The ECB and Ireland

by Henry Farrell on December 10, 2009

Brian Lenihan (Ireland’s finance minister) puts the best face he can on the external limits constraining Ireland’s economic decision making in his “budget speech today:”:

In the recent Lisbon referendum the Irish people reaffirmed our place at the heart of Europe. This was the right decision for our economy, for our future and for our children. The single currency has provided huge protection and support to Ireland in the current crisis. It has prevented speculative attacks on our currency and provided funding to the banking system. But, membership of monetary union also means devaluation is not an option. Therefore the adjustment process must be made by way of reductions in wages, prices, profits and rents.

As a small open economy, Ireland would probably have devalued to help cushion the shock, if it had not been an EMU member with no effective control over its currency. Given EMU membership, devaluation (and exit from the system) would probably have been a “very bad idea”: Ireland is hoping to make the best of a bad job, adding levies, increasing taxes and making swingeing cuts to public sector pay so as to shore up its fiscal position.

The problem is that all the fiscal rectitude in the world cannot protect you from “contagious crises of confidence”:

One of the “signals” that could instigate a sudden stop in Ireland is a sudden stop somewhere else, particularly somewhere with regional or trade connections. This is why bad news for Greece is bad news for Ireland. If Greece hits a sudden stop, Ireland will wobble, and will be the next in line for a sudden stop in Europe. There is another simultaneous game being played: the ECB and its bailout policies playing a reputation game against member sovereign governments and their fiscal discipline. Again, the Greek situation is bad for Ireland. … Ireland has done everything (so far) that the ECB could reasonably ask of her to impose fiscal discipline and restore competitiveness. If it were only Ireland at risk of a sudden stop, the ECB could be very accommodating about bailout assistance. The ECB would not let a well-behaved minnow like Ireland cause market turmoil. If a sudden stop was brewing and Irish bond yields rocketed up, the ECB could easily mop up any excess of Irish sovereign bonds, killing the run, and later tell some convenient story about why this did not violate EMU no-bailout guidelines. On the other hand, we now know that the Greek government has deliberately and substantially falsified its national accounts over recent years. … no political will to impose any meaningful discipline on tax and spending … adherence to the Growth and Stability Pact is a charade. If the ECB bails out Greece, all semblance of future fiscal discipline throughout the Euro zone is lost. … How can the ECB bail out Ireland if it refuses to bail out Greece?

Greek government bonds “tumbled”: today. It may very possibly be that Ireland is in the worst of both worlds – suffering the unmitigated agonies of fiscal rectitude imposed by the EMU’s straitjacket, but with at best highly uncertain prospects of support in the event of a new crisis of confidence. Brian Lenihan won’t be sleeping well the next couple of weeks.



JoB 12.10.09 at 8:28 am

Henry, as one of those that sat in meetings not so long ago with as tag-line ‘or else we’re taking our business to Ireland where the economy is a real T-I-G-E-R’ – I hope the Irish understand that they have benefited from being the Bermuda within the EU for quite a while now and that the should not take 2005 as their reference.

For most Irish it should be OK when Ireland ceases funding the inefficiencies of the big corporate America. The Greeks at least wasted their money on inefficiencies in service to their own citizens.


Pete 12.10.09 at 10:09 am

“we now know that the Greek government has deliberately and substantially falsified its national accounts over recent years”

What’s going to happen as a result of this? Both to Greece, and the individuals responsible for such falsification?


Barry 12.10.09 at 11:29 am

Well, the story continues. Now Ireland is raising taxes and cutting salaries during a severe recession? Not exactly a formula for recovery.


P O'Neill 12.10.09 at 1:14 pm

I’m a bit wary of the idea that this is a case of well-behaved Ireland being done in by more careless Greece. Leave aside the route into the current mess. The recent jitters with Greece started when the Bank of Greece let it be known that it thought that local banks were overdoing their access to ECB liquidity facilities. The trick being that these banks would use their large and getting larger holdings of Greek government bonds as collateral for ECB loans. But Irish banks are doing exactly the same thing and in fact the original sales pitch for NAMA was that they would do even more of it since they would get nice government bonds usable as ECB collateral in exchange for their illiquid property loans.

So I don’t think it’s contagion. I think it’s recognition that the jig is up on the backdoor ECB deficit financing of the last year, and the country with the healthier banks and better economic prospects escapes before the door closes.

My money is on Greece.


Steve LaBonne 12.10.09 at 2:23 pm

I have nothing against Ireland- it’s the homeland of most of my ancestors, after all, even though I am not by any means subject to the usual Irish-American fits of sentimentality- but after having to listen ad nauseum to US wingnuts drivelling about its low corporate tax rates I can’t help but feel just a tiny twinge of schadenfreude.


dsquared 12.10.09 at 2:42 pm

Like P O’Neill, I’m having a hard time swallowing a description of Ireland’s problems as having all that much to do with a contagious crisis of confidence.


novakant 12.10.09 at 2:58 pm

I think it would be good if everybody made sure exactly who they are talking about when they talk about “the Irish”.

Yes, I have been lectured by both Irish and non-Irish neo-liberals on how the Irish economy could serve as a model for everybody else, and yes that was terribly annoying and also ridiculous, since the “Tiger” was largely dependent on other people’s money and special privileges granted within the EU. And yes I’ve experienced arrogant, nouveau-rich Irish people with their polo matches, helicopters and Chelsea Tractors first-hand – and it certainly wasn’t pretty.

But I also know a lot of Irish people who didn’t profit much from the boom at all, because it doesn’t really matter if your house is suddenly worth 2 million, if you’re living in it and don’t plan to move to Poland anytime soon. These people were largely critical of the crazy developments on the property and financial markets, as well as what that did to Irish society, and now their basically f@cked, because of developments they never had any influence on in the first place.


Henry 12.10.09 at 2:59 pm

Reading it again, the post does have a whiff of the ‘virtuous Ireland,’ ‘naughty Greece’ about it, which I hadn’t really intended – what I had meant to say, and obviously didn’t, properly, was that fiscal rectitude, chopping welfare etc very likely wouldn’t mean diddly-squat if and when the shit hits the fan, and that the ECB’s actual decision will be based on politics rather than perceived adherence to a ‘virtuous’ economic policy. I didn’t know at all about the collateral switcheroo …


Henry 12.10.09 at 3:08 pm

And in response to Steve, one of the posts I have wanted to write for a while is a ‘where are ya now’ response to Airmiles and others who extolled the way of the leprechaun. But I have had little success in tracking down Amity Shlaes’ original profound contribution on the Celtic Tiger (I think DeLong mentioned it a couple of years back) which would be a crucial part of the project.


P O'Neill 12.10.09 at 3:22 pm

The Wall Street Journal was slowly shifting its flat tax love affair from the Celtic to the Baltic Tigers, which is a “where are ya now” topic all of its own. Basically much of the flat tax mania was the rediscovery that small open economies can do stuff that larger economies can’t. Which has its downside.


Barry 12.10.09 at 8:59 pm

Henry, for Schlaes’ stuff, just randomly piece together some of the whackier WSJ editorial pieces, and you’ve probably got something that she wrote.


bert 12.10.09 at 9:45 pm

How’s this?
From her column in the FT, before they finally marched her out of the building in a half nelson. Bonus points for the namecheck given to Charlie Haughey, moral titan.

Interesting that the only cloud on the horizon in August 2001 was a possible dropoff in foreign direct investment from a US outfit assembling commoditised computer parts. I don’t think I’m wrong in explaining this largely as a result of the former eastern bloc countries, well on their way to EU membership, already touting for investment on the basis of low taxes, low wages, access to the single market. As Amity sagely points out, the Celtic Tiger relied on “relative competitiveness”. Seen properly, from the boardroom, the arc of the Laffer Curve is long, and it bends towards zero.
Needless to say, if I come across any Shlaes articles praising Ireland’s debt-fuelled real estate boom I’ll let you know.


Daniel 12.11.09 at 1:43 am

>>but after having to listen ad nauseum to US wingnuts drivelling about its low corporate tax rates I can’t help but feel just a tiny twinge of schadenfreude.
Low corporate taxes are a good thing. Corporations provide jobs and people need jobs. Very much so in the case of Ireland.

You need tax revenue? Tax personal income. Leave corporate taxes alone (unless you are going to reduce them).

BTW, in reference to whom do you feel this schadenfreude? American wingnuts? They are not feeling any pain. Ireland, Greece, Portugal, Latvia, Bulgaria, etc…could be swallowed by the earth and it would be no sweat on their back.


Steve LaBonne 12.11.09 at 3:53 am

Low corporate taxes are a good thing.

Leaving aside that eminently disputable assertion (I will leave the disputation to the economists): effective, as opposed to nominal, corporate tax rates are generally lower in the US than in Ireland (and corporate income tax revenue as a % of GDP is quite a bit lower, indeed not much more than half of Ireland’s), a fact about which wingnuts and corporate shills routinely lie though their goddamned teeth. That’s one of the things that’s annoying.


novakant 12.11.09 at 7:22 am

#13 – is this statement meant to be ironic? if not, have you had a look at oil, pharma, defense profits lately? is greed good?


R Schnetler 12.12.09 at 1:11 am

#15 – And oil, pharma, defense represents all businesses? Where do jobs and taxes come from?

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