The crisis in Ireland
11th January, 2009.
Dashed across to Dublin this week-end, to address the Irish Green Party Conference, and met up with Richard Douthwaite of FEASTA - the excellent Irish think tank. I was shocked by what is happening to our neighbours. One newspaper headline declared yesterday that in this country of just 5 million people, 5,000 are being laid off every week. According to the Economist Intelligence Unit, “in October there were 260,300 claimants on a seasonally adjusted basis, up by a mammoth 57.1% on a year earlier, and by 6 .5% on the previous month (the largest ever monthly jump in claimant numbers.)”
Readers will have heard about Dell Computers laying off 1,900 workers last week; but you may not know that the venerable Waterford Glass company - part of Anthony Reilly’s Wedgewood empire - is threatened with closure too, if a buyer cannot be found. That’s an awful lot of pain, anguish and suffering - for men and women and their families. It does not bear thinking about. And it is severely damaging the banks that lent money to these men and women during the housing boom.
Like all the Anglo-American economies, the cause lies in the bursting of a massive and costly credit bubble used to finance and inflate Ireland’s property and other asset markets. And I am convinced that Ireland’s crisis has been exacerbated by the actions and policies of the European Central Bank. Indeed in my view, there is a direct link between high levels of unemployment in Ireland in October, and the decision of the governors of the European Central Bank, led by Jean-Claude Trichet, to raise the official base rate (known as the marginal lending rate) in July, 2008 to a whopping 5.25% - at the very height of the financial crisis. Since then Trichet and ECB governors have lowered the base rate to 2.5%, but it remains higher than that of the UK and the US. And I remind you again, that the base rate is not the rate that determines the borrowing costs of most companies and households; those are determined by much higher private bank rates - who would have passed on the ECB rate to their customers in the months following the July announcement.
The Economist Intelligence Unit had hoped that Ireland would compensate for the loss in domestic demand and activity, by increasing exports. However as the crisis in Ireland deepened, so the Irish currency - the Euro - rose in value, making Irish exports less competitive than say, British exports.
At the same time the steep rise in unemployment claimants rapidly helped empty the Irish government’s coffers. As recently as 2006 that government had made prudent provision with a fiscal surplus of 3% of GDP. But by 2008 the deficit had risen dramatically - and unsurprisingly - to 6.5% of GDP. The Economist Intelligence Unit (EIU) expects it to rise to almost 9% of GDP in 2009. The EIU describes Ireland’s “public finances” as in a “state of crisis unparalleled in any other developed economy….In early November the European Commission launched the excessive-deficit procedure against Ireland for its breaches of the Stability and Growth Pact……..given the magnitude of the deficits…Ireland may become the first country to be threatened with the imposition of fines.”
So: a small country faced by the massive debtonation of a privately-financed credit bubble and by dramatically rising debt, unemployment and economic failure at home, lacks all the major levers to deal with, and stabilise the crisis. Unlike Britain and the United States, Ireland has no control over the key rate of interest, which is set far away in Frankfurt. It has no control over the value of the currency in which its citizens trade. And far from emulatiung the US and UK by stimulating the economy through government spending, Ireland’s government is now obliged, by the European Commission, to cut back government spending steeply - and faces costly financial penalties for incurring the deficit.
The Irish Times believes that the people of Ireland must do what the Irish have always done to avoid crisis: they must emigrate. So the Times provided a useful guide in yesterday’s edition to immigration procedures around the world. With unemployment rising globally, its going to be harder for the huddled masses to find a welcome in a foreign country.
But it may not all be doom and gloom. This crisis may just give the Irish an opportunity to take back control over their own economy;. And the Green Party is hoping that the new austerity will help lower consumer expectations, and encourage the Irish as a whole to live more simply and more sustainably. For, as Green Party speakers emphasised yesterday - living more simply and sustainably could improve everyone’s quality of life too. A tough message in tough times, but its the only hopeful one to emerge from the encircling gloom.
Welcome to my blog about the financial crisis. I'm Ann Pettifor, author and analyst of the global financial system, and co-author of the Green New Deal. I predicted an Anglo-American debt-deflationary crisis back in 2003, and am known for my work on sovereign debt and international finance, including Jubilee 2000. Currently a fellow of the
9 Responses to “The crisis in Ireland”
Another good reason for the few remaining EU countries to stay out of the Euro. The EU has never done any use except create another wasteful level of costly uneeded bureaucracy.
Comment By eyebee on January 12th, 2009 at 11:06 am
[...] in the rest of the world are going to hell in a handbasket as well. In Ireland for example, Debtonation comments that One newspaper headline declared yesterday that in this country of just 5 million [...]
Comment By Sign of the Times « 86th and Lexington on January 12th, 2009 at 3:17 pm
Is it the whole story to say that Ireland’s (or Europe’s, for that matter) problems are due to the credit crunch.
Aren’t there additional issues beneath the surface, such as the shift to Asian manufacturing and the general overcapacity in the world economy (eg too many car manufacturers)?
In that context, isn’t the credit crunch the straw that is breaking the camel’s back, already weighed down as it is by these other problems?
Shouldn’t we be discussing these other issues to a greater extent?
Comment By Patrick Vincent on January 12th, 2009 at 8:49 pm
Patrick,
Thanks for this comment….I see things the other way around; we’ve got too many cars, and too much over-capacity because of too much, too easy credit was issued recklessly by the finance sector, and with government and central banks conveniently turning a blind eye……But now that credit has inflated these markets to bursting point, there is a mess to clear up, and the issuers of credit - the private finance sector - are reluctant to clear it up. Instead they are simply raising the borrowing costs of companies/households already overburdened by debt….by excessive inventories, and by workers that now must be made redundant so that creditors can be repaid….That is how it looks from my perspective.
Comment By Ann Pettifor on January 13th, 2009 at 9:56 am
I wonder if there is any research on how ‘easy’ money distorts decision making and the allocation of resources, without regard to the price of that money? Because I agree with you Ann that is what has happened.
I have seen it happen in many contexts; for example, a charitable foundation I once ran always made the best decisions when its resources were low and needed to be rationed rather when they were high. But it would be interesting to see if someone has worked out the psychological/social mechanisms that make this so.
Comment By Nicholas Colloff on January 13th, 2009 at 11:08 am
[...] Crisis In Ireland - “One newspaper headline declared yesterday that in this country of just 5 million people, 5,000 are being laid off every week. In October there were 260,300 claimants on a seasonally adjusted basis, up by a mammoth 57.1% on a year earlier, and by 6 .5% on the previous month (the largest ever monthly jump in claimant numbers.)”” [...]
Comment By TheTraderBlog.com » Tuesday Links on January 13th, 2009 at 3:13 pm
Richard Douthwaite invited me to give the FEASTA annual lecture in December
here
http://www.feasta-multimedia.org/2008/Chris_Cook.mov
and here
http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-credit-crash-presentation
My thinking, based upon a career reaching top level in financial markets (and I am increasingly being consulted by governments looking for solutions), is that rather than addressing the Quantity of financial claims over assets, we should have a new look at the nature, or Quality, of the claims, by literally reinventing what we mean by “Equity”.
So I’m advocating a “Debt/Equity swap” on a large scale through unitisation of property (land) rentals…just not equity as we know it….
There isn’t very much equitable about a limited liability corporation as an enterprise model, after all…
Comment By Chris Cook on January 13th, 2009 at 5:33 pm
Why should the Irish people or anyone else for that matter be crippled economically by the debts arising from financial speculation? This bailout of banks is insane. We could create a new money system tomorrow and let the lot go under. RBS has £1trn debts - is the UK taxpayer going to underwrite what should in reality be cancelled (derivatives, hedge funds, private equity- all should be wiped out) and see our public services shredded for the benefit of a tiny number of Anglo-American financial oligarchs?
Comment By Ken MacIntyre on January 21st, 2009 at 1:56 pm
To survive, we all know that companies must have a solid strategic plan, a way to get from the recession point today, to create a secure footing, a solid foundation to secure their future, Ireland Inc’s future.
Now wouldn’t it be great for the Taoiseach, The Minister of Finance, the Tanaiste to be able to stand up, deliver a speech that not only acknowledged this…
but had a solution
….a solution that saved jobs
….a solution that started to give hope
Because, we know deep down, we as a nation deserve this – it’s our heritage
As you will see I am passionate to see Ireland succeed - as are the huge team of
business experts who have already joined us - who will roll up their sleeves and
work with the banks to create this foundation, this foundation for success – we just
need help to give it a push, some momentum and with momentum we can be off - why
because we can, yes we can!
Comment By v2020 on March 18th, 2009 at 3:38 pm
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