September 23, 2007

Ireland has become a fat, flabby nephew of an ailing Uncle Sam

Posted in Celtic Tiger · 18 comments ·
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A strong United States is good for us Ameropeans, but heaven help us now that the dollar is on its knees.

The collapse in the dollar and the realisation by Federal Reserve boss Ben Bernanke that the US economy is facing a housing slump poses a number of tricky questions for Ireland.

For years, Ireland has played a smart game pivoting between the US and the EU. Despite professing publicly to be good Europeans, Ireland benefits more when Europe is weak and America is strong – not the other way around. The fusion of monetary economics, 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.

This was the way it worked up until this year. Now the US is facing a currency crisis as the dollar slumps, highlighting the deep structural problems in the US, largely resulting from a borrowing binge which has only been outdone in Ireland. We are getting into debt five times faster than the Americans.

As a result, our geo-political blueprint has to be reassessed because, since 1996, we have profited enormously from being a transit nation for American capital and European labour. When we had no capital, we attracted in American investment by giving it a tax break and when we ran out of our own workers we attracted in European migrants by opening our door.

Both have been hosted here with impressive results. We are an Ameropean nation, half-American, half-European.

This constant juggling has had an impact on us, our political system, our expectations and national philosophy. This Ameropean geo-political stance is evident in elections.

Irish politicians, commentators and the electorate in general seem to think that we can have the tax system of Texas and yet deliver the social welfare system of Sweden. This can only happen if the growth rate is always better than your neighbour and for this to be the case, we need a strong America.

Unfortunately, the American economy is now unravelling. The pyramid scheme, whereby the Americans funded their day to day spending not from their savings but from equity release on their overvalued houses, has been exposed. In contrast, Germany is growing faster than anyone expected, so both interest rates and the dollar are going the wrong way for Ireland.

The last thing we need is a wounded America whose economic and political power has been emasculated by the disastrous Bush administration. Because we are small, we are liberated when America is the world’s only hyperpower. Since the end of the Cold War, the US’s grand strategy has been to maintain its overwhelming military, political and economic pre-eminence.

For that, we should be thankful — not because the strategy has been remotely designed with Ireland’s interests in mind, but because, as a by-product of US dominance, we have flourished.

Our increase in living standards has been the result of cherry-picking from both the European and American way. By attracting foreign investment on the one hand, and taking advantage of the European pool of savings on the other, we have profited in ways unimaginable only a few years ago.

But all this is changing. The dollar is now at its lowest level ever against the euro. This makes us look expensive for American multinationals, which now account for close to 80 per cent of our exports. (The figure for total multinational exports is 94 per cent of all Irish exports.) Taken together, the output of Intel, Dell and Microsoft in Ireland amounts to 20 per cent of our GDP.

As our currency rises against the dollar and sterling – our two biggest trading partners by far – we have to ask ourselves the question, why is this happening?

The reason is that we are locked into the most inappropriate currency regime which has helped turn a lean, fit, exporting country into a flabby, indebted outfit that is cannibalising itself.

We are turning into a mini version of the US where borrowing against overvalued houses begets more borrowing and the debt inferno gets bigger and bigger. This is not an economic miracle, it is fool’s gold.

In recent weeks, those who expose this sham and tie it into events playing out in America have been deemed unpatriotic.

There has been a ‘bull’ and ‘bear’ game playing out. The allegation is that it is possible to talk down the economy. However, when you dig a little deeper you see that the ‘bulls’ on the Irish economy are not bulls on the Irish economy at all , but bulls on the housing market – and the reason is that they are paid to ensure the housing market keeps rising.

But the housing market is not the economy, in fact the housing market has to fall for the rest of the economy to breathe.

The bizarre thing about the bullish case for the Irish housing market is that it is predicated on impoverishing the young Irish workforce by sentencing them to years of debt. In addition, the reason the government is hyping up housing is that it gets about 28 per cent of the price of every new house in taxes.

Our entire budgetary strategy has the effect of indebting our young people. The government takes money from young workers through the housing market and uses the cash to engineer tax cuts ahead of elections pretending to be a tax-cutting government. In reality it is just robbing Peter to pay Paul!

In short, like the Bush administration whose tax cuts were dressed up as revolutionary, our administration and their cheerleaders are trying to tell us that the housing market and the economy are the same thing because both the government and the banks make money out of housing.

Their entire ‘‘bull’’ case for Ireland impoverishes young workers and forces them to spend 15 times their annual salary on a shoebox 50miles away from their job. If this is what they mean by ‘‘economic success’’, one shudders to think what they would term ‘‘economic failure’’?

The ‘bear’ case is that we need to blow all this froth off our economy so that we can recover and instead of spending our cash on equity release for SUVs, second apartments and Big Bertha golf clubs, we need to get back to basics, start innovating and competing again.

When seen from this perspective it becomes apparent that the so-called ‘doom and gloom merchants’ are in fact the only ones that have a clear vision of a successful future for the country. On the other hand, the ‘blue skies’ merchants offer nothing but promises, debts and progressive economic emasculation.

That’s what the cheerleaders offered America up to last year. Look at what has transpired. Who’s patriotic now?


  1. David, as you have pointed out in your other writings, the credit that has fed the real estate speculation – here in the USA and in Ireland – did not go into creating ongoing productive infrastructure. Here in the USA there is a growing fear of job loss. I teach MBA students here ; they face declining prospects similar to those that you have described for the young in Ireland. The cause is the same in both countries, as you have pointed out again.

  2. Andrew

    David,
    You have nailed it, but why did it take so long for anyone to say what you just wrote? This situation could have been predicted long ago, when loose credit practises and rampant speculation fueled a false economy. The best remedy should be quick and painful. the party is over, Ireland, now get back to work….

  3. I made two “doomesday” scenario videos on u tube which were derided by those who watched them.
    http://www.youtube.com/watch?v=aL7mOOSK1rw
    http://www.youtube.com/watch?v=OhpEc6eo8YU
    The current layoffs at Intel may be the beginning of the prophecy coming to pass.My forecast for the housung market is happening as we speak. David knew it had too end in tears.Everyone knew.

  4. andrew

    I work for a multinational company and during our quarterly visits for our execs, we are always reminded by the CFO how expensive it is to operate in Ireland. The ONLY reason we are here is to realise tax savings. We could pick up and move to many other places in the EU with lower cost of living and lower cost of operating and be up and running in 6 months. Once it makes sense to do so, the company will, taking 200 high paying jobs with them.
    Multinationals have intelligent people running them. I expect they will seize upon this downturn as an opportunity to lower their taxes and costs in Ireland even further. If there is resistance by the IDA or the Irish government, the multinationals can use the credible threat of leaving. While Ireland has been partying for the last 10 years, other nations have been at work innovating and becoming more competitive. If anything, i think the multinationals are actually happy about this coming downturn as it increases their negotiating power.

  5. Garry

    +1

    In November 2005, 1 euro was worth $1.20. In November 2007, the talk is 1 euro will be worth $1.45….

    Thats a 20% rise in operating costs without factoring in wage inflation, energy costs etc. It is not what a CFO/CEO wants to hear when deciding on location of foreign subsidaries. It will put the Irish managers of multinationals in a strong negotiation position with the government, basically because they are fighting to keep their jobs; However those same managers will be weakened internally in their organizations; and it will leave workers more worried about their jobs. After all, the companies wage budget has increased by 20% without the workers seeing a penny, and the managers who were managing once high performing subsidaries now have to explain why their locations are now dragging the share price…. Will the social partnership help out these non unionised private sector employees?????

    A property tax should have been re-introduced in 2000 and definitely on second homes. As we dont control interest rates, the government should have used taxes to moderate construction activity not give tax breaks to encourage it. They screwed that one up…
    We are entering a tough time but, it was far worse here before. We are spending billions on public services; we are just not getting value. Now when money is tightening, hopefully old fashioned concepts like value for money will make a comeback.

    The dollar weakening is a big deal but by far, the biggest challenge facing Ireland over the next decade is energy security. The cost of energy will increase over the next decade as cheap oil stocks dwindle and Putin sits and decides how much to charge for Russian oil/gas. We are at the end of that pipeline. Tough decisions and a long term vision (stuff that has been missing around here for a while) are needed.

  6. Gerry said.
    “Tough decisions and a long term vision (stuff that has been missing around here for a while) are needed.”
    Pray tell us which of our current political parties will make them, regardless of who is in power now or ever
    ? None of them will grasp the nettle until crisis point-and then too late.Fianna fail have always been the profligate spending party. Occasionally they pass the buck for a few years ,and another admin imposes a hardship regime,and Bingo! they bounce back in again to replay the only tune they know. Profligacy,pork barrel politics.Blatant electioneering,vote buying, and above all ensuring the speculators and developers maintain their momentum.Their primary objective-to win just sufficient votes to get the magic number,to throw money at the huge bloated public sector unions and the farming community, despite the long term cost to the real wealth creators whom they prey upon to pick up the tab..

  7. “start innovating and competing again”. Again? We never really did innovate very well? Sweded though bigger than Ireland is a small country. But they have a list of globally successful companies: electrolux, ericsson, saab, ikea, volvo, and so on. Where are our giants? The only notable big companies, and not nearly as big as the swedish ones I mention, are the banks and CRH! All founded on the building trade! We never had a culture of innovation and still don’t. True the government is begining to try, with a recognition that Research is vital. Research funding for the 3rd level sector has been dramatically increased. But this is not enough to build an innovation ecosystem. What do we do to encourage proto-type patents? (the Irish patent output is pitiful). How do we create large critical mass incubation centres?

    About competing. After the rapid increase in 3rd level takeup in the 80s we had a huge number of cheap graduates. Now we have a huge number of expensive graduates. Reducing taxes was and is a fantastic way to encourage investment, but it has reached its limits. We need to see how to deliver better value for money. That doesn’t always mean cheaper. Better will do too. Problem is, we aren’t better. Our infrastructure (road, rail, broadband) is inferior. Our dependence on others for energy is a dreadful exposure. I see little evidence that our political class have the will or the capability to rise to these tall challenges.

  8. Correction:Second sentence is “Sweden though bigger than Ireland is a small country.”

  9. Shane O'Neill

    David is as always on the button. Ireland’s economic miracle arguably genuinely ended on 911. All that has happened thereafter is that the flood of cheap money around the world encouraged by and encouraging low Eurozone interest rates made Ireland still an attractive place to operate for the multinationals.
    As the New European countries are discovering, a business-friendly (i.e. cheap) corporate tax regime basically attracts FDI which creates jobs which creates a boom which creates an inflated housing marked which…. Ireland’s key issue is that it has 4 m people against 60+m Germans so interest rate decisions will always be made according to the needs of the bigger ecomomie. It looks likely that unless Ireland exits the Euro, there will be a Ballsbridge-Berlin economic see-saw act with Ireland booming while Germany suffers and vice-versa. The key is that when the burden to bottom line of increased wage bills outweighs lower CT bills, multinationals whose managers bonuses depend on ever-increasing profits will relocate wherever it takes. In 2017 following 10 years of recession it may again be possible to buy a late noughties 3 bed house in Naas for €100k, and an ambitious young middle manager in Fort Worth will successfully present the case to his boss for relocating from overpriced Bulgaria to cheap-again Ireland… economic musical chairs, just don’t be caught red-handed when the music stops…

  10. The Dáil Éireann debate on the abolition of Residential Property Tax from Oct 1996 is available on line. http://historical-debates.oireachtas.ie/D/0469/D.0469.199610030006.html

    It makes an interesting read not just for the data on the level of owner occupancy and the average house price in Dublin just 10 years ago but how Forfás report “Shaping our Future” was dismissed.

    Its also very funny in places. Pat Rabitte calls Maire Geoghegan-Quinn “the Arianna Stassinopoulos of Connemara” and Willie O´Dea is in there as well.

  11. Wessel

    unless Ireland exits the Euro….

    Nope, that will be bucking the trend of transnational economic regionalisation. We ARE in Europe. We have been overdependent on our American benefactors. Our window of opportunity is fast closing in developing new links, in particular with the four Asian blocs (Japan, China, India and ASEAN).

    Two months ago a delegation of a major Chinese city visited the local authority I work for. From the initial visit they made proposals for co-operation, whilst we twiddled our thumbs. Thankfully our Enterprise Board is leading a delegation of twelve companies in November to this Chinese city to explore joint ventures as part of an EU Incubation Project.

    The point is, as previous posters pointed out, we ain’t too good at the innovation thing, BUT we have the expertise to SELL and to network into Europe (our American “gateway” experience).

    Let’s build on that strength and stop moping about the downward trend in America.

  12. MK

    Hi David,

    Another interesting thoughtpiece. I think most economic observers are realistically in between ‘blue skies’ and ‘doom merchants’, whatever they may say publicly to emphasise a point.

    Its true that we have a dependancy on the US. Ironically, you mention the ‘Jack Charlton’ diaspora as a potential ‘solution’ in another section, yet it is this diaspora card that we have ALREADY played in getting the US multi-nationals here in the first place. Ireland had a number of attributes which attracted up to half or whatever it was of US FDI in Europe, namely:

    1) We are part of the EU
    2) We can speak ‘American’ (ie: we have the English language, and know the culture)
    3) We had good Labour force skills and low costs (historically), postive tax & financial incentives
    4) Their Great-Granny’s were from Cork !

    US businesses will need a foothold in the EU and in euro-land, so Ireland is a very logical choice for many businesses given the above.

    > For years, Ireland has played a smart game pivoting between the US and the EU.

    And it will continue to do so. But the threat of competition with a weak dollar or not, is not from outside the EU, but is intra-EU. The european multinationals have started doing it years ago, investing in the Poland’s, the Hungary’s, Czech Republics, etc, although not as much in Lithuania perhaps, a country which you covered in your programme transmitted last night. The US multi-nationals that are based here could do likewise, and move their EU businesses to elsewhere in EU-land and euro-land. We can see that German multi-nationals that set up here in their droves in the 60′s and 70′s have mainly all gone elsewhere.

    Another sidepoint is that a weak dollar ironically makes US products more competitive in Europe, so this is a balancing factor when the products and services sold are add-on (ie: some of the costs will be dollar based.)

    What is clear is that the US is important to us, as is Europe. We are in a position to hang our coats on the area that is most succesful at any one time. We are European, but with stong US links. But we need to remain competitive, not necessarily for things such as manufacturing, but higher up the value chain. We may not have an Ericsson, like Sweden do, or a Nokia, like Finland has, or a Microsoft or Google, but sometimes many smaller fish can in a ‘school’ be as effective and indeed more so than a whale.We do know that we need a lot more smaller fish however.

    Immigration is used as an economic tool, so why not for us too and the EU expansion to 25 counties will provide many good workers for years to come. Its tue that some at the bottom may be affected but it will only be some and a rising sea will lift all boats so everyone will have opportunities.

    The over-indulgence in property and credit reliance are problems, but see this as a way of growing up for a country which is still economically in its teenage years. Our property market is unlike some other EU countries which have more government-led market interventions in terms of rental contols, housing supply, taxes, etc, which can help prevent massive booms and busts, but by no means all. The credit expansion and lower interest rates have led to a property price expansion, but this was to be expected. We (others!) have gone too far in terms of speculation, but that will work itself out of the system, perhaps with a little pain here and there but overall by real price reduction through CPI effects which will be ‘shared’ by everyone.

    MK

    ps: perhaps it would be useful if you had an entry/text summary for each of your programmes on here so that people can comment on the issues raised in them directly.

  13. Conor

    I work for an American multi-national based in Ireland doing R & D for the semiconductor industry. As of last week when 1 Euro equated to $1.40 we for the first time became more expensive when compared to all US locations. Run rate (Cost/employee) in Ireland is the most expensive in Europe and 4 times more than equivalent in Bangalore.

    We have had local management change the titles of some of the engineering graduates roles to stem senior executives desire move of such functions to India. 10% of employees in this site in Ireland have PhD level education and another 40% have a masters degree. All its Irish employees have a science/engineering degree.. the battle to keep these jobs in Ireland is tough in spite of our patent output and productivity.

    The baby boomers (space race inspired) were the last generation to really embrace technology as a career in the US. Science and Engineering uptake has suffered the same fate in Ireland over the last 10 years.

    India and China are climbing the technology food chain extremely quickly. In the last few decades the Dilbert cube land of high tech corporate America is populated predominantly by Asian immigrants, many with higher degrees from American universities.

    As happened in Ireland in the late 90′s, returning immigrants to India and China are allowing multi-national R & D functions to perform at the highest level without going through an organic learning curve. These immigrants are returning to Asia because the jobs are being outsourced anyway. To these immigrants the fact that you can sell a house in Cupertino California at an inflated price and take a more senior position than is available in the US makes this appealing. These returning immigrants bring the contacts, technology and western business acumen back with them.

    In light of this the future for technology innovation in Ireland is questionable.. Ireland needs to innovate in areas where geographic or local natural resource will give an advantage over the rest of the world.
    Innovation where we compete on brain power only is not the way forward. Cost becomes the common denominator here.

  14. Quote:
    “Ireland needs to innovate in areas where geographic or local natural resource will give an advantage over the rest of the world.
    Innovation where we compete on brain power only is not the way forward. Cost becomes the common denominator here.”

    We have lots of new hotels and golf courses coming on stream, every year..and nobody wants to travel as far as China for a game of golf.!

  15. Conor

    Many of the hotels built were financed on section 23 type tax relief. This was convetional tax planning, not necessarily the wisest investments from an Ireland Inc perspective.

    The option for Irish tax payers was pay 43% to Biffo or pour it into concrete, Even if section 23 had a 0% capital increase and yielded 0% it would take another non-tax friendly investment to yield 94% to compete. (43% tax and 20% CGT on on gains from net after tax = 100% pre tax investment) That’s even better than SSIAs.
    Does Ireland have an natural advantage over the rest of the world when it comes top golf courses? weather, transport, infractucture, ?

  16. As a member of an international home-exchange club I frequently exchange my home (and car) in Gran Canaria with another family in France, Austria, Australia etc.It enables one to travel the world on a backpackers budget and get to meet new people and better tips on where to go etc.
    I am astounded at the number of people who have an interest in visiting Ireland though.For such a small country-perhaps because of its size-there is much curiousity,and of course it has been much publicized in recent years,for the economic boom etc.The home exchange clubs are growing exponentially since the Internet,because of the E-mail simplicity of making contact with many people at the same time.
    Ireland has always had a good image as a friendly country. less is known about the cost of living and the nightmare (lack of) infrastructure shambles.I was shamed recently when my good friend and tennis partner from Norway, told me that the beating almost to death of a young tourist from his country was publicized in all the newspapers there. Failte Ireland dont waste too much of your advertising budget there..Ditto Spain , a number of young visitors from here, have also suffered similiarly at the hands of the gangs of young thugs who appear to roam the streets of Dublin nightly with total impunity.But then again i was privileged to accompany a party of young solicitors on an inspection tour of Mountjoy jail some months ago and our guide told us his greatest nightmare was the prospect of some busy police station Sergeant deciding to actually execute all the arrest warrants lying in his dusty files.If 6 people were presented at the gates Mountjoy tomorrow morning by An Gardai, the prison staff would have to decide which six incumbents to release, before the end of their sentence.! Never mind that the government are sitting on a highly explosive report on prisons completed by an ex high court judge just before he died some months ago.
    The controversial proposed new prison in north Dublin will-like the proposed new airport terminal- be at maximum capacity the day it opens!!(and Mountjoy finally closes)
    When I visit well governed European nations, Austria, France, Scandanavia,etc,(like many other irish citizens nowadays) and travel by road rail or subway,I shudder at how far backwards we have advanced, as a so called “Tiger” economy.the parish pump politics here is frightening, its inefficient, and its destroying the country.Take Norway as a case in point.It has the same population as Ireland. in every sense it is as far removed from our way of doing state business , our political gombeenism,and our level of incompetence in governance as the Earth is from the Moon. The people there own the natural resources (Oil assets, hydro power stations, etc) not multi- nationals.The country is governed with efficiency.No public sector unions dictate to the political parties etc , no divisive,ruinous and profligate spending, buying sectors of voters (such as the farmers)
    I hope the hotels continue to do bumper tourist business, because if the home truths leak out-they may as well close up shop.!

  17. Frank

    Is it just me being excessively simplistic or did the arrival of the Celtic Tiger in the mid 1990s offer us a brief opportunity to encourage the development of small scale and perhaps some large scale domestic entrepeneurial ventures before this unexpected bubble would inevitably burst. Instead successive governments have continued the reliance on foreign multinational companies begun under Lemass’s leadership in the 1960s. I realise that we cannot rely exclusively on Irish owned companies but at least if we could minimise our reliance on foreign based investment, it might make a hige difference to our economic future.

  18. I enjoyed the article David wrote in the Sunday Business post, today,entitled
    “The great credit contradiction” . However, surely the statement, “This is the paradox of credit, the rich get money for nothing, while the poor pay through the nose for it” is telling us nothing new.thats a fact of life in every capitalist economy.The pyramid borrowing structure he outline which funds very large projects(such as the proposed Dublin 4 skyscrapers) is interesting, and suggests that the developers/investors may-in the end have to take a hit-but they are well cushioned for that from the past 20 years, and the Fianna Fail government will move heaven and earth to soften it for their merchant princes of the construction sector, now that the “re-adjustment”, according to Mr Cowan-is here at long last.

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