|Japanese Prime Minister Taro Aso meeting Taoiseach Brian Cowen, in Tokyo, on Jan 15, 2009 |
Irish Economy 2009: The irrational exuberance of the boom may well be matched by its counterpart in these grim times and while the full gamut of scenarios could even include the sky falling, realists with their feet on the ground, would be best deployed in preparing for a decade of low global growth ahead.
Inept Irish political leadership has compounded the crisis facing Ireland and has resulted in an evaporation in confidence as the economic situation worsens.
Last month, Taoiseach Brian Cowen deluded himself into believing that a list of aspirations on what the Irish economy could achieve in years ahead, called a "framework," would give the public the impression, that the Government had a plan to deal with the crisis. In fact, it only confirmed that Cowen is an absolutely unfit person to handle a crisis.
The blundering political response to the crisis, has damaged Ireland's international reputation and in today's Financial Times, an article titled Things fall apart and headed with a picture of Brian Cowen looking the worse for wear, says:"After a decade or more in which Ireland outpaced its European Union partners, many commentators are now wondering whether the one-time “Celtic tiger” is destined for a protracted period as one of the continent’s also-rans. The bitter joke doing the rounds in Irish financial circles runs: “What is the difference between Iceland and Ireland? Answer: one letter and about six months.”
The crisis that Brian Cowen, prime minister, and his coalition government face is being likened to that of the 1980s, when the national debt quadrupled before economic reforms provided the platform for Ireland’s subsequent take-off. “We’re either in 1982, where the diagnosis was made but where there was no political will to take action, or 1987, when the politicians eventually tackled the issues,” says Alan Barrett, chief economist at the Economic and Social Research Institute, a leading Dublin think-tank."
Dr. Barrett's comparison is apt and whether Ireland jumps from a debt-to-GDP ratio of 24.7 per cent in 2007 to 80 per cent or more, the country needs a government with a mandate to tackle the crisis.
Italy has a debt-to-GDP ratio of 104 per cent - the highest in the Eurozone - while Greece's is 94 per cent and will get worse.
Standard & Poor's decision to cut Greece's credit ratings; Ireland and Spain being put on its watch list; record gaps in yields on 10-year bonds between Germany and other Eurozone countries - - the Greek 10 year bond yield is about 2.5% above the German bund yield of 2.9% - - and a vast amount of bonds due to be issued this year - - more than €1,000bn is expected in Europe - which is putting added pressure on governments as they try to issue debt, have given rise to questions on the survival of the Eurozone and the prospects of Ireland running out of money.
There isn't a common fiscal policy in the Eurozone and Ireland does have a central bank - the European Central Bank. On December 18, 2007, the ECB flooded the inter-bank market with funds of €348.7bn (half a trillion dollars) and that was just one day! So it's unlikely that Ireland will be left in the lurch unless the Government fails utterly to stem the budget deficit.
In an extreme scenario, one could plan for a revolution!
Outlook for the Global Economy
The huge rise in the deficits in the developed world countries in coming years, will have an impact on growth prospects. Taxes will be higher and the savings rate will rise in the US where people will not be able to rely on wealth creation through rising house prices.
In recent years, America's savings rate has fallen close to zero and consumer spending has risen.
Stephen Roach, head of Morgan Stanley Asia, said in recent months that the global economy is facing a multi-year rebalancing.
For the US, this spells a sustained deceleration in personal consumption growth as households abandon newfound asset-dependent saving and consumption strategies in favour of the income-led fundamentals of the past.
"The US, in my view, will now have to come to grips with a much slower growth trajectory – with real GDP growth likely to slow from the 3.2% trend of the past 13 years to no higher than 2% over the next 2-3 years, or longer," Roach says.
"This should prove to be a very challenging outcome for the rest of the world – especially for those developing nations, which have derived so much of their economic sustenance from exporting goods to over-extended American consumers," he adds.
Asia has prospered with currency values at artificially low levels and the rebalancing in global growth will not be an easy path.
The Financial Times says that China, the world’s workshop has grown far too dependent on a US and European spending binge that is now over. Morgan Stanley’s Stephen Roach says exports as a percentage of gross domestic product have risen from 20 per cent in 1997 to 40 per cent. The FT says it rode the huge, credit-fuelled demand surge beautifully. Now it will have to find other sources of growth. Personal consumption as a percentage of GDP has been in structural decline. At about one-third of GDP, that is not enough to sustain domestic momentum let alone credibly substitute for US demand, as some fantasise.
Stephen Roach wrote in the FT this week: "Unfortunately, there is an important and ominous distinction between the US and Japan - the impacts of bubbles on their respective real economies. At more than 70 per cent of US GDP, the bubble-infected American consumer actually poses a much greater risk to today's US economy than that imparted by Japan's bubble-induced capital-spending boom, which accounted for only about 17 per cent of Japanese GDP at its peak in the late 1980s. Moreover, since the US consumer is by far the most important consumer in the world, the global implications of America's post-bubble shake-out are likely to be far more severe than those imparted by Japan.
So what can the US do to avoid becoming another Japan? Quite frankly, not much. By focusing on investments in infrastructure, alternative energy technologies and human capital, the Obama Administration is correct in attempting to contain the recession and initiate a long overdue rebalancing of the US economy. However, these actions will not cure the post-bubble hangover of the over-extended consumer. That will take time and a new pro-saving mentality that encourages American families to live within their means.
Like the Japan of the 1990s, the US faces stiff headwinds. And until the rest of the world uncovers a new consumer - which is not likely during the next few years - a protracted global slowdown is distinctly possible."
Ireland faces a tough decade as it is now more dependent on the US economy, that it was at the beginning of the Celtic Tiger.
House prices remain too high; taxes will rise and unemployment is unlikely to revert to the low levels of the recent past, for years to come.
Nevertheless, the country is not likely to go bust unless the people continue to indulge incompetent politicians. It will be tough for most people over 40 seeking work, while younger people will have the option of emigration.
Above all, people will have reason to try and escape wage slavery by trying a venture on their own.
The 1980's weren't as bleak as they were subsequently painted and while consumption will have to be cut, peoples lives will have been ruined and there will be much pain for some, we have to be careful that irrational exuberance is not replaced with irrational pessimism.