Exports Keep Ireland Alive For Now

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Ireland maybe on the verge of an EU deal to push out debt payments for 12 to 15 years but it has been its exports that have managed to keep the nation afloat. In fact exports make up to 106% of GDP which has enabled it help trade its way out of the crisis in spite of the harsh austerity that has been imposed.

Ireland will export as much as India this year, and more than Brazil, fruit of an industrial policy dating back to the early 1990s that has made the country a hub for global pharma, software, medical equipment, and financial services. It will rack up a very German current account surplus above 4pc of GDP.

Exports make up 106pc of GDP, compared to 35pc for Portugal, 30pc for Spain 30pc, 29pc for Italy, and 21pc for Greece. Ireland has a much higher trade gearing than Club Med peers, and that is what has kept the country afloat despite a 26pc collapse in domestic demand. Growth was 1.5pc in 2011 and 0.9pc in 2012, better than the EU average.

The export story is by now well-known. The global drug giants almost all have plants in Ireland, employing 44,000 people and producing half the country’s merchandise exports, though this may be losing its edge. The country is facing a “Patent Cliff” as a clutch of drugs – such as Pfizer’s statin pill Lipitor – come off patent in the US. It is the reason why Irish exports slipped 15pc in December.

Microsoft, Google, Facebook, Twitter, and a host of household names have regional headquarters in Dublin, whether drawn by a corporation tax of 12.5pc or by the critical mass of a high-tech skills. How much value is added to the Irish economy is an open question. Google rotates some 45pc of its global revenues through Ireland under transfer pricing schemes.

Even so, Ireland is clearly a different animal from the Greco-Latins. It never had a seriously misaligned currency within EMU. It had a misaligned monetary policy that set off a credit bubble. Real interests set in Frankfurt averaged minus 1pc from 1998 to 2007 (compared to plus 7pc in the early 1990s). As Irish eurosceptics foretold, the effects were ruinous.

The country has since deflated the froth. The gap in unit labour costs with the EMU-core has been closed again, at least on paper. “We have cut costs right through the economy with an internal devaluation of 15pc or 16pc,” said Mr Noonan.

One can quibble with the claims. Nearly all the gain in labour costs has been in the non-tradeable public sector – nurses, policemen, teachers – where wages have been slashed 14pc, with another 5.5pc to come. Productivity levels have been flattered by the annihilation of the building industry. “Private wages have declined only modestly,” says the IMF in its latest report.

Yet the point remains that Spain has not begun to see this level of deflationary shock. Were it to try with such a closed economy, it would tip into free-fall, push the jobless rate above 30pc, and cause the debt trajectory to spin out of control. As for Italy, its unit labour costs rose as fast as Germany’s last year. Its deflation lies ahead.

Ireland not out of the woods yet!

Club Med can take no comfort from Ireland’s success, but is even Ireland itself out of the woods? The budget deficit is still 8pc of GDP five years into the ordeal, and public debt is already nearing the limits of viability at 121pc of GDP this year.

Dublin has pencilled in a 3pc deficit by 2015, but dissidents say 6pc is more likely. The IMF warns that a “stagnation” scenario of 0.5pc growth a year into the middle of the decade would cause the debt ratio to spiral up to 146pc by 2021.

That is a serious risk as Europe persists in botching macro-economic policy, and US austerity threatens the fragile world expansion later this year.

Investment has collapsed to 10pc of GDP.

This is the lowest in recorded Irish history and the currently the lowest in the EU. “If this does not recover over the next couple of years, I’ll be worried”, said Rossa White from the National Treasury Management Agency.

Indeed, it is the crux of the matter. Spending has been slashed through the muscle and into the bone. This presumably is what Laszlo Andor, the EU employment commissioner, was talking about last week when he decried a slash-and-burn policy in the name of competitiveness that is tipping the crisis economies into a “downward spiral” and making it even harder to cut control debts. Are his colleagues in the Berlayment listening to him?

A mass exodus of 40,000 to 50,000 each year to the four corners of the Irish Diaspora have kept unemployment down to 14.1pc, but 60pc of those left on the rolls have been out of work for over year — the highest rate in Europe — and that is where the “hysteresis” effects of lasting damage bites hardest. It steals from growth from the future by degrading work skills.

Troika has done more damage to Ireland than the English ever did in 800 years.

Irish trade union chief David Begg was speaking with poetic licence last week when he accused the Troika of doing more damage to Ireland than the British Empire ever did in eight hundred years, snapping that the English had at least left some “beautiful Georgian buildings.” Needless to say, he has not forgotten the Wexford massacre and the potato famine, and nor have we at this newspaper. Yet he made his point.

“When we meet the Troika, we tell them that austerity is not working, and they tell us that it is. It is a dialogue of the deaf,” he said.

Mr Begg said he had come to realise that EMU is constructed in such a way that the “entire burden of cost adjustment” falls on workers if there is macro-shock. He is right. An internal devaluation is achieved by forcing unemployment to such excruciating levels that it breaks the back of labour resistance to pay cuts. It is the polar opposite of a currency devaluation that spreads the pain. Note that Iceland’s unemployment is just 5.4pc today, and Britain’s is 7.7pc.

“Such a callous disregard for distributional justice – which we have witnessed in this country over the last five years – is a fatal flaw,” he said.

“For much of its history, European integration has proceeded on the basis of a ‘Permissive Consensus’. European citizens thought it was a good thing, or at least did no harm. I doubt that view is still current. From what I hear in the circles in which I move, today’s labour movement is disaffected from the European project,” he said.

“What will happen when people eventually realise that they are trapped in a spiral of deflation and debt. We may reach the tipping point,” he said.

Europe’s labour movement is the dog that has not barked in this long crisis. Bark it will.

Source: Irish Independent

Economic Growth That Generates Poverty

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A very interesting concept whereby countries that generate surpluses end up causing poverty to its own people. Ireland being a great example of this. The Troika demand that goods and services generated, are exported all the while wage reduction and austerity are forced on the people.

The extreme form of what Adam Smith called a “folly” occurs when surpluses finance poverty and economic instability. Two infamous twentieth century examples were the German reparation payments after World War One, and the Latin American debt crisis in the 1980s and into the 1990s. In both cases, external powers pressured governments to generate trade surpluses in order make payments to foreign governments (in the case of Germany in the 1920s), or to foreign banks (the Latin American countries in the 1980s). The former led to Hitler and the latter to a generation of impoverishment.

In effect, these externally-imposed, government-generated surpluses take goods and services from residents and transfer them to foreign governments, banks and corporations. This type of trade surplus falls into the category of what Jagdish Bhagwati, the famous Indian economist (now at Columbia University), termed “immiserizing growth”, economic growth that generates poverty not improvement for a population. To put it simply, the country exports and the population grows poorer.

Armed with the ideas of “mercantilism” and “immiserizing growth”, we can have a look at the “Star Pupil”. The chart below shows why the Triad of the EC, IMF and German government (and the German opposition, it would appear) make Ireland the teacher’s pet. While the famous PIGS (Portugal, Italy, Greece and Spain) languish in stagnation or plunge into decline, Irish GDP has increased, by 1.4 percent in 2011 and one percent in 2012. Not great, but looks good compared to decline. More important ideologically, the Triad assures us that this growth shows that “austerity works”. It shows the PIGS the shining path to recovery.

Here is the logic of the Troika

In case we missed it, the path to recovery runs along the following road. Austerity forces down wages, lowering production costs. Lower costs result in export competitiveness, and the growth of exports rejuvenates the economy as a whole. The rejuvenated growth reduces the fiscal deficit by raising tax revenue that can be used to pay foreign creditors. If the residents in the PIGS would show the discipline of the Irish, the euro crisis would soon end.

Who benefits from Ireland’s surplus?

The exposé of this ideological story would not be complete without pointing to the recipients of the Irish export surplus, the major banks in Europe that hold the debt of the Emerald Isle.

Even if by some miracle a mega-importer appeared on the world horizon (think China), the Irish path would still represent a road to misery. The chart below shows three economic trends since 2001. Unemployment rose continuously after 2007 in the land of the star pupil, with economic growth brining no reversal (measured in percentage of the labor force on the left). This rising unemployment rate went along with increasing exports per capita, from less than six thousand dollars per head in 2007 to over eleven thousand in 2011-2012 (measured on the right hand vertical axis).

While exports per head increased, domestic national income per person, total national income minus the trade surplus, declined, from $35,000 in 2007 to 25,000 in 2012, a drop of one-third. Domestic income per head declined in both the years of positive GDP growth. This appalling redistribution from the Irish to the European 1%, aka a trade surplus, was not the result of austerity reducing labor costs. For over twenty years Ireland ran a continuous annual trade surplus with no austerity to “lower costs” Under austerity imports contracted in Ireland because of falling incomes of the 99%.

Ireland, the Star Pupil of Immiserizing Growth, 2001-2012

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This is Bhagwati’s “immiserizing growth” in real time, unrequited transfer abroad of almost a third of national income. The star pupil fails the test of a decent society, to protect the welfare of its people. And if the cause does not jump off the page, have a look at the final diagram. The vertical axis measures Ireland’s export surplus per capita, and the horizontal one measures domestic income per capita (GDP minus the export surplus). From 2001 through 2004, more exports per person went along with more domestic income per person. Then came the bad news, more exports, less left over for the Irish population to consume and invest.

Ireland may be the star pupil, but for the sake of the 99% its government needs to find different teachers and perhaps drop out of school.

Ireland, Star Student of Export-led Impoverishment, 2011-2012 (thousands of dollars)

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Source: social-europe

IMF Tells Ireland No More Austerity Next Year

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In October the IMF admitted that its Fiscal Multiplier(is not 0.5 percent but really 0.9-1.7) used for justifying austerity measures was wrong and in fact the implication was that austerity doesn’t work. Now shortly after Ireland announced the 2013 budget, the IMF has asked that Ireland does not implement austerity measure next year. It was worried that Irelands growth which is already weaker than forecast may hinder its ability to re-enter the bond markets.

IRELAND should not impose further austerity even if growth targets are missed next year, the IMF has said.

The agency also called on Europe to honour pledges to help make Ireland’s debt more sustainable, in its latest review of the country’s finances.

It outlined fears that growth may be weaker than expected during 2013 – but does not advocate more austerity.

Instead it advises the coalition that if it is failing to reach economic targets next year, it should not rush to bring in any further cutbacks, for fear of damaging any fragile growth. Instead the economic targets could be pushed out until 2015 to help recovery.

The IMF made the statement as it approved its eighth review of the bailout programme, authorising the release of a further €890m funding under the bailout terms.

It said Ireland had so far shown “steadfast policy implementation” with the conditions of the bailout programme, despite slower growth this year.

It is predicting more gradual economic recovery with growth of 1.1pc in 2013 and 2.2pc in 2014. But with many economists forecasting growth of less than 1pc in 2013, there is a real threat to Ireland’s chances of getting out of bailout and back to the markets as planned in 2014.

The IMF says that if growth is weaker than forecast and economic targets begin to slip, the Government should not introduce extra cuts or a mini-Budget. Instead the Government should wait until 2015 before taking extra measures, in order to protect whatever growth there is.

IMF deputy managing director David Lipton said: “The program with Ireland has now been in place for two years and the Irish authorities have consistently maintained strong policy implementation.

“The authorities have demonstrated their commitment to put Ireland’s fiscal position on a sound footing, with the 2012 deficit target expected to be met even though growth has been low.

“Nonetheless, if next year’s growth were to disappoint, any additional fiscal consolidation should be deferred to 2015 to protect the recovery.

“Continued strong Irish policy implementation is essential for the programme’s success,” said Mr Lipton.

In what may be a reference to the ongoing negotiations on repayment of Anglo Irish debt, Mr Lipton called on European partners to deliver on pledges to help Ireland.

“Ireland’s market access would also be greatly enhanced by forceful delivery of European pledges to improve programme sustainability, especially by breaking the vicious circle between the Irish sovereign and the banks.”

The IMF also said that the banking sector needs to be reformed and shored up to help improve lending. “Vigorous implementation of financial sector reforms is needed to revive sound bank lending in support of economic growth,” it said.

Source: Irish Independent

IMF Admits Austerity Doesn’t Work

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Probably one of the biggest stories this year and completely missed by the MSM has been the IMFs change of the fiscal multiplier, that it bases its austerity on, from 0.5 to 0.9-1.7%. This is for all practical purposes an admission that austerity does not work. Try telling that to the Irish, Greek, Portuguese, Argentinians and other countries worldwide that have been on the receiving end of the IMF’s policies.

Courtesy of Steen Jokobsen, chief economist at Saxo Bank in Denmark
Read more at http://globaleconomicanalysis.blogspot.com/2012/10/imf-admits-it-prescribed-wrong-medicine.html#DI5sYuUoQDPyZmOT.99

Is IMF short for I must fail?

Fiscal Multipliers are wrong, IMF admits – the biggest macro story this year

The big story this week is the International Monetary Fund’s (IMF) admission that the fiscal multiplier is not 0.5 percent but really 0.9-1.7 percent according to Financial Times article It’s (austerity) Multiplier Failure

This is actually not just big news, but massive news! For the IMF to let alone realize and then admit this is central to the outlook for growth and fiscal deficits across all economies. Let’s walk through the maths here:

The fiscal multiplier defines that 1 percent of austerity will net cost 0.5 percent of gross domestic product (GDP) – but now the IMF says it is higher. Hence, its whole approach of austerity at any cost is losing its academic as well as practical application.

If the fiscal multiplier is larger than 2.0 percent you have an extremely vicious circle. You are enforcing a diet which will kill the patient rather than heal him, as for every percent you reduce in spending you lose 2 percent in growth.

The bigger the hole you dig, the harder the climb back up! Do you think it is a random decision that the IMF made 1.7 percent the top of its range? Hardly!

The fact that only FT Alphaville in its “The IMF game changer” has spotted and written about this is close to being scandalous. It tells us that the Anglo Saxon press’ need for supporting Keynesian initiatives (buying time, maximum interventions and pretend-and-extend) at all costs is done for political reasons rather than for finding real solutions to this crisis which is now spinning out of control as systemic risk is at an all-time high.

The IMF has increased the systemic risk by extending the payback period of central planners’ calculations (much lower growth and higher fiscal/structural deficits). The market knew this, but it is such naive forecasts produced by the IMF which dictate policy recommendations for the debt crisis. The IMF is ironically seen as the ‘expert’ although it has experiences considerably more failure than success in its “helping efforts” – think Asian Crisis, Russia, EU debt crisis! The IMF is asking for your patience – extend-and-pretend squared is here!

It is sad that it took this long though! This has been discussed at length before by me (interview in April with TradingFloor.com), plus in the FT (whose writers deserve much credit). The most prominent voice on this topic has been Soc. Gen’s excellent economic team led by Ms Michala Marcussen – who I happened to study with a couple of ‘wars’ ago at the University of Copenhagen.

What we need now is for policymakers to start producing credible forecasts which politicians cannot misuse. The IMF started this, so will the Federal Reserve, European Central Bank and Bank of England take note? Will the Congressional Budget Office in the US reduce its growth forecast? (See link for how this has been done in the past). Probably not, but the IMF’s admission this week is a game changer. You can’t save yourself to prosperity, not even in the eyes of central planners anymore! The IMF admission also proves what we have known for a long time: Macro stinks!

Finally, and most importantly, this creates a need for something new – which is the very theme I keep emphasizing. Let’s work on creating the fundamentals for the micro economy which will create more jobs. The strongest multiplier, after all, remains taking one person out of the unemployment queue and putting them into a job. This reduces the subsidies needed as the person earns a taxable salary, is probably less ill, feels better, spends more etc. So the real challenge the IMF and other central planners need to realize is: You can help, but only by going away and taking a holiday. The S&P 500 (excluding financials) has a Return on Equity (ROE) in excess of 20 percent this year. It is based on an economy growing at 2.0 percent! So, do you need more proof?

President Clinton is in growth terms one of the most successful US presidents in history. What did he do politically for eight years – except for smoking cigars? Nothing! Belgium was without a government for almost two years and every single macro indicator improved during this spell. I rest my case! Let’s have total radio silence for five years and we will all be in a better place!

Mike Shedlock goes on to say

Wrong Medicine In terms of governments doing nothing for five years (as in no more stimulus) I am in agreement, if that is what Steen means (but I am not so sure that’s precisely what he means). Nonetheless, while were at it, let’s get rid of Fed meddling as well.

As for the multiplier theory, the IMF is now saying it prescribed the wrong medicine.

What was a .5 multiplier is now a range of .9 to 1.7. Anything close to or above 1 means austerity can never work.

No doubt, Krugman will be crowing “I Told You So” over this, but there is not an Austrian economist anywhere that was in support of the massive tax hikes we have seen. Reduction in government spending was not the problem. Rather massive tax hikes and lack of badly-needed reforms was the problem.

Certainly what we know is austerity cannot work “as implemented” but I said that years ago. We have seen massive tax hikes and few work rule and pension reforms. We needed lower taxes, less government, and massive work rule reforms (and still do).

Blaming the problems on “austerity” will get a lot of sympathy from Keynesian clowns, but they cannot distinguish good medicine from cow patties.

Source: http://globaleconomicanalysis.blogspot.com/2012/10/imf-admits-it-prescribed-wrong-medicine.html

Portugeese Emirgrating To Africa

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Things are so bad in Portugal these days that many are emigrating to Angola a former colony. As many as 100,000 are now making their living in the resource rich West African nation which boasts a growth rate of between 8 – 10% this year. Many are making their way to other ex colonies such as Brazil and Mozambique.

Portugal is enduring its worst recession since the 1970s, with austerity measures imposed, unemployment at a record 15% and the economy predicted to shrink by 3% this year. So deep is the malaise that one government minister offered some provocative advice: “If people are unemployed they should leave their comfort zone and look beyond our borders.”

This is what they are doing in such former colonies as Angola, Brazil and Mozambique, whose economies hold up an inverted mirror to their own. Oil-rich Angola enjoyed growth averaging 15% between 2002 and 2008 and, although it then lost momentum, it is still posting figures that the eurozone would envy, with growth expected to recover to between 8% and 10% this year.

Angola is attractive to the Portuguese because of business and cultural links – not least a shared language – forged before it gained independence in 1975. A long, devastating civil war followed, but a decade of peace has transformed the desirability of taking part in sub-Saharan Africa’s third biggest economy.

The number of Portuguese living here has soared from 21,000 in 2003 to more than 100,000 last year, according to official figures which are likely to be a conservative estimate. Some 38% of foreign companies registered in Angola are Portuguese, media reports say, still well ahead of Chinese firms at 18.8%.

….

Portuguese people are scenting opportunities in Angola’s thriving construction industry: the skyline of Luanda, the capital, is a symphony of cranes, new skyscrapers and the still incomplete dome of a parliament building by Portuguese company Teixeira Duarte. They are also finding work in banking and IT.

“There’s no humiliation in coming here,” Ribeiro added. “The Angolan government only accepts people with a decent CV looking for a proper job. It’s mostly professionals in the higher bracket. The language still matters. Communication is very important if you hold a high position and need to communicate with workers on a day to day basis. And of course there is a cultural understanding. In 500 years we left an imprint of everything, even a taste for wine, and the hostility towards us is long gone.”

As Europe lurches from financial crisis to crisis, Africa’s economic “lions” offer a lifeline.

Source: Guardian

Germany Leading Europe Into 1930s Style Depression

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James Meadway, Senior Economist, New Economics Foundation, giving an interview on Russia Today discussing Germany’s “relentless austerity” drive across the eurozone and its affects.

David McWilliams: EU Pissing Down Our Backs, And Telling Us Its Raining

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David McWilliams explaining the “Fiscal compact” and how it can’t work.

The German Elite want a Federal Europe and to be top dog. A weak euro suits them perfectly. It gets a free lunch and don’t want to lose it.

 

 

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