March 30, 2008

Iceland’s economic 'meltdown'

Posted in Celtic Tiger · 32 comments ·
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After a few years of indebted instability, Iceland’s economy is set to undergo a short sharp shock. We are in for a much more protracted downturn.

Exactly two years ago this weekend, this column focused on the strange and rapidly growing economy of Iceland. It seemed likely that, because the Icelandic economy was becoming rapidly indebted, it was becoming more unstable. Equally, as it did not have the protection of the European Economic and Monetary Union (EMU), its unsustainable debts were likely to lead to a financial crisis.

The mainstream financial markets rejected this view, spouting the usual mantra about Iceland’s fundamentals and so on. However, question marks remained. For the past two years, the Icelandic authorities have been doing their best to stave off the day of reckoning – but it appears that the predicted catastrophe is now upon them.

Every single financial measure in Iceland is now screaming ‘meltdown’. For example, interest rates on credit default swaps for Iceland’s main banks are now trading at 1,500 basis points. A credit default swap is an instrument that ensures against the risk of default. This means that if you are lending to an Icelandic bank and you want to ensure against the likelihood of a default, it will cost you €1.5 million to insure every €10 million loan you give it.

This is ten times the rate of the average European bank, implying that the market believes that a serious default is now only a matter of time. Banks simply can’t do business on these terms.

Meanwhile, the krona – Iceland’s currency – has fallen over 25 per cent this year, and is still in free-fall, despite recent hikes in interest rates.

It is clear that the Icelandic model is over. It was based on a bank-led boom, taking full advantage of financial liberalisation to borrow huge amounts of money and lend it to all takers. Icelandic banks expanded aggressively abroad – including in Ireland where Landisbanki bought stockbroker Merrion Capital and thought about bidding for Irish Nationwide.

Bjork may be Iceland’s most famous export, but the vast bulk of the wealth created in recent years has spun off from the banking sector, leveraging up and expanding. This was a country behaving like an out-of-control hedge fund, and it is suffering accordingly.

Iceland will recover, but it will experience large currency devaluation, one or two of the banks will possibly be nationalised to stave off bankruptcy and, like Norway and Finland in the early 1990s, it will probably have to issue a state-backed bank bond to pay off debts. As is happening in the US in the case of Bear Stearns, Iceland’s ordinary taxpayers will pay for the swashbuckling idiocy of its banking high-fliers.

However traumatic the experience, it will be swift and the turnaround is likely to be quick. Some people may be punished as dodgy practices are exposed and the country will start again. It is a world leader in hydrogen technology, at the cutting edge of genome research, and it will take more than a financial whirlwind to topple these Norsemen.

Most importantly, house prices will fall rapidly, to such an extent that within a year of two there will be great value in Iceland. Lessons will have been learned and the cycle will start all over again.

At the moment, Ireland can look north and thank our lucky stars that we are in the eurozone. Our banks have behaved in the same way as those in Iceland. If we still had the punt as an independent currency, we would look exactly like Iceland. For example, by late last year, only 50 per cent of Irish banks’ loans were covered by domestic deposits. So the banks here, like their Icelandic partners, were borrowing enormous amounts of money abroad to finance lending at home — which was almost exclusively going into property.

As a result of economic and monetary union and the creation of the euro, we won’t run out of money as a country. However, if the share prices of Irish banks are any indicator of future banking demand, we are in for a torrid time. Bank insiders have known this for awhile.

As far back as last summer, for example, some senior figures in private banking were advising their rich clients to get out of property, while telling the ordinary Joe Soap that there was never a better time to buy. So it’s not that the banks weren’t aware of the difficulties. It’s just that they chose to tell different stories to different people – one message for the rich and another for the not-so rich.

Now let’s try to read the tea leaves for a moment. We know that, in Iceland, the short sharp shock is already under way because it has its own currency. We, on the other hand, are going to suffer a much longer domestic slowdown. Ireland will experience what a US region experiences after a property/banking boom and bust, which is more akin to a slow puncture than a high-speed blow-out.

House prices will continue to fall, not rapidly, but progressively. Instead of prices collapsing, as happened in the early 1990s in Britain, Finland, Sweden and Norway, and now Iceland, we will go through what Massachusetts did in the late 1980s.The adjustment will take place on what is called the ‘‘real’’ side of the economy.

When I worked as a student in Boston in the late 1980s, there were loads of jobs and nowhere to live. By the early 1990s, there were loads of places to live and no jobs. People who had flooded into the New England area in the 1980swent back to the mid-west, Chicago and the South.

Immigration stopped. The region’s budgets went into deficit and the place felt a lot less crowded, congested and pricey. This process took time.

There was no crisis, no single event or catastrophe. On the contrary, there was a slow realisation that the game had changed. There were still dollars in the banks, but people simply slowed down, re-examined their credit card bills and tried to hold onto their jobs. House price fell for six years.

However, on the upside, the technology hubs around Cambridge, MIT and Harvard thrived. They could attract the best people because Boston was no longer prohibitively expensive. Cash that had been diverted into the fool’s gold of property now was available for real investment, and the high-tech hub boomed.

Ireland is likely to experience the first part of this Massachusetts story. It is already happening and will get much worse. The big challenge for all of us is to make sure that the second part of the Boston story is repeated here over the coming years.

Oddly, even though the EMU gives us an element of protection, it also anaesthetises us to the severity of our difficulties. Like Iceland, our problems started in the banking system, and it would not be surprising if over the course of the next few months we get more bad news from this sector. However, unlike Iceland, which will go through the mill, we are likely to experience something much more protracted.


  1. Johnny Dunne

    How can we get a real debate going about the possibility of moving on from the euro to stave of a very long recession in Ireland ?

    Exiting the euro must be considered now as a real option for the Irish economy if the government is to be able to fund the public service from decreasing tax revenues and not having to borrow massive amounts in the years ahead. We could convert personal debt to the new ‘punt’ when revalued by the financial market ?

    As you have said in the past if we had our currency the ‘Jugglers’ could start living again and focusing on building productive Irish indigenous export companies. How could a growing company export competitively to the UK or US now?

    Unfortunately, I don’t see any ‘leaders’ coming forward in the Lisbon Treaty debate addressing the implication of voting ‘Yes’ to the possibility of EMU withdrawal (while still maintaining EU market access). In business, management can change direction to prosper. They would never sign a ‘contract’ which could risk losing their only competitive advantage — 12.5% corporation tax for transfer pricing by multinationals exporting ‘services’ which don’t create many jobs in Ireland.

    Anyway…just thoughts…

    David — is there a ‘political party’ with a cohesive voice to influence and address these required changes ?

  2. John Q. Public

    Johnny, are you crazy? Exiting from the Euro would shoot interest rates way up again, give us exchange rate fluctuations etc. We have enough to worry about so let’s ride this one out and hope it is slow and protracted.

    There are plenty of ‘Jugglers’ in the country but they are too busy juggling their own money dodging tax etc. The entrepreneurial spirit here is all about cute hoorism, that’s all, and the government are a bunch of muppits.

  3. Ger Kennedy

    Ireland would become “Icelandic” if we bailed out of the Euro now. Our intrest rates would shoot up overnight to ensure that the “new punt” didnt experience Zimbabwe like devaluation. (OK a slight exageration..)

    At the moment it is a difficult time to be in the Euro Zone because of our trading partners (ie UK and USA). That will change in time. The US$ and Sterling will come back in time. I hope it is not too late for our multinationals and Ireland Inc. It may well be. The US$ will be in the hole until the US financial mess is sorted out and that could take years if we lucky. Longer if we are unlucky. Sterling shoul dnot be as bad but that economy has US like issues but not in the same volume I think. If it takes too long for those currencies to come back and we stay relying on those markets then many of our multinationals will pull out I fear. To avoid this collision we need to start thinking euro. Germany, France, Holland, Belgium and Spain are huge markets with millions of people. We need to concetrate on these and wean ourselves off those convenient “english speaking” markets.

    Probably best to stay in the euro and hold on with the fingernails. It will be good for our nation. About time people had to work, innovate and think in order to make money instead of just walking into an estate agents office and signing some papers.

    Ger

  4. GOM

    Agreed that we need to get used to work, innovate and create knowledge as the sustainable way forward but “our multinationals” – it’s a bit of a stretch that they will help pull us out of any longer term downturn. In fact, the more concerning pressures on those companies are not the exchange rates but the more durable and sustained pressures of lower cost in Eastern regions.

    Its great to see innovators rewarded for their work and fair play to the lads from Limerick last week – but there is a worrying sign in all of this when they got investment money from a US incubator and sold their company to a Canadian outfit and also now will leave and go work in Canada – an example of Ireland Inc. losing both sustainable value and talent. If we need to get used to work and innovation we had better work smart about retaining the innovation done by indigenous small companies through better mechanisms for supporting them and by attracting meanginful sources that will finance them in the early stage – that would be the investment I’d like to see made and I hope our weaning off the property drug will help remove some of the blinkered thinking about what creating real value is.

  5. Johnny Dunne

    Exiting the euro may sound ‘crazy’ but all options should be debated thoroughly by those politicians, economists and busness people in the ‘know’

    Lots of things sound crazy until something ‘suddenly’ changes and it’ too late – consider this much talked about multi national scenario. Currently the GDP in Ireland is a whopping €180 billion which must be nearly the highest in the world per capita considering we have just 2.1 million in the workforce. That’s about €85k a head, nearly 3 times the average industrial wage. How have we pulled off this trick ? Well it helps when we have exports of €150 billion, a significant chunk of GDP. The scary thing is this export figure and in turn GDP (and other economic metrics such as productivity) has been propped up by ‘services’. How do we do that ? Usually services are delivered by people. We have only 2 million workers ??? Very busy – well not really. Services exports is now €65 billion (45%) of of all exports, how sustainable is the double digit growth in thiss sector ? For example, a third of these services exports are computer software which we don’t produce but book licences/invoices in ireland, this needs very few employees locally to process these agreements from sale office around the world through the Irish offices of the mainly US MNCs. 1 or 2 of these moving would be crazy !

    Tottally agree, we need to promote innovative irish owned, well financed companies with the capability to scale internationally into global brands. At the moment, less than 10% of our exports are from indigineous companies. Take out the food sector and exports are less than € 5 billion (3% of total). Take out the handful of big players and you have less than 100 with greater €30 million revenues — crazy !

    Anyway, Enterprise Ireland are trying to support emerging companies but due to European regulation cannot invest significant amounts in indigineous company’s sales and marketing efforts (no revenue, no productivity, no wealth creation) and has a mandate from Europe to provide mainly solely supporting R&D, where we have a fairly poor track record of creating companies so scale. Even the Government had to go to Brussels to get Business Expansion Scheme (BES) approved with restrictions twice now……mix in no control on exchange and interest rates and I’m not hearing any politician coming up with long term policy solutions or even a ‘crazy’ vision ?

  6. Kevin

    Johnny,opting out of the Euro and allowing the debt to be revalued to the “new punt” is a non-starter due to one of the facts that David mentioned in this same article; 50% of the loans that Irish banks make are not covered by the domestic market. The banks will not be able to get those international loans revalued into the “new punt” so if they revalued their domestic loans for customers they would end up with a huge exposure to currency risk. We all know how much the banks like risk in the current climate.

  7. Garry

    * We screwed up!
    * We pissed away a 10 year boom on domestic and internation property to the benefit of a minority of the ‘barbara striesland’ generation.
    * Nobody else is to blame.

    Switching currencies is not a tactical decision like our juggler friends who switch credit cards in order to borrow more.
    * It takes years to plan and execute even with goodwill on all sides.
    * At a time when trust is a very precious commodity in banking circles, does anyone seriously think a short term tactical refloating of the punt would work? We dont need to think, pull up a ringside seat and see whats happening to Iceland, a small country whose longstanding stable currency is many times more trustworthy than an opportunist refloating of the punt could ever be. Whats the interest rate there?

    Our problems are our own making and the solutions are under our control. Blaming the EU at this time is like an alcholic blaming the licensed trade for their impending hangover.

    The Construction Industry Federation are already making veiled threats against the Lisbon treaty in an effort to get leverage for an ECB rate cut. Not happy with having raped house buyers for the last 10 years they are willing to thrash Irelands reputation abroad so they can shake the last few pence from the boom that nobody believes in any more.

    Time for us to grow up and face the music, its never as bad as it looks.

  8. David Campbell

    To David
    Wolfgang Munchau on “ft.com” had an interesting view (30/3’08) on Iceland’s economy. He doesn’t think Icelands economy is “melting down”, but he admits. It is suffering from huge macro economic imbalances; high inflation, current account deficit and imbalance between foreign debts and assets.

    He explains the high increase in credit to Fort insurance. (Which you mention in your article.) as being due to a speculative attack by international financial speculators. He makes the point that only one of the three giant Icelandic banks have any exposure to toxic mortgage derivatives, and he quotes university level research showing that the capital structure of the banks is sound, and so is their debt maturity profile.

  9. Philip

    Agreed. Let’s forget about blaming those outside of Ireland for our troubles. We are locked in to Europe and we have a role to play. Let’s find that role as mature adults. The last thing we want is a credit crunch caused as a result of petulent attitude to our euro neighbours.

    Also, bear in mind that your euro neighbours are not that well off either. Start reading the international papers! This is a global crisis which is not just economically driven. I just came back from Britanny and the economy and job situation is not good at all – and their road and telco infrastructure is lightyears ahead of what we have here. You need to realise that there is a lot of things coming together ranging from outsourcing, knowledge economies, displacement of jobs by lower costs etc. burgeoning public services, increasing elderly population etc. immigration, increasing property prices and bubbles – and now commodities and soon it’ll be about water and land. This is NOT JUST an Irish phenomenon. We are being hit not by a credit crunch, but a global resources availability crunch. It’s never happened before.

    A man with a hammer sees a world full of nails…so it is with finance, property etc. and even economics. The nail I see here is sustainability.

    30 – 40 years ago I remember reading about speculations on what might happen were robots to take over manufacturing jobs. And the same old blather went on about how we would need to be more skilled etc. The outsourcing to China is just the same thing. No one has really grasped how we will keep most everyone occupied. We cannot all be knowledge workers. Elitism always dominates…we start creating our ivory towers of knowledge economies in the cities and keep the rest of the ungrateful in the shantytowns (former deck-landers if you will). Yes, Boston managed to pull itself out by attracting the talent and putting the likes of MIT on the map…but what about the plain people there? I can tell you that nothing much improved for them. The societal tiering is all to easy to see as you start to venture outside to the wrong side of the city.

    The crunch is merely a side effect of what should have happened 6 years ago when David started his first musings on this topic. But the Euro, the Inflation exporting phenomenon (aka chasing low cost wages) just made credit too cheap. Big loans felt small. All we needed was a trigger. It just happened to be a financial one. But recovery will not be financial or economic. The real basis of the crunch is sustainability.

    Ireland could become a very precious asset is what is now a Malthusian game. If I was a developer, I’d be goin back to the farm or demolishing them unsold buildings to raise spuds and importing people to do the picking and building wind farms to power up the place. The vision needed going forward is not based on financial/economics as we have known it. It has to be more imaginative and self sustaining at every level. It needs a real social dimension which has an accountable public service (which can be flexed) and a entrepreneural focus which must not just balance the financials, but it’s social and sustainability books as well. Unfortunately, this is way too advanced for us greedy paddies and we’ll probably sell it off to the biggest bidders located in the middle or far east.

    Oh, as for Iceland, they’ll be fine. But I think it does not apply to Ireland.

  10. eugene

    “We cannot all be knowledge workers.”

    In any case being a “knowledge worker” is a mugs game, since IT is easily outsourced, and immigrants are plentifully available. For that reason the West has seen long term decline in the numbers of IT since the dot com boom, and the very people who complain about the reduction in the number of people who take IT degrees ( IBEC etc.) run courses on outsourcing ( A hint to IBEC. If you are going to complain that the best leaving cert graduates in science and mathematics are not going into IT you should pay IT workers more. The top 2% of Irish graduates probably want to get the top 2% of non-managerial wages, and they can do that in fields which are protected from outsourcing by law, custom or circumstance. Not IT.).

    “buildings to raise spuds and importing people to do the picking and building wind farms to power up the place.”

    sure. The chinese are increasing consumption of Whisky ( Scotch), English speciality cheeses, and I imagine grass fed meat cattle will be a big seller there soon.

    I think we can do IT too, but agriculture is our stand-out industry, although it would not interest me to work there ( except maybe, a distillery).

  11. Rob

    Funny thing is that whiskey or ‘uisce beatha’ is an Irish product, made its way to Scotland, got famous there and the Scots market it way more successfully than we do (attributed to US Navy/army drinking it during 2nd WW?). Anyway Irish whiskey, taste wise, is way up with the Scotch and beats any of that American rubbish hands down. Next point, for example who has heard of Redbreast? An excellent Irish whiskey that nobody really drinks and has heard of. These products should be marketed along with our excellent agricultural produce. My father is from a farm and laughs at the term ‘organic’, everything was organic when he grew up. We will never compete with large-scale farms in germany etc. so lets produce good organic food and charge well for the privilege. Ireland had tremendous natural beauty which is a free resource, all you have to do is provide a good facilities and a good infrastructure (which we neglected to do when we had the money). Ireland should be criss-crossed with high-speed trains, look at Switzerland, its full of mountains and lakes and yet every city is linked up. The IBEC/CIF lobby have it coming to them anyway. I heard Tom Parlon announce on radio that property was still a great buy. Matt Cooper then asked where he was intending on buying, it then sounded that Parlon had to swallow a golf ball before he managed to say anything. Brilliant.

    Therefore we should concentrate on the things we are good at, natural produce, tourism, etc. Try and retain high end industries like pharmaceuticals etc. Forget the manufacturing etc. its gone. Stick with euro, interest rates may not come down much, but can’t see them going up much either. Our future is with the EU. Also get the best deal going if there is any oil/gas off our shores. It seems weird that other countries state companies (Norway?) will actually be profiting from Ireland’s resources? Lastly energy, wind, wave, tidal, max that to the nth degree. We are constantly battered by wind and wave yet do not harness it effectively. We should be leading Europe in this area.

  12. AndrewGMooney

    Iceland is a fascinating test of ‘The Will of the Nation State’ versus the Market. The Market will win.

    I wonder why a ‘house-price boom’ ever occurred in Iceland! It”s not exactly short of space to build. Bit like Ireland… And England – once that whole M25 ‘green belt’ N.I.M.B.Y. nonsense is sorted.
    Perhaps Iceland could even become an affordable tourist destination if this carries on! Like Ireland:

    http://www.irishabroad.com/news/irish-voice/news/Articles/Dollar-for-Euro-at-Irish-Hotels290308.aspx

    Still, if there’s no Yanks or Brits kissing the Blarney Stone this year: I’m sure there’ll be enough credulous Krauts to fill the gap. Sorry…was that tasteless? I’ll be taking my family and my Euros to Perpignan where at least there’ll be some sunshine whilst we suffer our temporarily impoverished currency situation.

    With German inflationary pressures increasing, it’s hard to see how interest rates in the Eurozone can benefit the Irish economy in the near future.

    http://uk.reuters.com/article/eurMktRpt/idUKL2890994120080328

    Any intentional Irish decision to leave the Euro would permanently damage the reputation of the country and render it a laughing stock. However, it’s entirely probable that the Euro will implode under the pressure of Germanic monetary zeal pitted against weaker fringe Eurozone economies. Economies which will will soon desperately need some flexibility to manage their micro economies within the larger host. Italy. Greece. Spain. And Ireland.

    So, I’d just hang in and ‘play the long game’ and wait for others to do the deed. Don’t be the first to jump ship.

    Now you know why Brits were ‘suspicious’ of this whole ‘Euro’ thing. If you don’t control your own money supply: How are you still a country? What does it mean? Other than a flag and such like…

  13. Johnny Dunne

    There seems to be good ideas and suggestions coming through on how the economy could prosper….

    I suppose those who appreciated David Mc William’s views on this blog have already understood we’re in trouble and are prepared to address the issues. That’s maybe what a ‘knowledge economy’ is all about, people sharing innovative ideas – but all the knowledge (and R&D) in the world is no use for future incomes without applying it to real commercial use and generating revenues. Maybe, that’s what we should be doing — transferring the innovations from the likes of China, India etc and using Irish companies as a ‘route to international markets’ for these product and services (using the ‘Global Tribe’).

    I wonder why the IDA is not attracting large numbers of companies from these high growth economies (nearly 90% of the 1,000 MNCs based in Ireland are from still the US, UK and Germany). Dare I say they may already be getting a better deal elsewhere, even outside the euro zone selling into Europe and beyond ……

    No point in blaming others, we have benefited in the past from being a small open economy which now more than ever needs to market ourselves effectively in a global marketplace where others will always have advantages now that we have supposedly caught up. We’ve ‘boxed clever’ in the past to get the best deal for Ireland, but maybe now we need a change in strategy and the economic levers so entrepreneurs take risks locally and win globally not selling out early but reinvesting because it makes sense. . Is it possible for the Irish to have a mind set change and be proactive rather than waiting for it something to happen beyond our control, leaving us to bad news drip fed from the likes of the CSO, ESRI, Dept of Finance etc

    I understand the PDs have a few thousand members, many probably ‘inactive’ but have held the balance of power for the past 20 years. Is it possible that a new driving political force will emerge soon which can help us all over the next 20 years stay here in Ireland (without gloating on misfortune, nit-picking and ‘harping’ back to the past) ???

  14. VincentH

    You have to admit that most do not believe the place exists. For if they do it is more in the realm of Narnia than the real world. But the property binge, world wide, was at it’s genesis a response to the dot-com bust and continued for as long as it did because there was nothing much around which excited. Renewables had and to some extent still have there possibilities, but were starved for want of realistic vision and caught between the nimby and the stone-age green.

  15. GOM

    I much prefer the provision of solutions, good suggestion Johnny Dunne – more optimistic and proactive. Indeed, it seems it is not all bad. I read an article recently by a guy called Anthony King, in the New Scientist that outlined the perspectives of professors, scientists, students and entrepreneurs about “How Ireland is Building its Research Capital” (New Scientist; 13/10/2007, Vol. 196 Issue 2625, p58-61) – by this account, Ireland is one of the best funded regions in the world when it comes to research. As with all initiatives such as this, it takes time for them to bear fruit but two things struck me about the article.

    The first was in relation to the fact that HP and Intel seem to have set up camp at one of the centres (CRANN) set up using Science Foundation Ireland money – I think this is a positive sign….but also double edged by the fact that these non-indigenous companies may be creaming the best research and we are essentially exporting the fruits of our labour. The second was that the real problem downstream from thhis research was the lack of entrepreneurial talent, in fact the entrepreneur in the article was an immigrant from Australia. Besides just throwing money at the problem in the form of tax incentives etc. I also believe our education system can be improved by introducing elements of business education to our science and engineering programmes, e.g., a course on how to start a business or intellectual property licensing and management. Many scientists and engineers don’t know how to practically set up a business and opt for the “soft option” of going to work in the MNCs…consequently we end up with MSc and PhD level people doing work that they are overqualified for so we need to break that cycle to release the talent in a more productive way.

    I don’t agree that being a “knowledge worker” is a mugs game, most people will not be or even will aspire to being millionaires and will seek to gain fulfillment by being able to use their education to its fullest extent – that is obvious by the profile of people now leaving the country, i.e., highly educated and cannot fulfill their needs here.

    So whilst, the funding of research seems to have taken a big step forward, we need now to follow up with equally robust commercialisation strategies. We can talk at the macro level all we want in terms of the external influences of dependent monetary policy but it will ALWAYS come back to the quality of the value created on the ground, i.e., “there is no such thing as a free lunch”.

  16. eugene

    “most people will not be or even will aspire to being millionaires and will seek to gain fulfillment by being able to use their education to its fullest extent”

    Dont be naive GOM. It is clear from the points system that the smartest students follow the money, this isn’t a matter of becoming a millionaire ( not that they would be opposed to that) but making money to get into the real middle classes. Not the cubiclised jobs-could-be-lost-to-outsourcing- two-hours-to-work middleclass, but the one that lives on the Southside and has no idea how the other 90 percent lives.

    You cant teach entrepreneurialism, its like teaching coolness. what we can do is give tax breaks to VCs, let them write off losses against gains, etc. That would help to move dead money from property to VC. Once people start making big money as entrepreneurs, and VC’s, more money will follow.

    There is little use, though, talking about entrepreneurialism unless we ackowledge the money motive. People want to become milllionaires in Ireland because that is the only way to a decent living, really. And if entrepreneurs when successful were only as successful, in money terms, as a civil servant no-one would do it.

    It is not just about money, but people seek rewards.

  17. GOM

    eugene,

    I accept the arguments made but let me respond with some data I uncovered in studying the area. I also want to point out that I accept that the word “most” in my phrase probably stretched it and I my thought process was in trying to relate the fact that because of the property boom some people believe that the value of their houses being above a million Euro makes them a millionaire – that is a perception that definitely needs correction. One more point, there is a slight contradiction in your point – “It is not just about money, but people seek rewards” insofar as it does argue that not all people see money, i.e., becoming a millionaire as their primary fulfilment, but rather as an overall package so I believe we are saying similar things.

    I think your view that the smart students follow the money is also narrow – they follow the security offered by the medical, law and other “high-point” professions. Many doctors do not get to the consultant level so don’t move beyond making the “Mickey mouse” money referred to by a consultant in the not so distant past.

    The area of entrepreneurial education is nascent, and I agree, some of the soft skill associated with being an entrepreneur is not teachable in the classic “education” sense, but the practical elements of starting a business are. The most significant study into this in the Irish context was carried out by a guy called Fleming in 1996. The study was a looked at a group of four hundred and nineteen graduates of entrepreneurship programmes who were surveyed in 1991 and again in 1996 to assess trends over time. Over a third of the group studied indicated that the enterprise initiative had an effect on subsequent career decisions. In addition, it emerged that as graduates matured, the proportion entering business as owners increased with one in fifteen running their own business within ten years of graduating. For those in employment, several (over half) indicated that they were searching for a business opportunity, fifteen per cent said they were running a business part-time. The conclusion of Fleming’s study is that Entrepreneurship education promotes an awareness of self-employment as a career option and motivates young people to begin equipping themselves with the skills, knowledge and experience required for effective business ownership. Absolutely many will fail but it shouldn’t stop them from trying and we need a cultural shift in our thinking that accepts these failures as part ot the learning process.

    The other point you made about not all people can be “knowledge workers” is absolutely spot on but the idea of promoting a concentration of knowledge businesses then leads to the formation of other small businesses around them, such as coffee shops, office suppliers, etc… the point is that using knowledge work can help us leverage value creation in a very powerful way.

    We need to be an open economy so we need to look at data from those places that do promote the formation of small businesses. Also there should be a general awareness that Multinationals do not employ the bulk of the workforce – that seems to be the accepted state of affairs here. Take for instance facts like these…in the 1960s one in four people worked for a Fortune 500 firm, in 1980 the figure was reduced to five and in the 1990s one in fourteen. In addition, it is estimated that small businesses and firms with less than one hundred employees have created more than 75% of the private sector new jobs in the USA, in the late 1990s. Furthermore, 15% of the fastest growing new firms accounted for 90% of the new jobs. In the interests of backing up (crediting) my source, these facts come from a study I did in the area.

    Sure, its not for everyone but not everyone knows or is aware of the option of becoming an entrepreneur, but also the benefits are not obvious beyond working for yourself-type benefits so the definition of the word fulfilment needs to be broadened by showing people other ways to create value.

  18. GOM

    I just saw this http://www.breakingnews.ie/business/mhojojgbkfau/rss2/ and wondered what it meant in terms of motivations for a) the lenders and b) the potential borrowers, i.e., is this just another creative way to get another sector into debt or a good way for a small business owner to go. Typically the sector of small business owners is populated with relatively optimistic people so no surprises on the sentiment in the article but it would be worrisome if this was a way for banks to make up for the declining credit markets elsewhere.

  19. aidan

    “Besides just throwing money at the problem in the form of tax incentives etc. I also believe our education system can be improved by introducing elements of business education to our science and engineering programmes, e.g., a course on how to start a business or intellectual property licensing and management. Many scientists and engineers don’t know how to practically set up a business and opt for the “soft option” of going to work in the MNCs…consequently we end up with MSc and PhD level people doing work that they are overqualified for so we need to break that cycle to release the talent in a more productive way.”

    why is it always science or engineering graduates that are the ones asked to learn other skills like business or languages, why not the other way around, why not get business graduates study some engineering or science and maybe they could come up with some ideas. One of the major reasons why other countries like britain america and france have a big indiginous technology sector is because the government, public and semi state sectors are major employers of engineers and scientists in areas such as defence, energy etc, therefore this attracts more people into these areas because of the availability of secure government employment, after a few years working in public sector many of these graduates start up their own companies, this does not happen in ireland, therefore less people are attracted into it in comparison to other safer areas like law, accounting , medicine

  20. Observer

    http://news.bbc.co.uk/2/hi/uk_news/politics/7322825.stm – No or of Little Benefit

    I found this on the BBC and find this remarkable what was announced and what Gordon Browns response was without suprise.

    It appears that we can be successful by only being more motivated ourselves to starve off a long-term recesssion, any ideas about what next?

  21. Ed

    “There is little use, though, talking about entrepreneurialism unless we acknowledge the money motive. People want to become millionaires in Ireland because that is the only way to a decent living, really. And if entrepreneurs when successful were only as successful, in money terms, as a civil servant no-one would do it.”

    Successful entrepreneurs don’t start out thinking about money – it will come eventually with success and only passion can drive success in the real world. Our points system, while being fair, is not the best when it comes to producing star performers in any area. Crammers can sail through the system and at the end of the process discover that it’s not for them, but at that stage it’s too late and they go through life in a lack lustre manner doing the minimum that is required of them. Entrepreneurs tend to know from an early age what they want and few will ever need the services of a careers guidance teacher. A biography of a successful individual in their field of interest is far more inspiring than a chat with a teacher offering pointers in some unknown direction, that is purely based on their assessment. You can only encourage entrepreneurs, you can’t produce them.

  22. AndrewGMooney

    VincentH said:

    “the property binge, world wide, was at it’s genesis a response to the dot-com bust and continued for as long as it did because there was nothing much around which excited. Renewables had and to some extent still have there possibilities, but were starved for want of realistic vision and caught between the nimby and the stone-age green.”

    VincentH: You might enjoy this article which suggests that ‘a new bubble’ will emerge around sustainable energy technologies, a bubble to avoid the possible meltdown as envisaged in this article:

    http://www.harpers.org/archive/2008/02/0081908

    Maybe ‘wave-power’ in Donegal means more than the latest hip surf-spot? LOL!

    http://news.bbc.co.uk/1/hi/northern_ireland/1297746.stm

  23. GOM

    Ed – fair point about the scientists and engineers being the ones to learn new skills – the points I raised were logical progressions from where I started earlier and the New Scientist article. Still, and this is not a point to raise the hackles of business grads, science and engineering grads can do an MBA but there is no route for a business grad to do a masters or PhD in science or engineering so combining a technical primary degree, which is where the basis of understanding science and technology originates, with a business degree is more practical for a tech grad.

    Ireland has never had a defence requirement – beyond the one that protects the vested interests in the country, VRT etc….. so has never created a research entity based on military requirements. There are trends away from the national supports for such centres in Britain and the USA. The MoD in the UK has pushed most of its in-house research out and formed organisations like Qinetiq which now largely develops for the commercial sectors. In the US, there is still a network of national labs but many small businesses, spun out of these or not are funded through the SBIR programmes. But Ireland has done very well in the EU – places like the Tyndall institute in Cork and the National Centre for Sensor Research (NCSR) take an inordinate share of grants in the UK. In 2005, for one EU action with a budget of €40m for the entire EU, Ireland attracted €8m and repeated this the next year. So we know how to attract the money and write very competitive proposals. I know people will say this is going to dry up with the accession countries etc.. sure it will get more competitive but that’s the nature of progress – we just need to find another vein to tap! My earlier comments about the actions of SFI should also help us sustain that kind of progress, i.e., creating well funded research centres. The problem I believe that is more undermining is the fall off in people taking up science and engineering in schools…..this is not an Irish problem it happens in all developed economies.

    Andrew, the bubble for “cleantech” is well in the process of forming…. check out this presentation I found http://www.rrbconference.com/bestanden/downloads/46.pdf (about 1.5Mb) ..the investment in this sector has tripled in the the 5 years to 2007 and last year two virtual start-ups got investments if $100m for solar cell manufacturing facilities…basically if you can harness the energy from a fart VCs will throw money at you right now. Problem is the VCs in Ireland don’t have that bite size or sustaining power.

  24. GOM

    Typo …in the last post….”grants in the UK” should read “grants in the EU”

  25. Wessel

    On the discussion of entrepreneurs… I have the priviledge to view business proposals for start-ups on a monthly basis and most of what I see are me-too proposals. That is not necessarily “bad”, i.e. copying others, just indicative of a low level of genuine innovation.

  26. Johnny Dunne

    Related is the likes of Peter Sutherland pontiicating about the “Knowledge Economy” / University R&D Funding today in the Irish Times – “It will be a hollow achievement indeed to have 176,000 students in higher education by 2016 if our brightest and best continue in increasing numbers to leave these shores to study at the best universities abroad”. Strange…showing how out of touch with ‘commercial’ reality in Ireland the so called ‘establishment’, most have never been involved in building a sustainable business.

    The Dept of Education will spend circa €10 billion this year, much of this increase in spend is on retaining the ‘exceptions’ in their ivory towers. To borrow a phrase, we need to ‘get real’ on how we can increase the run rate of €85 million invested in a total of 32 companies in the past 3 months, being driven by entrepreneurs with the passion and ambition to scale a business internationally !

    Compare this to the €100′s of billions of private sector credit in Ireland, maybe the highest % of credit in the EU as a proportion of our ‘MNC inflated’ GDP. Despite the slowdown in the construction sector and consumer spend, there is still billions being borrowed monthyl…

    How can we turn this around to ensure ‘scarce’ capital is invested in productive assets in future (do we need PHDs to work this one) ?

  27. bryan

    “I have the priviledge to view business proposals for start-ups on a monthly basis and most of what I see are me-too proposals.”

    innovation can be in implementation: facebook came after myspace, and google after alta vista.

  28. GOM

    Followers also provide validation of the reality of a space – would you turn down a proposal because it had a competitor or consider that at least the proposer is not a lone lunatic? Would you consider Microsoft a leader or a follower? This is a very difficult area and I don’t envy the job of having to turn down proposals…bit like not placing a bet on a potential winner.

  29. [...] had an interesting post a couple of days ago about the sad state of Iceland’s economy.  Yes, that’s Iceland with a ‘c’.  Not a country you hear very much about. It [...]

  30. gadfly55

    The German bankers are the bedrock of the euro. I would leave the country immediately if the Republic withdrew from the Euro. This island will return to its normal condition for the next 20 years and unless it develops substantial alternative energy systems, the economy will decline substantially as the American big earners withdraw to lower wage and regulation economies. The party is over, learn to wear insulated underwear for six months and become self-sufficient in essentials. The housing stock has been built, there are more than enough places for people to live together, efficiently sharing heated space, rather than wasting money and resources to have a lifestyle, Who pays the lifestyle costs, and when essential costs absorb income, style is soon forgotten, The assumptions have been wrong in this 100 year con game of material progress. The age of chaos will pass to the age of theocratic authority. Revelations about human society and conduct cannot be refuted by chaotic pursuit of individual idiocy.

  31. shtove

    Leaving the eurozone would trigger the Doomsday machine from Dr Strangelove, or at least the “mother of all financial crises”. Even preparing to leave would destroy the market in government bonds – the state would go bankrupt and cease to exist, to be succeeded by god knows what kind of hybrid legal entity. Not gonna happen:
    http://www.voxeu.org/index.php?q=node/729

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