Home > debt crisis > No, no, no. Ireland is, alas, not an austerity role model (charts).

No, no, no. Ireland is, alas, not an austerity role model (charts).

from Merijn Knibbe

The European Central Bank (ECB) is very concerned about its ‘credibility’. But shouldn’t that at the very least mean that members of the board know what they are talking about? Jurgen Stak, still a member, was clearly not aware of basic facts when he stated that Ireland is a role model for austerity. But is it? Do suffering and frugality and disempowering labor lead to export success and economic growth, as Mr. Stark indicated in a speech in Ireland this week (this is not mentioned in the article behind the link above, but it is mentioned in todays De Volkskrant, a Dutch newspaper. Interestingly, the speech is not published on the ECB site, unlike speeches from other board members)?

No. Mister Stark is wrong. Ireland does not show strong export performance. To the contrary. Ireland’s export performance is dismal, even compared with the other countries which are going down the path of internal deflation (graph). It’s far from a role model. But Greece is, according to this data. (I’ve shown this before on this blog, but as Stark continues to be wrong I have to state it again. ! And the two additional months which are added to the data of the previous September 29 blog show that differences between countries have even increased: Greece does even better and most others do worse.

A larger version here

Internal devaluation policies are supposed to lower wage costs by increasing unemployment, which in its turn, as domestic demand is depressed because of high unemployment and lower wages, is supposed to magically ramp up exports. The resulting surplus on the current account can be used to pay down debts. But that’s not what seems to happen. Even when exports increase this is offset by a matching increase in imports. Except for Bulgaria and Greece the differences between export growth and import growth are negligible.

As 5% of 100 is smaller than 5% of 200, the rate of change of imports and exports does not tell the entire story of the development of the trade deficit. When imports of a country are much larger than its exports, the trade deficit can still increase even when export growth is larger than import growth. But when we look at the change (!) of the trade deficits, the same pattern shows (graph)

Larger version here

Ireland does somewhat better – but the improvement is negligible. The Baltic states (role models too) even show a deteriorating trade balance. The only country which does real well is, again, Greece. So, mr. Stark, which of these countries is the austerity role model!

Technical note: the trade balance is part of the current account and shows imports and exports of goods and services. The current account also shows factor incomes (i.e. wages earned abroad, or the (large) part of turnover Microsoft Ireland which Microsoft Ireland has to pay as royalties to Microsoft USA. Ireland knows a large surplus on the trade balance, but as the factor income balance is very negative (even more so than some years ago!) the surplus on the Irish current account is about zero.

P.S. According to Paul Krugman, the ideas behind internal devaluation are not scientific but a romantic ideal. When you think of it the idea of neo-classical ‘general equilibrium’, on which internal devaluation policies and in fact the entire Euro is based, is indeed quite romantic: magic ‘invisible hands’, no rational design of the economy but a spontaneous order, organic growth instead of planned investment, pain and suffering which lead to prosperity and bliss, a society in which everybody earns what he deserves, the whole which is larger than the individuals – it just goes on. But believe me: the Euro area is

not,
repeat: not

any kind of general equilibrium. I’m all in favor of spontaneous order – but that’s not what’s happening in Europe (remember: the combined Euro Zone government deficit is less than halve the USA or UK level – or is this just another unromantic boring empirical accounting fact?).

  1. November 28, 2011 at 12:26 pm

    I just checked OECD. “Goods, Balance in millions”. For Greece there are for qt1 and qt2 :
    Qt1 2010 -12 007
    Ot2 2010 -8 976
    Qt1 2011 -10 786
    Ot2 2011 -9 601

    And checked “Account Balance in millions”:
    -11 211 -5 165
    (Qt1+Qt2 2010= -16.376)

    -8 378 -8 042
    (Ot1+Ot2 2011= -16.420)

    (US-Dollar converted, Seasonally adjusted)

    Hm… what ist the difference?

  2. merijnknibbe
    November 28, 2011 at 3:21 pm

    My sources:

    Click to access 6-15112011-AP-EN.PDF

    Member States’ total trade (intra-EU + extra-EU) – non seasonally adjusted data

    According to this source the Greek trade deficit in 2010, first eight months, was 22 billions and in 2011, first eight months: 11.9

    For Ireland I cross-checked with this source (hence the microsoft remarks but which also showed that these sources were consistent):

    An Phríomh-Oifig Staidrimh, Balance of International Payments, second quarter of 2011 from 22 September

    and indeed, as Krugman also mutters: a very large errors and omissions post in this data, p. 7, above “‘memorandum Item”).

    I lack the language skills to cross-check the Greek data with official publications.

    I’ve no idea where the differences between Eurostat and the OECD come from.

  3. November 29, 2011 at 4:33 pm

    I´ve made an article for “you” this mornig ;).
    http://logicorum.wordpress.com/2011/11/29/the-trade-balance-of-greece-wich/

    The source ist bank of Greece.

    Regards
    ALOA

    • merijnknibbe
      November 29, 2011 at 6:26 pm

      Thanks,

    • merijnknibbe
      November 29, 2011 at 8:34 pm

      So it seems that there are two anomalies:

      1. Between the data of Elstat and Eurostat on one side and the Greek Central Bank and the OECD on the other side
      2. Between Greece and the rest of the EZ countries when it comes to export performance

      The most down to earth explanation for this is that coverage of Elstart export statistics is larger than those of the Central Bank, which shows up as an increase in exports while it’s in fact (at least partly) an increase in measured exports (at least partly). This, however, implicates that Greek exports in 2010 (and 2009 and…) also were quite a bit larger than previously estimated, which is an explanation of the whopping 15% of GDP deficit on the current account. This might have been as much as 5% of GDP smaller (which still leaves a very large deficit, of course). Which indicates that GDP must have been 5% higher…. but let’s leave this to the people at Elstat and the Greek Central Bank: It’s a very good thing that you discovered the anomaly.

  4. October 3, 2013 at 5:46 pm

    As an Irish economics student, I agree completely. Austerity has been hugely damaging to the economy. It was left us with stagnant growth and high unemployment and many of my friends are contemplating emigrating. No other country should even consider copying the Irish example.

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