I remain, as ever, both fascinated and utterly perplexed by the financial markets. Take this from the Telegraph this morning:
Ireland’s borrowing costs have begun flashing warning signs again on fears the full damage from the country’s banking crisis has yet to surface.
Of course the full damage from the country’s banking crisis has yet to surface yet. It can’t have done. Although Ireland is going through the most remarkable pain the prospect of those having the desired impact are remote. Massive pay cuts, significant cuts in pension entitlements, cuts across the whole state sector that will in the longer run impact the very core of Ireland's ability to trade — based as it is on a well educated workforce — and so much more have yet to have their full impact. Savings are still being eroded, people have yet to retire into poverty, health impacts have yet to be seen, nor educational ones, and the ability to service debt has yet to be really tested when Ireland has to maintain Euro membership or its appeal as the conduit of choice for US companies into Europe will be destroyed.
And yet, apparently, the markets haven’t appreciated that. Why not? Isn’t it obvious that announcing these measures is different from the grinding poverty, whether real or of hope and aspiration that they will create as their full impact comes to bear and people live with the consequences of bank failure?
What sickens me in the case of Ireland is that the impact on people is severe and yet some markets refuse to recognise that. Homelessness in Ireland is growing and there are 300,000 empty houses — about 10% of the total housing stock. many say they’ll have to be pulled down to maintain house prices.That is how sick is the damage banking has caused. And still the markets don’t get it.
And you wonder why I think we should do as much as possible to lessen their impact on people's lives?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
That Telegraph article is really good: Ambrose Evans-Pritchard (who wrote it) is probably the most astute economist working there (although v right of centre politically). The key paragraphs are:
“The nation has certainly been bold, cutting public wages by 13pc (including pension levies) to restore competitiveness. This is known as an “internal devaluation” in IMF parlance, the only option left for a country that cannot devalue its currency.
Less clear is whether it can work. The budget deficit seems stuck at 14pc of GDP, and unemployment has risen to 13.7pc. The severity of the slump is eating away at the tax base. Critics say the country is chasing its tail.”
Absolutely – the strategy has been disastrous, and the leading research institutes over there (e.g. ESRI) have nothing to offer except more of the same. How long before Ireland falls into major civil unrest?
Although withdrawal from the Euro would have been problematic, it would almost certainly have been a better option than what the Irish have had to put up with over the last 3 years. I wonder if the option was seriously considered over there?
The key lesson is quite simply that in a global slump, it’s very hard to cut your way out of a fiscal crisis. Cameron and Osborne, please note.
“Homelessness in Ireland is growing and there are 300,000 empty houses – about 10% of the total housing stock. many say they’ll have to be pulled down to maintain house prices.That is how sick is the damage banking has caused.”
That’s an issue which goes far deep than banking. The root cause is states granting perpetual land titles and progressively de-taxing them, turning them into a prime vehicle for speculation. Involvement by the banking sector is a symptom of the underlying issues, not the cause.
“The key lesson is quite simply that in a global slump, it’s very hard to cut your way out of a fiscal crisis. Cameron and Osborne, please note.”
Current expenditure will rise from £637 billion in 2010-11 to £711 billion in 2015-16, according to the Budget Statement. That doesn’t sound like a cut in government spending, just a reduction compared to the last government.
“The key lesson is quite simply that in a global slump, it’s very hard to cut your way out of a fiscal crisis. Cameron and Osborne, please note.” Exactly, Ireland has carried out the policies they want to implement, and look at the results. And have you seen the latest? The government has appointed Philip Green to see how the cuts program can best be implemented. The same ‘entrepeneur’ who is a serial tax avoider.
Presumably, while he lectures those of us in the public sector on how wasteful and inefficient we are, he’ll still be flyiing his celebrity friends round the world for lavish, no expense spared parties.
I don’t think Ireland has any choice. One option is to cut and go through an internal devaluation & face depression. The other option is to leave the Euro, which means leaving the EU, devalue & default. In such a scenario, capital markets would be closed to them and they would have to cut anyhow and leaving the EU would further destroy the tax base. However bad things are, what they are doing is the least worse option.
@Will
On Ireland, you’re right that leaving the Euro carries serious risks.
However, the experience of Iceland – which has enjoyed something of a recovery following a massive devaluation – and indeed the UK (where devaluation has certainly helped stop our recession from being even worse) suggests that currency flexibility is an advantage in these situations.
Also, I don’t agree there was no alternative to cuts in Ireland – at least not on the scale implemented. Ireland is a relatively low tax country so they could have put up taxes on high earners rather than adopting a strategy which means low earners and people on benefits lose out.
Would Ireland automatically have to leave the EU if it abandoned the Euro? Couldn’t they say “the British have their own currency and are still in the EU so why can’t we do the same”? Seems a reasonably strong argument.
@Alex
Budget executive summary, page 2:
“The Budget and the plans the Government inherited represent a total consolidation of £113 billion per year by 2014-15 and £128 billion per year by 2015-16, of which £99 billion per year comes from spending reductions and £29 billion per year from net tax increases.”
That’s in the Coalition’s own words. You must be the only person in the country who thinks the government is increasing spending. Keep taking the tablets…
@Howard
Alex is, I think, from another planet….
I guess up is down there
Any other explanation is hard to find
@Will
Great, isn’t it hat bankers can impose such a no choice scenario on a country
And carry on
It’s the last bit that’s really galling
“Homelessness in Ireland is growing and there are 300,000 empty houses”.
PaulL has of course hit the nail on the head. They have a readily available solution to the above and the deficit: annual land value taxation.
But the politicos still come out with this nonsense that the house price bubble was caused by a shortage of houses. Ireland, US and Spain experienced a worse boom/bust than UK, yet they all have a surplus of homes. Balls only recently came out with this old canard to me – as did Mrs Balls when she was in the Treasury. They really don’t get it.
Howard,
I suggest you look further into the document on page 45, Table 2.3: ( Total Managed Expenditure), which clearly shows spending of £669.3m in 2009/10, £696.8m in 2010/1, £699.8m in 2011/2, £711.0 in 2012/3, £722.0 in 2013/4, £737.5m in 2014/5 and £757.5m in 2015/6.
In which year does spending go down? Ireland may have reduced its spending year on year, but the UK coalition government has simply cut future spending promises that the Labour party knew it would never have to honour.
@Alex
And I suggest you read a basic economics textbook so you can figure out the difference between real-terms and nominal expenditure… or indeed between nominal expenditure and expenditure as a share of GDP. Still, the government knows exactly what it’s doing, even if you don’t… 😕
@Howard
Well said….
Alex reveals his ignorance (there’s no kinder way to put it)
Nominal GDP in this period rises from 1424 bn to 1902 bn (table C5)
That’s 32.6%
Table C7 shows spending rising by 26%
As a proportion of GDP spending falls from 39.6% on current account to 37.3%
But the strongest testimony of all is that net investment falls from 49 bn in the state sector in 2010 to 20bn in 2016
Where will the future hospitals, schools and so on come from?
It’s typical Tory negelect
And an utter inability to read data allowing for inflation and the supposed growth we’re going to enjoy from Alex
@Alex
Tell me then why we need 40% cuts?
Or is that all utter nonsense and we’re actually only going to get 5%?
Nobody said “we need 40% cuts”. The Chancellor asked certain ministers what they would cut if they had to cut 25% or 40%, presumably with the intention to see what there priorities were. Some areas are ring fenced, so there will be substantial reductions in some departments, but overall, government spending will be maintained at current levels, which as I originally pointed out, is quite unlike Ireland where there have been substantial year on year reductions.
Government spending may decline as a proportion of GDP, but in terms of inflation adjusted pounds the figure will be the same as this year, and I don’t remember to many Labour MP’s haranguing Gordon Brown to the effect that his government wasn’t giving them enough money.
@Alex
You reiterate your initial error
You are clearly out of your depth