Posts Tagged ‘Ireland’

Those who like to tint their spectacles with roses saw reason to cheer. The Eurozone economy appeared to be on the slow march to recovery. Oh boy it was slow, and the signs of recovery were subtle, but they were there. Then yesterday it began to look as if was all going to blow up.

There is a consensus across much of the euro area that pain just can’t be avoided; that recovery can only occur if first we have pain, then more pain, and then – just to be on the safe side – a bit more pain. But, or so goes the consensus, the people realise this; they are willing to make the sacrifices, and recovery will follow – just be patient and let hard work and fortitude carry the euro through.

Last year Stein Ringen, a sociology professor at Green Templeton College Oxford, penned a piece for the ‘FT’. He said: “Economists are no more likely always to agree than any other experts but there was a remarkable unanimity as the crisis unfolded: Europe was on the edge of the abyss; bold and rapid action was needed from strong governments.” But, in his bullish article, he added: “Against this storm stood a remarkable woman, Angela Merkel, insisting no quick fix was available. She has been proved right.” He then talked about how the solution turned out to be “steady work and steely brinkmanship.”

The article was written on March 27 last year. At that time there was a consensus across the euro area that predictions of doom had been disproved. There was one snag with the optimism of that time: subsequent events showed it to be ill-informed. In fact, the euro area has been in recession/depression ever since.

Then earlier this year, in another one of those ‘told you it would be all right’ type statements, José Manuel Barroso, president of the EU Commission, said: “[The] existential threat against the euro has essentially been overcome.” He concluded: “In 2013 the question won’t be if the euro will or will not implode.” Or take this piece in ‘Bloomberg’, written in January this year, Why Austerity Works and Stimulus Doesn’t http://www.bloomberg.com/news/2013-01-07/why-austerity-works-and-fiscal-stimulus-doesnt.html

The author Anders Aslund said: “After five years of financial crisis, the European record in Northern Europe is sound, thanks to austerity, while Southern Europe is hurting because of half-hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.”

So, was there evidence to back-up these claims? Was austerity working?

Of late there have been signs – small signs, but signs nonetheless – of improvement. Take Markit’s latest Purchasing Managers’ Indices (PMIs) for both manufacturing and services. The word high features prominently. For Ireland the composite PMI for June rose to a five month high; it hit a three month high for Germany; a 24 month high for Spain; a ten month high for France, and a 21 month high for Italy.

So that was encouraging.

Spanish manufacturing now appears to be out of recession, with the latest manufacturing PMI for Spain hitting 50 – a 26 month high – a score which is meant to be consistent with zero growth. Furthermore, recent trade data showed the first trade surplus for Spain in 40 years.

On the debt front, central government debt in Greece is well below target so far this year, and much better than during the corresponding period last year. Ireland appears to be on course to meet its targets for this year.

This is where the good news finishes, however.

Sure, Spain posted its first trade surplus in 40 years, but this was largely down to plummeting imports. In other words, the surplus was a symptom of economic depression. Sure the PMIs are looking better, but they still suggest the euro area is in recession – a very deep recession in some cases, including – by the way – France and Italy.

As for debt, total external debt (that’s public and private owed to creditors abroad) is 168 per cent of GDP in Spain, 200 per cent of GDP in Greece, 227 per cent in Portugal, and 410 per cent in Ireland.

Debt maturing in 2013 or 2014 in Greece equates to 21 per cent of GDP in Greece and Portugal, 23 per cent in Spain, and 32 per cent in Italy.

Unemployment, especially in Greece and Spain, remains at levels that can only really be called horrendous.

How can hard work save these countries when there isn’t the work for people to do?

But we now appear to be entering a new era; one in which monetary policy will slowly tighten. If the Fed raises interest rates in 2015, as it suggests, what will this mean for the euro area?

Bond yields soared in Portugal yesterday on the latest political uncertainty following the resignation of two government ministers. They also rose sharply in Greece, which is also facing a political challenge at the moment, after the Democratic Left pulled out of the Greek coalition following the closure of State TV, in another government attempt to reduce spending. Yields were up in Spain too.

The good news, albeit small comfort for many, is that Angela Merkel seems to have woken up to the plight of the euro area’s unemployed youth. Post German elections – assuming she wins that is – there is even a chance she will rein back on pressure for more austerity.

The truth is that austerity is not working. Sure parts of the economies across much of Europe need a radical overhaul, and indeed could do with some austerity measures. But other parts of the economy need stimulus, and they need big stimulus. Nothing short of a latter day Marshall Plan will do.

But the ECB has been a disaster – fretting over inflation when deflation was a bigger danger.

Maybe, the ECB will mend its ways, but the signs are not good. If the Fed tightens, the euro may come under pressure relative to the dollar, and in such an environment it is hard to imagine the ECB announcing quantitative easing, even if this is what the region needs.

Alas, thanks to policy errors, and an ill-founded sense of confidence – even a head in the sand mentality amongst many decision makers in the euro area – it is no longer the euro that faces a so-called existential threat, it is the EU itself, and that is tragic.

It is not too late to save the project, but only massive investment, perhaps funded by the ECB printing money, will do it.

© Investment & Business News 2013

“The existence of tax havens, coupled with high mobility of capital, means governments are constrained in the tax rates they could otherwise apply – crucial for both wealth and job creation,” or so says the Institute of Economic Affairs.

These are brave words, given the current climate.

The Institute also said: “Without tax havens, big businesses would move away from the UK. If tax havens could not be used by multinational corporations in the UK, then a single rate of corporate tax would have to be set. If set too low, then corporations’ contribution to the overall tax take would fall. If too high, then business would move overseas, damaging the overall economy.”

And: “without tax havens, many innovative products would be stifled by punitive tax regimes. Offshore tax havens allow the UK to make the most of its comparative advantage in financial services and avoid potentially damaging double or triple taxation on investment returns.”

Maybe so, but remember corporate profits to GDP have hit an all-time high. You can’t blame companies for trying to squeeze wages, but when they all try to do that, the result is less demand across the economy, which in turn is bad for corporate profits in the long term.

Surely, we need higher corporate taxes across the world, not lower ones. Tax havens, however, are a distraction from the bigger issues. What we really need is for some kind of international agreement that any country wishing to participate in global trade to be required to sign up to a minimum level of corporate tax.

© Investment & Business News 2013

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The inflation hawks say runaway inflation is inevitable. With record low interest rates and money printing, it is as sure as eggs are eggs.

If that is so, explain this. In the latest data out today from Eurostat, inflation in April was recorded at 1.2 per cent. That is about as alarming as one broken egg in a giant chicken farm.

The inflation rate has halved over the last year – it was 2.6 per cent in April 2012.

A breakdown of the figures is not yet available, but last month inflation in Greece was just 0.6 per cent. In Germany it was 2.0 per cent.

Truth be told, in order to compete, the countries of the southern Eurozone – that is Portugal, Spain, Italy and Greece – have to see prices fall relative to Germany.

This has already happened to an extent in Ireland. If you give the consumer price index in Germany and Ireland a reading of 100 in 2008, then by March this year the index had risen to 115 in Germany, 109.5 in Ireland. In other words, since 2008 German prices have risen by 15 per cent and by 9.5 per cent in Ireland. The economy of Ireland still has plenty of problems ahead, but it has at least partially closed the competitive gap with Germany.

The problem facing the southern Eurozone is that at a time when average inflation across the region is just 1.2 per cent, in order to close the competitive gap they may need to see even lower inflation than that – indeed outright deflation may be the ticket.

When you carry large debts, deflation is about as disastrous as you can get. Imagine the scenario. A country suffering from deflation may be growing in real terms, but in nominal terms contracting. And if nominal GDP is falling, it becomes devilishly difficult – some might say nigh on impossible – to cut debt relative to GDP.

Capital Economics reckons that as a result of deflation, there is a danger that by 2020 debt government debt in Italy and Greece may pass 200 per cent of GDP. And it could be around 170 per cent of GDP in Spain and Portugal. The very process of austerity, and the domination of hawks at the ECB, is creating low inflation across the Eurozone, which in turn may cause debts in Southern Europe to escalate to even more horrendous levels.

Capital Economics reckons there are three possible solutions: default, euro exit, or money transfers from north to south of the Eurozone – in other words, much closer political union.

Italy’s new Prime Minister Enrico Letta is pushing for the latter approach. In a speech yesterday he laid it on thick: “Our destiny as Europeans is common, otherwise it will be made up of individual countries that will slowly decline,” he said.

There is a fourth scenario, however and that is more inflation, especially wage inflation, in Germany,

EU Social Affairs Commissioner László Andor has called for wages to rise in Germany. In an interview with Süddeutsche Zeitung, he said: “Belgium and France have been complaining about German wage dumping.”

Mr Andor warned that the alternative to growth policies entailing rising wages in Germany – perhaps enforced by a rise in the minimum wage – may be mass migration.

In words that might resonate with many in the UK, he said: “Some people compare the situation to America in the 19th century, when there was a mass migration from the south to the prosperous north after the Civil War. In order to avoid this, it is necessary to create growth in the crisis countries.”

Whatever the solution, it is clear that deflation and not inflation is threatening to pulverise the southern Eurozone economy.

© Investment & Business News 2013

Look through a list of former US bankrupts and its reads like a Who’s Who. Implicit in the US business world is an assumption that it is better to have a go and fail than not even try. And more to the point, if you do fail, have another go. In Europe, the stigma of failure is such that it is a wonder that there are any entrepreneurs at all.

Now Ireland has overhauled its bankruptcy rules, and in so doing ensured it no longer lags half a millennium behind the US. It is now merely a couple of centuries behind.

Right now in Ireland, if you go bankrupt, the period of your bankruptcy lasts 12 years. If you go bust, you are condemned to misery for around a quarter of your working life. It isn’t much better than debtor’s prison. Then again, for that very reason, bankruptcy is very unusual in Ireland.

Now insolvency rules are being overhauled. The bankruptcy period is being shortened.

It’s an improvement, but… Under new rules individual debtors will be restricted for a period of up to seven years from spending more than 247 euros a month on food, 57.1 euros on heating, and 125.97 euros on so-called social inclusion – that is a grandiose term for going to the cinema, or to see sporting events.

The thinking behind the rules is in part to protect debtors from being forced by creditors chasing bills to go hungry, or cold.

But these comments from Lorcan O’Connor of the Insolvency Service of Ireland are telling: “There are very few people in Ireland who could claim to be experts in personal insolvency.”

Perhaps the single biggest respect in which the US economy scores over other countries is the way in which it has an innate ability to reinvent itself. Mistakes are not only considered inevitable; in some ways they are seen as a sign of ambition, of big ideas.

Europe, perhaps with Ireland in the vanguard, is still living in a past which sees failure as an anathema, and as a result, risk is suffocated virtually at birth.

©2013 Investment and Business News.

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178

When they talk about the Eurozone’s more problematic areas, Ireland is held up as a beacon of hope. For example, take these words uttered by Capital Economics: “Ireland remains a head and shoulders above the other peripheral euro-zone economies.”

But data out yesterday provided a sharp and quite nasty shock to such complacency.

In recent months while all around the Purchasing Managers’ Indices (PMIs) relating to manufacturing across the Eurozone have been dark, the Irish equivalent has been bright. Ireland showed that austerity can work. A country can suffer the ignominy of a bail-out, and despite staying the euro, enjoy impressive recovery.

Well maybe that is right, but take a hard look at the data. Unemployment is 14.7 per cent, the budget deficit was estimated to have been around 9 per cent of GDP last year, and government debt is predicted to be around 121 per cent of GDP at the end of this year.

Look at the story of growth. It was minus 5.5 per cent in 2009, minus 0.8 in 2010, plus 1.4 in 2011, and plus 0.7 in 2012. So last year and the year before, Ireland expanded – in fact it enjoyed one of the highest growth rates in Europe, which is what gave hope to its supporters. But many forecasters are predicting contraction this year and next.

Ireland’s growth is coming from exports. In 2009 it suffered a current account deficit worth 2.3 per cent of GDP. In 2012 it had a surplus worth 2 per cent of GDP, and is expected to have a surplus worth 3 per cent of GDP this year.

Ireland’s woes turned really nasty in 2010. That was the year when it ran a fiscal deficit of 30.9 per cent of GDP, and government debt rose from an average of 33 per cent of GDP between 1998 and 2008 to 65 per cent in 2009, to 106 per cent in 2011.

It just to goes to show, keeping government debt under control is not the secret to having a successful economy, and we have seen this over and over again in recent years. When the private sector hits a crisis, government debt can then soar.

But now we come to the really worrying part of Ireland’s story. The latest PMI for manufacturing came in at just 48.6. Okay so what does that mean? Any score under 50 is meant to suggest contraction. More to the point, Ireland’s latest PMI was the lowest reading in 14 months.

This does not mean Irish growth recovery is over, but it has most certainly hit a nasty hurdle.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here