December 3, 2006
The dollar appears eventually to be going the way every economist has been predicting for the past ten years: downwards. How far it will go is anyone’s guess, but it will have ramifications. What does it mean for us, the most American-dependent country in Europe? And what does it mean for global economic relations?
An interesting way to view the global economy of the future – the theatre where we, the Irish, will have to perform – is to see the relationship between the world’s economic power blocs through the medium of geology. The earth’s rigid outer shell, the lithosphere, is broken up into an extraordinary mosaic of oceanic and continental plates. Just underneath is another layer: a more fluid, plasticky surface, called the aesthenosphere. This is the uppermost layer of the earth’s boiling core, which bubbles away below.
When the pressure in the bowels of the earth gets too intense, the core bubbles and, occasionally, where the lithosphere is thin or cracked, explodes into violent volcanoes.
More typically, the plates are in constant slow motion, sliding glacially and peacefully over the liquidy aesthenosphere.
Where the plates interact and nudge against each other, important geological shifts take place, such as the formation of mountain belts, earthquakes and volcanoes.
Probably the best known margin is the San Andreas fault in California. The fault line is about 1,300 km long and, in places, tens of kilometres wide. Along it, the Pacific plate has been grinding horizontally past the North American plate for ten million years at an average rate of about 5 cm per year (about the same speed as your fingernails grow).
There are about ten other main fault lines across the globe, so earthquakes – both on land and under the sea – are relatively easy to locate, but predicting precisely when they will happen is almost impossible, as we saw with the Asian tsunami of December 2004.
Ireland could be regarded as living on the economic and political equivalent of the San Andreas fault, where the huge continental plates of the US and Europe grind against each other. When the world’s financial lithosphere is calm, we prosper in what economic geologists might term a false sense of security. When the giants move in opposite directions, we find ourselves in an uncomfortable position. We are consistently compromising, altering, adjusting and re-balancing.
This constant juggling has had an impact on us, our political system, our expectations and national philosophy. This ‘Ameropean’ geopolitical stance is evident in the chat before elections.
Next year, for example, Irish politicians, commentators and the electorate in general will display a split personality in claiming that we can deliver the tax system of Texas and have the social-welfare system of Sweden. Our discussions will centre on the utopia of lower taxes and better health, education and social security services. You can have one or the other, but not both.
The roots of this dichotomy are old and hark back to the fact that, over the past 30 years, Ireland has positioned itself politically at the heart of Europe (initially to move out of London’s orbit). Economically, we have moved away from the European model and jumped into America’s boudoir.
The European political move has meant that our politicians adopt the language and posturing of the European left-of-centre consensus, with its ultimate promise of a strong state providing a functioning safety net (this will be evident in the minister’s budget speech).
Yet this rhetoric is in direct contrast to the realities of being part of the US economic space. We have adopted American policy on taxation, investment, trade and business attitudes. We have stopped short of the American ‘get-a-job, bum’ attitude to the poor, preferring – but not delivering – the less unpalatable European ‘the-state-will-provide-from-cradle-to-grave’ approach to poverty.
So we are a bit like a jockey riding two horses. When the horses are moving along in tandem, the jockey’s position is tenable and almost comfortable. When our European rhetoric does not undermine our American values, we – like the jockey – can ride both steeds effortlessly. But when the two horses move in opposite directions, we have to choose.
What makes Ireland unusual is that it is the only EU nation that benefits more when Europe is weak and America strong.
The fusion of monetary economics, trade flows, immigration, demography and investment flows explains this. When Europe is in recession, Irish interest rates are extremely low to reflect this. But because we are much younger than the rest of Europe and young countries spend more, we get a free lunch.
We get German interest rates that fuel the Irish boom. On top of this, when Germany is weak, the dollar is strong against the euro. This makes Ireland look cheap and hyper-productive to American investors, creating more jobs here, reinforcing the injection of German cash because, as our incomes rise, we can borrow more without necessarily feeling the strain.
In addition, we still do twice as much trade outside continental Europe as within it. So we benefit disproportionately when the rest of the world is growing faster. In contrast, we do not get a huge payback from a robust Europe.
Also, because migrants from central Europe are so essential, we benefit when unemployment is high in Germany and France, because it makes their decision to come to Ireland easier.
We are unique in the EU in that it suits us to have a weak Europe. We are bit like a parasite feeding off a bloated and sclerotic Europe, which is too lumbering and slow to swat us away.
This bizarre set of divided loyalties holds true, not just for economics, but for politics, too. When Europe is economically fragile, the ambitions of some of Europe’s more deeply federalist politicians are thwarted.
The continent can only expand when there is a tailwind of positive economics at the national level.
If people are worried about their jobs, the last thing they are going to do is support what is perceived as a pampered elite with superfluous ideas and potty projects.
This is what we saw in last year’s constitutional votes, where the metropolitan elites were out of step with ordinary voters all across Europe.
This development is unambiguously positive for Ireland. As semi-detached Ameropeans — half-European, half-American – the prospect of a strong federal Europe challenging America properly in either foreign affairs or global economics might force us to choose, which is something we are loath to do.
The art of playing both sides is that you should never commit to either.
This is always easier when the relationship between your two suitors is very slightly unequal.
The falling dollar might be signalling that the inconsistencies in America’s economy -namely the huge budget deficit, current account deficit and rapid indebtedness of its population – are making themselves felt.
Equally, the more muscular performance of Germany in the past week suggests that, cyclically, Europe might be properly recovering. This is bad news for us.
Watch these developments because, notwithstanding all the media razzmatazz surrounding Wednesday’s budget, the big global trends will have more impact on the Ireland of the future than local sideshows.