Ireland to go bust

[RandBlade]

Its looking increasingly likely that Ireland will be the second Eurozone nation of the "PIIGS" group to go bust.

Portugal, Ireland, Italy, Greece and Spain are all eurozone nations that for different reasons are collapsing under a mountaing of bad debt that the government can not repay, which through the Euro have been tied together with about a dozen other eurozone nations. Greece went bankrupt earlier this year and had to call in Euro and IMF support, now it seems Ireland is almost inevitably next.

Its a tragic end for the "Celtic Tiger".

When Hazir and I started debating the pro's and con's of the euro back in 2001 I was someone who politically wanted the euro, I liked the idea of just one currency, but was economically nervous about it. The more I learnt about it - and the more Hazir spoke about it being a political not an economic decision which was absurd - the more I turned against it.

The euro is largely responsible but for opposite reasons for the collapse of both Greece and Ireland. For Greece, a weak economy, they needed low interest rates/devaluation etc to cope. Not an ideal situation but what was required.

For Ireland, a really strong and booming economy until recently, they needed high interest rates.

Instead it was "one size fits all" (or nobody) and Ireland had an interest rate far, far, far too low. Causing a massive boom in unsustainable property prices. Now that ridiculous bubble's burst, they're bust. Simply wouldn't have happened the same way had interest rates been correctly set for Ireland individually.

In 2006 Ireland's "growth" rate was 6%, inflation was 3.875% yet the eurozone's rates were 2.25% - so at the peak of an unnatural boom for a developed nation they had essentially negative interest rates! Of course Germany had a growth rate of 0.9%, inflation of 2% so an interest rate of 2.25% made sense for them, but not for Ireland!

[Dreadnaught]

Besides the economic damage this will do to Irish families, I'm concerned a bailout of Ireland will come with strings demanding Ireland remove the tax policies that have made the competitive.

[RandBlade]

That's definitely going to happen

France and Germany etc will insist as conditions of any bailout that Ireland jacks up its corporation tax rate, the one attractive thing that brought companies to Ireland. Totally ironic isn't it, it was the low corporation tax that allowed Ireland to do well, it was tying to Germany while doing well that has brought Ireland down ... now they need German help and they'll insist on removing the one thing that made Ireland do well in the first place (ie made them more competitive than Germany and France etc). It won't be of any concern for Ireland that results in their corporation tax going up.

[earthJoker]

France and Germany etc will insist as conditions of any bailout that Ireland jacks up its corporation tax rate, the one attractive thing that brought companies to Ireland. Totally ironic isn't it, it was the low corporation tax that allowed Ireland to do well, it was tying to Germany while doing well that has brought Ireland down ...

Without the help of the EU (aka Germany's money) they couldn't have such a policy in the first place.

[Dreadnaught]

I wonder if the Irish will recognize that and bluff. We'll raise other taxes, but we will still keep the corporate tax rate lower than yours because it's allowed us to become a tech center unlike you. You don't want to bail us out then? Okay, let's see how your bond markets like that.

[RandBlade]

He who pays the piper calls the tune.

[Steely Glint]

awww jayzuz we're gonna be bankrupt so we are

[Hazir]

Which eurozone country has gone bust before? I don't remember any going bust at all. As has been said, the Irish have had a party at the expense of other countries, now they're going to dance to another tune not of their own choice and probably liking.

[Dreadnaught]

How do you define the "at the expense of other countries" part?

[LittleFuzzy]

How do you define the "at the expense of other countries" part?

Ireland got companies to set up there rather than with their social superiors by looking more attractive, the slutty tart. It didn't maintain its proper station and now it's going to be put in its right proper place.

[Dreadnaught]

Indeed, it's payback time for those skanky competitive tax rates.

[earthJoker]

Indeed, it's payback time for those skanky competitive tax rates.

I am all in favour of competitive taxes. But the game Ireland played was risky from the start. Make tax cuts just to bring in HQs and offices from internationals isn't really a long term strategy, they go as fast as they come. The goal of a country should always be to have the best environment for the whole economy. Opening new HQs is probably a good PR stunt for the politicians, though.

[Nessus]

Stalin's dead, guys, you don't have to pound on socialism like the jail-house cougar she is

That said, I'm concerned about this cycle of Euro periphery nations failing and expecting the monetary union to back them up. Germany and France should push for harder solutions; if Spain goes dominoes after Portugal the whole currency is fucked, and this is after we agreed to bring in third world Balkans from Eastern Europe. If there's no option to shove nations out of the Euro, things are gonna get messy.

[Loki]

The irony is that the Eastern Europeans had to actually meet the criteria to get into the euro, which means they're generally in better financial shape than the South Europeans (and Ireland).

[Dreadnaught]

To be honest, I don't think some of the major companies who opened HQs there are leaving anytime soon. The promise of long-term low rates has made a ton of tech companies set up shop there.

[Hazir]

To be honest, I don't think some of the major companies who opened HQs there are leaving anytime soon. The promise of long-term low rates has made a ton of tech companies set up shop there.

Well, Ireland offered those low rates while ALSO indebting itself to an extent that's mindbogling. Left or Right, Ireland is in no position to save itself. Allowing it to continue with its so-called competitive taxing would simply mean that the tax-payers of countries that didn't fuck up in quite the same way (I am one of those by the way) are subsidising foreign companies to set up shop in Ireland. As far as I am concerned that is a 'thanks but no thanks'.

[earthJoker]

We will see.

[Khendraja'aro]

So, you have a bunch of companies who pay next to no taxes. That benefits the country exactly how in the long term?

[Loki]

So, you have a bunch of companies who pay next to no taxes. That benefits the country exactly how in the long term?

Income taxes, increased productivity, higher exports.

[wiggin]

I think Ireland's case - even better than Greece's - illustrates the problem with the Euro. Greece just spent freely with other people's money, but Ireland has a viable growth model - low corporate taxes leading to high FDI. The problem is that this growth model didn't have the same business cycle as most of the big Euro economies.

A few years back, Ireland had incredibly high growth (and relatively high inflation) due to their growth strategy. But because the euro's monetary policy was set far away from Dublin, real interest rates in Ireland were effectively negative (e.g. borrowing euros cost less than inflation there). If Ireland had an independent central bank, this would have been a perfect time to raise interest rates, but they couldn't so presto - they blow up a huge bubble that completely trashes their economy, especially the financial sector.

[Hazir]

I think Ireland's case - even better than Greece's - illustrates the problem with the Euro. Greece just spent freely with other people's money, but Ireland has a viable growth model - low corporate taxes leading to high FDI. The problem is that this growth model didn't have the same business cycle as most of the big Euro economies.

A few years back, Ireland had incredibly high growth (and relatively high inflation) due to their growth strategy. But because the euro's monetary policy was set far away from Dublin, real interest rates in Ireland were effectively negative (e.g. borrowing euros cost less than inflation there). If Ireland had an independent central bank, this would have been a perfect time to raise interest rates, but they couldn't so presto - they blow up a huge bubble that completely trashes their economy, especially the financial sector.

Utter rubbish, without the EMU Ireland would have been a bankrupt state 2 years ago. The problems of Ireland have got nothing to do with monetary policies. It has to do with giving guarantees when the Irish bank sector effectively imploded that the Irish state could not, can not and never will be able to afford. There is no amount of variance in monetary policies that could have made any kind of impact on that simple truth.

[wiggin]

Well, Ireland offered those low rates while ALSO indebting itself to an extent that's mindbogling. Left or Right, Ireland is in no position to save itself. Allowing it to continue with its so-called competitive taxing would simply mean that the tax-payers of countries that didn't fuck up in quite the same way (I am one of those by the way) are subsidising foreign companies to set up shop in Ireland. As far as I am concerned that is a 'thanks but no thanks'.

That's not true, Ireland's debt-to-GDP ratio was fine until they spend a horrendous amount of money bailing out their banks. They had to do this to prevent the collapse of their monetary system brought about by a bubble financed by easy euros.

Utter rubbish, without the EMU Ireland would have been a bankrupt state 2 years ago. The problems of Ireland have got nothing to do with monetary policies. It has to do with giving guarantees when the Irish bank sector effectively imploded that the Irish state could not, can not and never will be able to afford. There is no amount of variance in monetary policies that could have made any kind of impact on that simple truth.

I agree that their debt problems are due to the bailout of the financial sector (raising a big moral hazard issue, but probably a necessary move), but those problems came about due to loose monetary policy that helped slow-growth countries but was extremely detrimental to rapidly growing countries in the eurozone. To claim that EMU monetary policy has nothing to do with this is absolutely stunning. During a period of record-high growth in Ireland, the effective interest rate was negative. How much more evidence do you need that euro monetary policy is not a one size fits all kind of system?

[LittleFuzzy]

I agree that their debt problems are due to the bailout of the financial sector (raising a big moral hazard issue, but probably a necessary move), but those problems came about due to loose monetary policy that helped slow-growth countries but was extremely detrimental to rapidly growing countries in the eurozone. To claim that EMU monetary policy has nothing to do with this is absolutely stunning. During a period of record-high growth in Ireland, the effective interest rate was negative. How much more evidence do you need that euro monetary policy is not a one size fits all kind of system?

But they should have been slow-growth like everyone else. Growing faster than someone else is stealing from them.

[Dreadnaught]

Well, Ireland offered those low rates while ALSO indebting itself to an extent that's mindbogling. Left or Right, Ireland is in no position to save itself. Allowing it to continue with its so-called competitive taxing would simply mean that the tax-payers of countries that didn't fuck up in quite the same way (I am one of those by the way) are subsidising foreign companies to set up shop in Ireland. As far as I am concerned that is a 'thanks but no thanks'.

I would argue half-jokingly that perhaps that subsidy is worthwhile given the lack of a powerful tech hub in Western Europe.

[Hazir]

But they should have been slow-growth like everyone else. Growing faster than someone else is stealing from them.

They would have been no-growth without my tax-money and access to the markets of the EU.

[Nessus]

I think Ireland's case - even better than Greece's - illustrates the problem with the Euro. Greece just spent freely with other people's money, but Ireland has a viable growth model - low corporate taxes leading to high FDI. The problem is that this growth model didn't have the same business cycle as most of the big Euro economies.

A few years back, Ireland had incredibly high growth (and relatively high inflation) due to their growth strategy. But because the euro's monetary policy was set far away from Dublin, real interest rates in Ireland were effectively negative (e.g. borrowing euros cost less than inflation there). If Ireland had an independent central bank, this would have been a perfect time to raise interest rates, but they couldn't so presto - they blow up a huge bubble that completely trashes their economy, especially the financial sector.

If I'm reading you right, the problem with the Euro is the heterogeneous nature of European nations?* I can see the argument, but what's the alternative? Waiting around until Europe homogenizes on its own, and only then trying to form a cohesive whole? Because I don't see it homogenizing all by its lonesome (or lack of lonesome, to be precise); the Euro's one more tether around the nations' necks to bully them into forming one Europe. Realistically, Europe has to be one large entity to survive in a globe where the century is sponsored by the word super-power. Right? We can't build our economies on the backs of brown people anymore

*Assuming this because the Anglo press goes ape "rar rar dismantle Euro" at the first hint of trouble every goddamn time

[Hazir]

If I'm reading you right, the problem with the Euro is the heterogeneous nature of European nations?* I can see the argument, but what's the alternative? Waiting around until Europe homogenizes on its own, and only then trying to form a cohesive whole? Because I don't see it homogenizing all by its lonesome (or lack of lonesome, to be precise); the Euro's one more tether around the nations' necks to bully them into forming one Europe. Realistically, Europe has to be one large entity to survive in a globe where the century is sponsored by the word super-power. Right? We can't build our economies on the backs of brown people anymore

*Assuming this because the Anglo press goes ape "rar rar dismantle Euro" at the first hint of trouble every goddamn time

I entirely agree with you.

[wiggin]

I don't get where Hazir is going with this tax money angle, so I'll leave it alone. But this merits some response:

If I'm reading you right, the problem with the Euro is the heterogeneous nature of European nations?* I can see the argument, but what's the alternative? Waiting around until Europe homogenizes on its own, and only then trying to form a cohesive whole? Because I don't see it homogenizing all by its lonesome (or lack of lonesome, to be precise); the Euro's one more tether around the nations' necks to bully them into forming one Europe. Realistically, Europe has to be one large entity to survive in a globe where the century is sponsored by the word super-power. Right? We can't build our economies on the backs of brown people anymore

*Assuming this because the Anglo press goes ape "rar rar dismantle Euro" at the first hint of trouble every goddamn time

My problem isn't that nations in the EMU are heterogeneous in general, or even that their economies are different. My problem is that economic and fiscal policy is extremely heterogeneous, but monetary policy is centralized. Generally the two have to go hand-in-hand to keep problems like Ireland's occurring. The solution is either to have independent banks for each economic unit (i.e. get rid of the euro) or to impose a much greater degree of economic policy coordination. The last possibility would effectively mean getting rid of the old euro model in favor of a true economic union with a large degree of control over regulation, tax rates and codes, fiscal policy, etc.

Now this latter option is certainly doable and might be a good idea, but it would require national governments to give up a lot more autonomy. I'm fine with that - I don't live in Europe and couldn't care less - but I think it would be a difficult sell politically.

This is the fundamental paradox of the EMU. Back before the EMU, countries could more or less opt in or out of the EU's policies with little real penalty. Now, though, they move in monetary lockstep without the attendant fiscal and economic coordination.

[Hazir]

I don't get where Hazir is going with this tax money angle, so I'll leave it alone. But this merits some response:


My problem isn't that nations in the EMU are heterogeneous in general, or even that their economies are different. My problem is that economic and fiscal policy is extremely heterogeneous, but monetary policy is centralized. Generally the two have to go hand-in-hand to keep problems like Ireland's occurring. The solution is either to have independent banks for each economic unit (i.e. get rid of the euro) or to impose a much greater degree of economic policy coordination. The last possibility would effectively mean getting rid of the old euro model in favor of a true economic union with a large degree of control over regulation, tax rates and codes, fiscal policy, etc.

Now this latter option is certainly doable and might be a good idea, but it would require national governments to give up a lot more autonomy. I'm fine with that - I don't live in Europe and couldn't care less - but I think it would be a difficult sell politically.

This is the fundamental paradox of the EMU. Back before the EMU, countries could more or less opt in or out of the EU's policies with little real penalty. Now, though, they move in monetary lockstep without the attendant fiscal and economic coordination.

You have no idea where I am going? Where I am going is that the Irish want to continue their unilateral ways while they are asking me and other tax-payers in other EU countries to cough up the money for doing so. And if they are starting to whine about sovereignty while I know what they really want is having a go at my money with no strngs attached I tell them to go fuck themselves.

The least thing we should demand is to put in place a system where these little fucked up economies can't create crises several times bigger than their entire economy is worth.

If there is one thing that Randblade has got right it is that I have always seen the EMU as a political union. And because of its nature the EMU will force the EU to get its house in order. I have never believed in the SGP as an effective means to control the ninkunpoops in countries like Greece or Ireland or anywhere else, but I have always taken the line that the markets would do the disciplining. It took the markets a while to do so, but I still feel vindicated by what is going on right now.

I guess that I don't even disagree that much with your analysis, it's just that I am fed up. And I mean really fed up with the suggestions coming out of english speaking countries that the solution to be considered is breaking up the EMU. I really would like if the people that provide the American public with information would fucking learn to read in languages other than English and stop acting as if all wisdom about Europe resides in London.

[earthJoker]

The last possibility would effectively mean getting rid of the old euro model in favor of a true economic union with a large degree of control over regulation, tax rates and codes, fiscal policy, etc.

Now this latter option is certainly doable and might be a good idea, but it would require national governments to give up a lot more autonomy. I'm fine with that - I don't live in Europe and couldn't care less - but I think it would be a difficult sell politically.

The EU has a lot of that already, mostly common trade regulations. I don't see why the countries have to give up their fiscal policies to such a degree, though. I don't know the US tax system, but if you compare Germany and Switzerland you'll see that while Germany has a centralized tax system, in Switzerland the cantons still have their own tax and fiscal independence.

I can't speak to their roads, but as I understand it the fact that Ireland had a net gain in EU money (mostly 'regional aid') during some of the last decade doesn't translate directly into anything having to do with their tax policy or growth model. I don't understand the GCM very well or all of the things that go into it, though, so feel free to enlighten me.

Well, the information is really right out there, Google and Wikipedia have all the stuff. Quickly I found this here: http://www.finfacts.ie/comment/irela...tsbenefits.htm
Some of the last decade is very funny. It seems that you just simply don't know anything about it. Well it is not that tragic. Ireland is one of the biggest takers from the EU per head since ever. But know that you are informed, you should see that you can't simply call Ireland the good boomers and the others like Germany the envy slow ones. Ireland profited highly from its constellation within the EU, which is a good thing. But we shouldn't forget about it.
And the Germans are easy to blame anyway, if there is someone to blame, it must be the Germans

Furthermore, you might call it irresponsible banking, but I might call it irresponsible monetary policy. Plenty of people have pointed fingers at the Fed for their mismanagement of the credit bubble and the crisis; why should monetary policy in Europe be exempted? There's no question that the financial sector in Ireland is partly at fault for the problem, but the correction (and needed bailout) for their banks would not have been nearly as large without shoddy monetary policy.

I definitely call it irresponsible banking. The praise of the boom to the privates the blame to the govs. Doesn't sound like a fair deal to me.