IT is starting to look truly grim for Ireland, which is moving ever closer to the abyss. An article yesterday by Morgan Kelly, a professor of economics at University College, Dublin, added fuel to the fire. By next year Ireland will have run out of cash, Kelly claimed, and the terms of a formal bailout will have to be agreed. This view – that Ireland is already insolvent – is fast gaining converts; no wonder Germany is so keen to introduce European treaty changes to safeguard its taxpayers.
It is hard to be optimistic. Nominal (or cash) GDP is down by about a fifth since the peak; part of this is due to a large slump in real output and partly to a nasty bout of deflation (prices fell an astonishing 6.6 per cent in the year to October 2009, though they have risen since). The debt burden, for the state as well as individuals, therefore automatically shot up. Even though wages have declined (increasing debt to earnings ratios), the number of employees has collapsed nearly 13 per cent. In the UK, that would be akin to the workforce having fallen by 3.8m, a depression-style outcome.
Ireland’s first error was to join the euro; its second was to guarantee all bank creditors. These two errors have destroyed the country. Joining the euro led to an immediate halving in interest rates and a surge in growth and inflation – had Ireland retained an independent monetary policy, its currency would have soared and it would have jacked up interest rates. Plenty of countries have suffered a property bust – only some have been bankrupted as a result. Not all were euro members, of course, but those peripheral economies that did join are all now in terminal crisis.
Andrew Lilico of Policy Exchange, one of London’s most interesting economists, has been arguing for years that Ireland’s dalliance with the euro would end in disaster. He wrote an eerily accurate piece in 2001 in the European Journal. Even though it was running a budget surplus at the time, Ireland was forced to hike taxes in a vain bid to calm down its overheating economy; it could no longer use monetary policy. After that, the die was set: encouraged by ultra-low European interest rates, the banks lent (recycling vast foreign capital inflows), house prices boomed, the construction industry surged and foreign workers moved in (reversing Ireland’s history of net emigration).
Nervousness eventually crept in, prior to the US sub-prime crisis. House prices slowed at a time when oil prices were still rising and the Irish recession commenced. The European Central Bank – preoccupied with the rest of the Eurozone – hiked rates, Irish house prices crashed, credit inflows reversed and banks started to go sour. Eventually, the rest of the world entered recession.
The crisis turned into a catastrophe on 29 September 2008, Lilico argues. That was when Ireland rendered itself insolvent, in a ridiculous attempt to bluff markets, by providing a blanket guarantee to all bank creditors (not just depositors). The aim was to attract capital from the UK but the guarantee was unaffordable, given the banks’ vast liabilities; Ireland’s refusal to allow bondholders to lose money forced a succession of bailouts. Ireland thus became a fully-owned subsidiary of an ECB/German Treasury joint venture, its independence a sham. If German taxpayers or the Irish public ever tire of this arrangement, bankruptcy will be inevitable. What a nightmare.