EU Economy
Surging Irish growth a lesson for European Union policy makers?
By Michael Hennigan, Finfacts founder and editor
Sep 19, 2014 - 8:10 AM

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Simon Nixon of The Wall Street Journal writes: "Ireland’s blowout second-quarter growth figures are more than just a domestic achievement" and policy makers such as the ECB president, the German finance minister, and the Bundesbank president are likely to argue that the Irish economic recovery accelerating  in the second quarter of 2014 to a 7.7% year-over-year rise in GDP, supports their arguments for structural reforms in France and Italy.

Ireland did get some key moves right during the economic emergency and a drumbeat for debt default and exiting the euro wasn't heeded -- the issue of a State guarantee of bank debt and deposits at the start of the crisis was one consequential move that was made without a serious consideration of the downsides.

It is however bizarre to observe foreign policy makers and commentators praising Ireland for implementing structural reforms - - the current Government cannot credibly claim credit for any structural reforms of substance and when Michael Noonan, finance minister, responded to the request of the bailout troika to establish a fiscal advisory council, he created an intellectual ornament that reports to himself.

Ireland remains one of Europe's most expensive economies; we are an expensive business location, and while many Irish private sector workers are on low pay, the average hourly wage cost (including social security) is 28% higher than in the UK.

The Irish courts and the big professional firms have been have been heaving with activity through boom and bust, with the Exchequer picking up big tabs and almost four years after Ireland gave a commitment to the bailout troika to reform legal services, it's still pending as the barristers in the two governing parties are not minded to inconvenience their legal colleagues.

The Competition Authority said in April 2012:

In November 2010, the Government signed a Memorandum of Understanding (MoU) with the EU/IMF. The MoU included a commitment that, by the end of the third quarter of 2011, the Government must establish an independent regulator and implement the outstanding recommendations of the Competition Authority. In October 2011 the Minister for Justice, Equality and Defence, Mr. Alan Shatter, TD published the Legal Services Regulation Bill."

There has been a framework agreed for changes in some public sector work practices but it's apparently unclear to all parties what the overall impact of changes will be.

Low employer social security costs (which ensures that most private sector indigenous workers have no occupational pension) long predate the current government as does the official support for foreign-owned firms that refuse to recognise the right of workers to be represented by trade unions.

Mario Draghi, ECB president, had a second disappointment Thursday in respect of the central bank plan he announced earlier this month to buy asset-backed securities (ABS) in addition to his July announcement of new financing for banks from this week.

Last week it was reported that Germany and France refused to give guarantees in respect of the ABS and on Thursday Europe’s banks borrowed €82.6bn through the first of the ECB’s Targeted Longer-Term Refinancing Operations, or TLTROs, out of a possible €400bn, much less than analysts had forecast.

“The ECB has set itself the goal of expanding its balance sheet substantially,” said Krishna Guha, vice chair of ISI Group, a research company, as reported by The Financial Times. “But judging by the take-up of the first TLTRO it is going to be very difficult to achieve this with the TLTRO and promised private asset purchases only.”

Guha added: “The problem is that [the ECB] has always allowed market demand for its loans to determine the size of its balance sheet, instead of determining this itself through asset purchases. But what’s optimal for the banks isn’t necessarily what’s optimal for the economy.”

Also on Thursday François Hollande, French president, ruled out going beyond spending cuts already announced, saying that to do so would destroy any hope of economic growth.

Warning that “results take time”, the president said: “France will not do more than that because it would be bad for growth.”

Elsewhere, Germany plans a 2015 budget without any need to raise debt and on Friday  Wolfgang Schäuble, German finance minister, told reporters in Hong Kong: "The scope for monetary policy to stimulate growth is low." He was on a stopover before the start of the G20 summit of finance ministers and central bankers, set for Saturday and Sunday in Cairns, Australia.

Schäuble said his country's economy was robust and that it was important for Europe to stick with the tough path of fiscal reform. "We are in the global economy and in Europe in a situation, in which we seem to have too much liquidity and too much public debt."

In  a letter to Pier Carlo Padoan, Italian finance minister, dated September 9 Schäuble and his French counterpart, Michel Sapin, endorsed plans to step up investment to give Eurozone economies a better chance at growth in the years to come.

“Investment, for instance, in the euro area is now 20% below what it was in 2007,” Vítor Constâncio, the vice president of the European Central Bank, said at the news conference in Milan last Sunday. “In the stressed countries, the percentage is even, of course, much higher.”

He called for “a reversal in the behaviour of investment,” and said he broadly supported the €300bn investment plan of Jean-Claude Juncker, the incoming European Commission president.

The IMF on Thursday reported on Italy and it said labour reforms are critical as unemployment reaches a post-war high of over 12%. Following a loosening of restrictions, 70% of new employment contracts are now temporary. "Flexibility is important, but there are limits to the inroads it can make on improving worker productivity."

Reforms are important but big temporary workforces such as in Japan and South Korea are not viable solutions.

The Fund said that Italian banks still have too many bad loans on their books, which is reducing their capacity to finance fresh and productive investment.

A recent poll found that almost two-thirds of Italian voters support Matteo Renzi, Italian prime minister, but just 42% said they supported Renzi's plans to boost economic growth, with 46% expressing negative views.

We said last month that the so-called Golden Age of European growth in the period 1950-1973 is not likely to return anytime soon and beyond temporary workers and young people struggling to find reasonably paid work, it’s difficult for governments to confront some home truths.

A Eurozone growth plan coupled with ECB measures may help in the short-term. However, there are big changes underway in business with the internet accelerating the trend towards a small number of global giants dominating key business sectors.

Coupled with that there is increasing competition from emerging market companies for OECD companies in emerging markets.

Germany has about 340,000 exporting firms compared with 100,000 French exporters and French firms generally have little interest in exporting.

In 2007, the top 10% of French exporting firms accounted for 94% of export revenues.

Italy has few big firms and lots of family-run operations but the second largest manufacturing sector in Europe after Germany, and up to mid 2013 it had lost about 24% of its industrial production, going back to the 1980s level.

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On Thursday, Michael Noonan, finance minister, claimed full credit for the economic recovery. It was his predecessor, the late Brian Lenihan, who took most of the hard decisions and despite controversy about the European Union and the Irish burden of supporting failing banks, it was international loans that kept the economy afloat in its grimmest of times.

Iceland was once seen as the template of success where  foreign creditors were told where to get off but today it is a limbo situation similar to Argentina.

Bloomberg News said last February that Iceland has managed to reduce its public debt to 82% of gross domestic product, the island is still subject to capital controls and has net external debt equivalent to 436% of GDP, central bank statistics show.

Investment rose 19%  y-o-y in the second quarter but being a small economy with a huge dependence on foreign firms, there can be big gains or losses with little impact on the domestic economy.

Finfacts report: Irish Economy 2014: GDP up 1.5% in Q2; GNP up 0.6% - personal spending weak

Investment grew 19% and public spending expanded by 7.9% but consumer spending grew only by 1.8% and 0.3% in the second quarter over the previous quarter.

Finfacts report: The idiot/ eejit's guide to distorted Irish national economic data

After two monumental economic busts in a generation it's a little early for crowing and the old habit of drowning out dissent should be kept in check.

1. The smallest quarterly rise compared with the same period last year was in personal consumption at 1.8% compared with public spending at 7.9% and gross capital formation at 18.5%

2. The GNP is boosted by tax inversion companies and by the year end these firms will have a payroll of 600,000. Changes in undistributed earnings impact GNP and the Balance of Payments (BoP).

3. Goods exports value for BoP purposes are €7bn higher in H1 2014 compared with the 'external trade' release, less of an adjustment for imports giving + net exports in Q2 - I assume this is related to the new European accounts standard.

4. Per euro of exports, indigenous firms have much greater economic impact.

5. Chemicals + medical devices account for 60% of goods exports and in capital intensive sectors, export value is four times material imports. Being capital intensive, payroll has been in the low 40,000s for a decade.

6. So it's foolish to view a Balance of Payments surplus as cash that is in local Irish banks. The trade surplus fell by €1.54bn in July which is temporary.

7. Aviation leasing in Ireland employs less than 1,000 people but the companies own over 3,000 commercial aircraft that were valued by the Department of Transport in 2011 at €83bn -  almost half the value of annual GDP.

Add in over 300 aircraft in Ryanair's fleet.

Purchases and sales do create volatility in the data.

8. By the end of the decade,  the various distortions in the national accounts will likely disappear because of global tax reforms but even in the US since 1999 GDP per capita is not a good indicator of the standard of living of most people there.

9. Absent a big jump in personal incomes including adding what would be viewed as 'real jobs' (income and security that would get a mortgage and have some surplus to spend ) amounting to a net 250,000 to return to an unemployment rate of 5 to 6%, there will not be guaranteed high growth.

10. There has been a delayed recovery in many places but the usual pattern is to experience a spurt in growth when it does happen.

11. The Government's annual target for FDI exporting jobs is 7,000 to 2020.

Simon Nixon of The Wall Street Journal writes:

Ireland is reaping the rewards of an open, flexible economy and the decisive action it took in 2009 to recapitalize its banking system.

Unlike some eurozone countries that allowed lenders to hide their bad debts through a combination of accounting gimmicks, regulatory forbearance and the so-called technique of “amend, extend and pretend,” Ireland forced its banks to disgorge their bad debts to a government agency at knockdown prices and then forced them to recapitalize to conservative levels."


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