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A Short View on the State of Ireland

04 March 2015
Richard Kemmish

 “The lowness of Interest, in all other countries a sign of wealth, is in us a Proof of Misery; there being no trade to employ any borrower.  Hence alone comes the dearness of Land, since the savers have no other way to lay out their money.”  
  – Jonathan Swift, A Short View of the State of Ireland, 1728 
On the face of it, Euromoney’s Ireland Forum next week should be a very upbeat affair. Looking at the results of one of the banks that survived I was struck by just how strongly the economy has returned to growth – there were substantial increases in their lending to the ‘real economy’ - and the improvements in non-performing loan provisions, buoyed along by a strong recovery in asset values. 
But a self-congratulatory conference wouldn’t add a lot of value (and would hardly be in keeping with the best Irish traditions of self-deprecation as exemplified by Jonathan Swift’s oh-so-prescient comment). We could instead ask if the poster-child of EU austerity programmes has any lessons for elsewhere? And how sustainable this recovery is?

We all view economics through the filter of our own interests, so I of course think of Ireland as the Eurozone country with the second highest proportion of floating rate mortgages (87%, compare with, for example Germany where just 16% of new mortgages are taken out on a floating basis). Combined that with the highest peak-to-trough decline in house prices after the recession and is it any wonder that Irish house prices should be so responsive to the drastic cuts in eurozone interest rates? 

But is this really what the ECB is trying to do – inflate asset prices to rescue banks from NPLs? From banks in other Eurozone countries we hear a lot more of the first half of Swift’s quote – thank you for the cheap funding from TLTRO but as long as the real economy doesn’t want to borrow, it’s hardly going to achieve the objective of stimulating growth. Why do Irish banks find ‘borrowers with trade’ to lend their cheap money to when Spanish or Italian bank lending continues to decline?

I’d like to think that it’s because of Ireland’s unequalled ability to attract foreign direct investment, in particular from the USA – at the conference next week Bill Reinsch of the US Foreign Trade Council will be discussing this.  

Then there is the other intent of zero interest rates, and the other way in which Ireland serves as a poor precedent for her Eurozone peers. Competitive devaluation of your currency is not the ‘done thing’ anymore – it is after all globally a zero sum game. But the global plethora of rate cuts is clearly achieving the same thing, cut interest rates and see your currency devalue, leave them (or cut them less rapidly) and see your terms of trade deteriorate. Ireland, as a small economy whose two biggest trading partners are both outside the eurozone has most to lose from a strong euro and the most to gain from a strong dollar or sterling.  

Swift’s essay was most famous though for his proposal to “hang up half a dozen Bankers every year, and thereby interpose at least some short delay to the further ruin of Ireland”. The first, but certainly not the last person to propose that in Ireland. Hopefully next week’s conference will be a bit more constructive than that.   

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