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Friday, January 30, 2009
THE "joke" has become a bit tiresome but it is so widespread that it cannot be avoided.
It goes like this. What is the difference between Ireland and Iceland?
The answer: one letter and six months. The implication being we are the next sovereign state that is going to go bust (and presumably that our Government also falls after riots on the streets).
The joke has been doing the rounds in Ireland for some time, but it has become even less funny since it started getting such prominence in the British media. It has appeared in a variety of British newspapers and then, most damagingly perhaps, was quoted to Finance Minister Brian Lenihan during a live interview on BBC2’s influential Newsnight programme last week.
Lenihan put up a valiant display in denying the extent of this country’s problems as detailed by Newsnight — which exaggerated the extent of our unemployment, for example, as well as containing many factual errors in its short report.
However, the minister somewhat undermined his argument by describing the Irish economy as "vibrant". We may not be doing as badly as many in Britain would like to believe, but with domestic retail sales contracting and exports falling badly, and confidence shot to pieces, the use of the word "vibrant" rang somewhat hollow.
Ireland is not a "glorified hedge fund", as Lenihan pointed out to the BBC, which is what Iceland effectively became: a country that borrowed on a massive scale to make bets on buying businesses throughout Europe.
While we have had our own borrowing madness in the private sector — much of it used to buy property in Britain that has been shown now to be massively overvalued — it was on nothing like the scale in which that other little island in the Atlantic indulged.
There would appear to be two threads running behind the British coverage of Ireland’s woes. One is schadenfreude — the taking of pleasure at the misfortune of others — because some in Britain did not like the Irish getting above their perceived station, believing the jumped-up Paddies to be a bunch of hedonistic fools who didn’t know how to handle their newfound wealth.
The other is a deliberate attempt to blame our woes on our membership of the euro, a tack being taken by those in Britain who fear the outcome of this crisis could be the disappearance of sterling as the country joins the euro. An example of the first is to be found in a recent edition of the left-leaning New Statesman magazine which claimed "a cocksure and hedonistic generation is getting a small taste of the hardship and anxiety its ancestors endured". It also alleged that "a central thread in the history of independent Ireland has been the cunning ways in which the possessing classes have looked after themselves".
I suspect some of this is a backlash against the extraordinary prices paid by many Irish individuals and consortia in buying land and existing commercial properties in London and other parts of Britain in recent years. Their actions contributed to the inflation of the asset bubble in that country and its burst has affected all. But, put simply, many did not like the Irish being the new Arabs buying up traditional London addresses.
They don’t like it either that the Irish were able to use the strength of the euro to increase their purchasing power in Britain. Now our critics rejoice in the idea that we will be ejected from the euro — which would leave us perilously close to being another Iceland — or that our financial woes will lead to the currency’s implosion. "So much for the theory that the single currency is going to be a safe haven in these troubled times," a Daily Mail columnist noted gleefully recently.
I have not been a big fan of Irish membership of the euro. I never believed it had all of the advantages claimed for it and worried that it had many disadvantages that were being deliberately overlooked.
I never believed the big lie, told to us consistently by politicians of all hues prior to our agreeing to join, that sterling’s entry to the currency was inevitable.
The biggest problem with Irish membership of the euro was twofold. One part was the failure of our Fianna Fáil-led governments over the past ten years to conduct appropriate budget (fiscal) policies at a time when our control over monetary policy had disappeared.
Bertie Ahern and his acolytes threw money at the public sector like confetti at a wedding and Brian Cowen and his crew are now finding it impossible to pick up all the pieces. The second part was the abject failure of our regulators to police the actions of the banks in lending the cheap money available to them in excessive volumes to the wrong people and businesses.
It is true we are now left with an overvalued currency — that is screwing our exporters and therefore costing jobs — and a cost of money that is probably still too high, given our currency circumstances. But for the best part of a decade interest rates were too low for us and access to cheap money was the major driver in our pump-priming the bubble. Weak government followed the origin of the problem, the creation of the euro.
However, on balance at this stage, I reckon we’re probably better off in than out. The paradox is that while membership of the euro is wounding us badly it also stops us from being killed. While the strength of our currency is a major problem it also provides a protection against what would happen — a run on the currency and sky-high interest rates — if we weren’t in the eurozone.
Our membership of the Economic and Monetary Union makes it more likely that we will be bailed out of our difficulties (although those who voted no to the Lisbon Treaty may have to swallow their pride in return). The reality is that Britain is more likely to find itself bailed out by the International Monetary Fund than Ireland and Conservative party leader David Cameron is the one who has recognised his country’s exposure to this outcome.
BRITAIN has a history of defaulting on its loans and had to be rescued by the IMF in 1976. Our public finance deficits are no worse than theirs and while the British know they have problems, they don’t seem to realise how much they resemble Iceland’s and how much worse they may be than ours.
The news from Britain has been appalling. Last Friday it confirmed its sharpest fall in economic output in 28 years and that it had slid into recession. The New York Times has described London as "Reykjavik-on-Thames". While the British don’t mind saying that about us they are appalled by that description of themselves.
Britain’s banks have behaved every bit as badly as our own in making reckless loans secured on property but, to make matters worse, they have been far more active in the type of speculation that has ruined banking in the western world. They have more bad debts that they will have to accommodate.
The old adage about Britain’s difficulties being Ireland’s opportunity most certainly does not apply in present economic circumstances. As Britain remains our most important trading partner we need it to dig itself outside of a hole to create demand for our exports. We need its currency to appreciate so we can attract British tourists back to the country. We might be well served were Britain to takes advantage of sterling’s very low value on international currency markets to join the euro at an advantageous rate. Whatever it is, we need more from Britain than sneers.
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