Transcript Document

Ireland:
Villain of crisis or Hero of
recovery?
Marc Coleman MD Octavian Consulting
Radio presenter
Columnist, Sunday Independent
[email protected] www.Octavian.ie
Some background
• A longer-term perspective on Ireland is needed
• Political factors …. Because politics matters to fiscal policy
• EU level factors …. Because this is not just an “Irish story”
Why a longer term perspective is needed
Average growth: 1997 to 2014
Ireland:
Euro area
5.0
4.0
3.0
2.0
1.0
0.0
Source: OECD Economic Outlook, June 2013
OECD
IRELAND AND ENGLAND: POPULATION'S
COMPARED
Ireland England
EU & Irish population growth 2004-2014
(2004=100)
EU
50
114
112
Millions of people
110
108
106
104
30
20
10
100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CSO Population estimates, August 2014
2006
1841
0
What if Ireland was as densely populated as…?
Republic
Island
25.0
20.0
15.0
10.0
5.0
Germany
Switz.
Denmark
France
Austria
Ireland
1841
0.0
Ireland
2006
Millions of people
Why some debt increase was
justified for Ireland
102
40
Poland
A Long Term Perspective:
Demography
– or –
Ireland
116
78
76
74
72
70
68
66
64
62
60
90
1969 1973 1977 1981 1982 1982 1987 1989 1992 1997 2002
Stability of support for two main
parties deteriorates steadily and
strongly
Voter turnout deteriorates
steadily and strongly
Result:
Political parties have to bargain
much harder for re-election
Ireland’s electoral system makes
pre-election spending inevitable
Percentage of vote
1980s & 1990s:
Voter turnout
Percentage of eligible voters
casting a ballot
A short term
perspective:
Politics
Combined vote of 2 main political
parties
85
80
75
70
65
60
1969 1973 1977 1981 1982 1982 1987 1989 1992 1997 2002
Year of Election
Rate of increase in governemnt spending
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2000
2001
2002
election
2003
2004
2005
2006
2007
election
Attitudes to Europe
Votes on European Referenda
90.00
80.00
70.00
Nice I defeat:
Cynicism over 2001 ECOFIN reprimanding of
Ireland over cyclical balance
000s
60.00
50.00
40.00
30.00
20.00
Lisbon I defeat:
10.00
0.00
View that by defeating referendum Ireland
could achieve a superior bargaining position
vis-à-vis retention of EU Commissioner
1971 EU
Accession
1987 Single
European Act
1992
Maastricht
treaty
1998
Amsterdam
Treaty
2001 Nice I
2002 Nice II
2008 Lisbon I
Ireland’s record in Europe
1973-2013:
- GDP grows in real terms by 333.6 per cent
- Far and away fastest rate in EU
- From 60% of EU GDP per capita (1972) to 121% (2012
1990: Irish Presidency helps to secure German re-unification
1996: Irish Presidency of ECOFIN secures agreement to Stability Pact
2004: Irish Presidency steers EU Accession process and secures agreement to
draft EU Constitution (which France rejects)
Villain of the crisis?
EU level factors
• Abandonment of Stability Pact strictures by Ecofin in November 2003
• Adoption of a policy of zero real interest rates between 2003 and
2005
2004: A turning point
Actual budgetary balances
Structural budgetary balances
2003
2004e
2005f
2003
2004e
2005f
Ireland
0.2
-0.8
-1.0
Ireland
0.1
-0.3
-0.2
France
-4.1
-3.7
-3.6
France
-3.9
-3.4
-3.3
Germany -3.9
-3.6
-2.8
Germany -3.2
-2.9
-2.3
Source: 2004 Public Finance Report of EU Commission
If France and Germany can get away with it…..
From 2004 to 2007
Government
spending rises by
31%
Spending
significantly exceeds
inflation plus pop.
growth
% Annual
change
2004
2005
2006
2007
Total
Government
Expenditure
6.2%
11.1%
10.6%
12.1%
Inflation
2.1%
2.5%
3.9%
4.9%
Population
growth
1.6%
2.2%
2.5%
1.6%
How was this public
spending financed?
A massive expansion of private sector credit
injected an amount equivalent of one third
of GDP into the economy in just 4 years
2004
2005
2006
2007
GDP growth (% change y-o-y)
4.4
5.9
5.4
5.4
Balance of Payments (Current Account)
as % GDP
-0.6
-3.4
-3.5
-5.4
91.0
115.4
134.1
148.6
1,870.50
1,962.70
2,048.30
2,122.80
Gen. Gov't Balance as % GDP
1.4
1.7
2.9
0.1
Gen. Gov't Debt as % GDP
29.5
27.3
24.6
25.0
Total Gov't expenditure (€bn)
45.7
50.8
56.1
62.9
Private Sector Credit (€bn, end Dec)
Employment (000s)
Capital taxes, income taxes & VAT became
hugely dependent on credit expansion
A heavy and unsustainable
dependence on capital taxation
And exposure of other tax categories to
construction activity
Share of capital taxes in total
Share employment in construction
18
14.0%
16
13.0%
12.0%
14
11.0%
12
10.0%
10
9.0%
8
8.0%
6
1998Q1
1998Q3
1999Q1
1999Q3
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
7.0%
4
2004
2005
2006
2007
2008
2009
2010
Monetary Policy
Backdrop
Real Interest rates: Euro zone (yellow), Ireland (blue)
Bundesbank avge real interest rate 1948-1998 (black)
7
6
Ireland’s higher inflation brought real interest
rates to significantly below euro zone levels
5
4
Negative real interest rates between 2002 and
2005
3
2
But
Euro zone real rates were already significantly
below average Bundesbank norm between 1948
and 1998
1
0
-1
M3 growth 2003-2005 was 8 per cent per
annum ,well in excess of reference value of 4.5
per cent
-2
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
An aggravating factor:
Ireland’s “transmission mechanism” differs from rest of EZ”
• High home ownership, weak rental security of tenure
• Variable rather than fixed mortgage rates
• A strong culture of “my home is my castle” in contrast to more functional
approach to property on European mainland
• High taxation of home construction (VAT, builders levies) and home ownership
(stamp duty, property tax) gives politicians incentive to inflate the market.
• While there is as yet no property boom (price rises are a correction in my view)
the above factors have not gone away.
An economy warped by low interest rates and weak regulation
14%
12%
10%
2004: Economy not perfect but
-
Fiscal balances and debt prudent
Current account in surplus
Private sector credit and house prices only
modestly excessive given Ireland’s young
and growing population
8%
6%
4%
2%
0%
-2%
1999
2004-2007
2000
2001
2002
2003
2004
D
om
esticD
em
and External D
em
and
- “Socialist” policy increases
public spending by 31%
- Monetary policy backdrop allows
policy makers to temporarily
disguise long term policy
implications by overreliance on
property market
2005
2006
2007
Consequences II
Housing market trends
Residential Property Price Index (Base Jan 2005 = 100)
The Housing market
From a position of slight or modest
overvaluation in 2003……
Percentage Change over 12 months for Residential Property Price Index (%)
140
20
15
120
10
100
5
…house prices explode in 2005 and 2006
Interestingly peak growth subsides in
80
0
60
-5
-10
40
-15
20
-20
0
-25
2005M01
2005M04
2005M07
2005M10
2006M01
2006M04
2006M07
2006M10
2007M01
2007M04
2007M07
2007M10
2008M01
2008M04
2008M07
2008M10
2009M01
2009M04
2009M07
2009M10
2010M01
2010M04
2010M07
2010M10
2011M01
2011M04
2011M07
2011M10
2012M01
2012M04
2012M07
2012M10
2013M01
2013M04
2013M07
2013M10
2014M01
2014M04
2014M07
May 2007
Did anyone shout “stop!” ?:
September 2004
Taoiseach (Chancellor) announces he is a “socialist”
October 2004 (Magill ma
13th July 2005 (Irish Times)
“High rates of lending growth threaten our economy”
July 29th 2005 (Irish Times)
Growth in our economy is “not sustainable”.
August 19th 2005 (Irish Times)
“The influence of construction is hugely disproportionate” [in the economy].
September 2005 (Irish Times)
I carry Jean Claude Trichet’s warning to financial authorities to “take action” in relation to overheating
March 31st 2006 (Irish Times)
“Stop the economy I want to get off”... “financial regulation has broken down”...”Nobody, absolutely
nobody, is in charge”.
June 2006
ESRI Quarterly Economic Commentary contains warning of a possible US recession
July 6th 2006 (Irish Times)
“Aimless, lopsided and unsustainable, our economy needs remedial action now”....”Revenue growth is
not strong..it is absolutely crazy”....the government’s fiscal position could “deteriorate rapidly”
Response July 13th 2006
Finance Minister Brian Cowen writes opinion piece rejecting my assertion that government finances are
overdependent on property
On July 17th 2006:
I physically confront the Finance Minister at a government Economic conference and challenge him to
prepare a contingency plan in case of recession.
April 13th 2007
I warn that election forecasts of all political parties (4+ per cent growth
per annum 2008-2012 are unrealistic (page 150 “Fall of the Celtic Tiger”, O’Donovan & Murphy 2014)
Response
“We know but if we put lower forecasts in our manifestos we are afraid government will accuse us of talking
down economy”
Boy who cried wolf syndrome
• Several economists were shouting “stop”
• Problem: Phenomenon of “Boy who cried wolf”, economic commentary
as entertainment (shock value)
• Predictions made of economic collapse from mid to early 1990s - long
before
• Then more boring commentators (like myself) issue warnings
• Easy for political leaders to dismiss “we’ve heard it before & it was wrong”
Hero of Recovery?
Ireland’s correction:
Spending cuts
(€bn)
Tax increases
(€bn)
Ratio SC/TI
October 2008
0.30
2.30
3/23
April 2009
1.20
2.70
4/9
Ireland begins fiscal correction with an
December 2009
3.10
0.10
31/1
emergency budget in October 2008.
Before the fiscal impact of the crisis has
begun in earnest
December 2010
2.20
2.40
11/12
December 2011
1.60
1.60
1/1
December 2012
1.85
1.65
37/33
or Portugal have begun in earnest
October 2013
1.60
0.90
16/9
Consolidation is sustained and
determined with a total correction
equating to roughly 12% of GDP
Total
11.85
11.65
1/1
- Early
- Fast
- Hard
Early:
Fast
In less than 15 months, Ireland
implements 3 budgets with a total
correction of nearly €10 billion or nearly
6% of GDP
Budget
This is before Britain, Greece, Italy, Spain
Hard:
Both fiscal and current
account balances are
corrected
Quickly.
Gen. Govt Deficit
10
5
0
2004-2007
Unit Labour Cost rises imply 15% deterioration
in competitiveness
Public sector leads this deterioration as earnings
in that sector rise 20% in period
2008-2011
Led mainly by private sector ULC decline by 15%
reversing earlier loss in competitiveness
By 2010 Current account back in surplus
-5
-10
-15
-20
-25
-30
-35
2008
2009
2010
2011
2012
2013
Recovery
2012
2013e
2014f
2015f
2016f
0.2
0.2
2.0 (3.0)
2.3 (2.5)
2.8 (2.9)
1,837
1,866
1,894 (1,910)
1,919 (1,920)
1,944 (1,945)
Unemployment %
GDP
14.7
13.5
12.4 (11.2)
11.8 (10.6)
11.4 (10.4)
Gen. Gov't Balance as
% GDP*
-8.2
-7.3
-4.8
-2.9
-2.4
Primary Balance as %
of GDP
-4.5
-2.7
0.0
2.0
2.6
GDP growth (%
change y-o-y)
Employment (000s)
Some caveats on “hero”
status
Composition of adjustment too much on tax increases and too little on public spending
- 1982-86:
- 1987-92:
- Dec. 2009:
- Dec. 2010
2 Elephants in the room
Public spending not reduced, taxes increased
Result: Average GDP growth of 0.3%
Public spending reduced by 10 per cent of GDP, taxes not increased
Result: Average GDP growth 3.4% (initial impetus to devaluation but after 1987
Ricardian effects as public fear of tax increases abates
Budget emphasises cuts in spending with no tax increases
Result: Domestic economy grows, unemployment stabilises and taxes come
in above target
Budget reverts to “tax and spend” mode
Result: Return to recession, renewed increase in unemployment and taxes
come in below target
1. Public pay 47% higher than private pay on average
Giordano et al: ECB WP 1406 “only Portugal Italy Greece & Spain comparable
2. Total government spending remains approx. 40% above 2004 levels
Financial credibility
restored
- Bond yields over bunds now at pre crisis
lows
- Fitch restores Ireland to “A” grade rating
last month
- Main banks (AIB, BoI) report greatly
improved results H1 2014
-
Latest indicators of recovery
• GDP Q1 2014:
+2.7% Q/Q (sa)
+4.1% Y/Y
• Unemployment: 11.2% August 2014 (from 15.3% peak July 2012)
• Fitch ratings:
Upgrade from BBB+ to A- in August 2014
• Property prices: 13% increase in year to date (but prices still 41%
below peak & credit subdued so not a boom)
Conclusion
• Ireland is unique because
• Highly successful experience in EU in terms of economic and demographic
growth
• Historic trends of population recovery makes higher debt inevitable. Gap
between Irish and Euro zone debt/ GDP levels probably justified by different
demographics (Life Cycle hypothesis)
• Last point re differential does not excuse high debt in both Euro zone or
Ireland
• Weak fiscal policy & high debt accumulation in Ireland has
• A domestic cause:
Dysfunctional political system
• a common cause:
Abandonment by large countries of SGP
Zero real interest rate policy between 2003 and 2005
(aggravated but not caused by Irish competitiveness loss)