ talk is about. There were rumours she’s come in 2008 but Ireland didn’t default (though it was close) I’d wager that’s what that means. I have no problem with the UK – they’re our neighbours but I don’t wan to be a UK citizen. I have obligations handed down to me by the founders of the free state.
    If it happens, I’m leaving…for good (and I’d guesss I certainly won’t be the only one) Maybe a million would leave.

  45. Too right Ronan. It’s very hard to take this article seriously when the facts are mistaken.

    Very simply, GNP is the relevant measure of Irish living standards, GDP is the measure of the tax base. Repatriated profits of multinationals can be and are taxed in Ireland. Suggesting otherwise is just plain wrong.

    Another point is that (when push comes to shove) the Irish revenue collection system is far more efficient and effective than equivalents in southern Europe.

  46. “we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.

    “But the bank’s head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible.”

    “Profligate nations”? Really? That’s quite a value judgement. Why say that? How different is Spain from the U. K. or the U. S.?

    “Pull themselves out of this mess through austerity.” Really? Has that ever been shown to work? Should the U. S. not have stimulated the economy in 2008 and 2009, but instituted an austerity program as well?

  47. Roubini: “Japan has a weak and ineffectual government that seems in denial of the scale of the problem that it faces.”

    Or perhaps mainstream economists are deluded about the seriousness Japan’s relatively high debt, given its relatively low unemployment and low inflation, and the fact that it has a fiat currency. Western economic commentators made fun of Japan’s floating currency during the Great Depression. How wrong they were!

  48. StatsGuy: “The neo-classical story I continually hear is one about the necessity of rapid wage adjustment, because median wages have been taking much too high a portion of the social surplus for the last 20 years…”

    If that is so, the gap between median and mean wages should have been dropping, right? But hasn’t the opposite been the case?

    StatsGuy: “BTW, lovely core inflation and weekly jobless numbers this week. Looks like Bernanke and Trichet will have no trouble hitting their inflation targets. Right up until their sovereign governments default.”

    Do you have in mind any plausible scenario where the U. S. defaults? We have never defaulted in our history, even when we were a developing nation. Do you seriously think that the richest, most powerful nation on earth is going to default on any of its financial obligations?

    StatsGuy: “Until the Treasury can no longer finance the jobless benefits and food stamps which are increasingly being used to pay for expenses at WalMart (according to their quarterly report).”

    If it comes to that, do you really think that the crazies in Congress will refuse to raise the debt ceiling?

  49. mondo pinion: “And as I remember, Oregon had their own money going not too long ago. Was it outlawed by the Feds?”

    The U. S. Constitution explicitly prohibits the states from issuing their own currency. The California IOUs were probably illegal, but did not last long.

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