Into the Double Dip with a Cup of Earl Grey
The domestic economy is headed into a double-dip recession according to the ESRI. And that’s just the beginning of the bad news. Government ministers and certain commentators will put it down to the Eurozone crisis (‘we’re doing a good job, hitting our targets, it’s those darned Greeks, and Italians and Germans‘) but the fact is we are lumbering under a sustained level of deflation induced by failed austerity policies. And entering into a period of uncertainty the Government is determined to hammer the economy again. That it doesn’t know the economic impact of its own policies just shows that the whole thing is approximating the Mad Hatter’s tea party.
First, the bad news. GDP is expected to rise by less than 1 percent next year with GNP falling by -0.3 percent.
Back in the summer, the ESRI was projecting GDP growth of over 2 percent. Now they estimate the overall economy will grow by less than 1 percent, with the domestic economy falling back into recession.
Second, the curious news. The ESRI is projecting GDP to grow this year by 2.2 percent. This compares to the Government’s own projection of 1 percent. Looking at this from the outside, this would seem a reasonably positive outcome. Even the domestic economy is projected to grow by 1.2 percent. However, this hides the fact that the economy is contracting in Euros and cents.
So we have economic growth and the value of our economy falls.
- GDP grows by 2.2 percent but falls by €700 million
- GNP grows by 1.2 percent but falls by €2,700 million
The reason for these contradictory results is that the economy is lumbering under an immense amount of deflation and falling prices (asset prices, goods and services prices). This has been engineered by the past Government through its deflationary budgetary policies. We have volume growth but in terms of money per capita, we’re all getting poorer.
Third, and now for the really grim news. There will be fewer people at work in the economy next year than this year. As a result, unemployment will rise - and if emigration is not maintained, it will rise even higher.
Back in the summer, the ESRI estimated that employment would grow by 12,000. The Government only a few weeks ago conceded that employment would fall marginally, by -3,600. Now the ESRI is predicting that there will be 22,000 fewer people at work next year.
This will lead to higher unemployment. The ESRI is actually projecting an increase in unemployment next year - to 14.5 percent, whereas the Government is estimating it will fall to 14 percent.
As you can imagine, this will have a number of implications for the economy: lower growth, more downward pressure on wages, falling living standards; and for public finances, lower tax revenue and higher unemployment costs.
But wait for it - there will be spin. The poor outcome for next year will be blamed on ‘others’. Oh, if only those ‘others’ could get their act together, our economy would prosper, at least avoid all this downside.
Yes, the Irish economy will take a hit from the downward momentum in the Eurozone which both the EU Commission and the OECD claim is looking into a double-dip. But this can only explain part of our souring fortunes.
In the summer, the ESRI was optimistically projecting GDP growth of 2.3 percent; now they’re pessimistically projecting 0.9 percent. Is this because of falling exports, owing to the Eurozone crisis? Only partially. The main reason for the lower growth projections is falling consumer demand which makes up two-thirds of the difference between the optimistic and the pessimistic growth forecasts.
Falling consumer demand is being driven by falling employment levels as we saw above. It’s also being driven by the fall in total wages in the economy - a fall of €1.6 billion between the optimistic and pessimistic projections.
This raises the issue of what the Government is actually thinking? If we are entering into a period of declining exports, the last thing we need is a set of budgetary policies that consciously depresses domestic activity - employment, demand, and investment. But that’s exactly what the Government is planning. It may have little control over external demand (the amount of demand for our goods and services in the international marketplace) but it does have more control over domestic demand. And, yet, the Government is intent on driving that downwards.
What makes this all so much more bizarre is that the Government doesn’t even know the impact of its policies. The Minister for Finance has already said he doesn’t know the economic impact of increasing VAT. Does he know the impact of cutting public sector employment? Social protection payments? Cuts in investment? Public service cuts? Probably not on the evidence available to us.
This is highly risky and highly reckless. In fact, if you think about it long enough it’ll wreck your head.
So take a break from it for a while. Get yourself a nice cup of Earl Grey. The Mad Hatter’s tea party is in full swing.
Discussion
Leave a Comment
Sins of the Father
Subscribe by Email
Best of the Web
EU Should Admit Greece is Bankrupt | Christian Rickens
The unvarnished truth - the second Greek Bailout should not have happened.
The mistake isn’t the size, but the construction of the bailout package. It isn’t geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.
How else can one explain the fact that around a quarter of the package won’t even arrive in Athens but will flow directly to the country’s international creditors? The holders of Greek government bonds are to get some €30 billion as an incentive to convert their old paper into new bonds. The aim is to keep alive the illusion that Greece isn’t bankrupt — after all, the creditors are voluntarily forgiving part of the debt. The financial sector is cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction.
That leaves €100 billion. But that too isn’t geared to what Greece needs in order to get back on its feet. It’s linked to an estimate of how much debt the Greek economy can bear without collapsing. International technocrats agree that with debts amounting to 120 percent of gross domestic product, the country can just about go on servicing its debt. That’s the level at which the cow can go on supplying milk without dying of exhaustion. So 120 percent became the goal.
Collaboration, with our European partners | Cunning Hired Knaves
The European project was supposed to be a bulwark against the dangers of fascist ambition, but now it is the instrument used to dismantle European democracy in the interest of the risk adverse looking for a steady income stream from the provision of the social net by those who cite the words and actions of old fascists while doing so.
The post Collaboration, with our European partners by Richard of Cunning Hired Knaves summed up in one sentence. For much better sentences and many more urgent points read the post.
On Sunday there were massive demonstrations throughout the Spanish state, with half a million people on the streets of Madrid and 450,000 in Barcelona, protesting against the labour ‘reform’ planned by the Partido Popular, the right-wing party that most closely represents the interests of the power elites that conserved their position when the transition from dictatorship to democracy was undertaken.
S.P.A.R.K. protest at cuts to lone parents, Dublin 18th February 2012
Many families were cut in the last budget but lone parent families were particularly hit by the Fine Gael/Labour Party government.
The key elements are that single parents can’t take advantage of training such as Community Employment (CE) Schemes and when the youngest child turns 7 years old, the parent is declassed as a lone parent but treated as an ordinary worker even though there are few affordable creche places. There is a bill coming up in March which will copper fasten some of the worst elements of government plans.
There is particular anger directed at the Labour Party because they are associated with women’s rights and a more progressive society.
Please share the link to this video
Exiting the euro | Michael Roberts
Michael Roberts argues that those in Greece who cite the example of Argentina when suggesting that Greece should leave the Euro are not necessarily looking at the whole picture. The situations are not the same, Roberts points out, citing Argentina’s former central bank governor at the time, Mario Blejer and his recent piece in the Financial Times. He also points to research based on the the experience of five recent devaluations of economies in crisis (including that of Argentina) which “shows that they lead to a 10-20% fall in real GDP and take five to ten years to recover to previous real GDP levels. But that is not to say that there is no alternative to “lowering wages, privatising the state sector, reducing taxes for the corporate sector (especially big business) and ‘deregulating’ labour markets i.e. the super-exploitation of the Greek people to raise profitability.”
But the left could also find an alternative policy to exiting the euro where Greece negotiates a full default on its debt to private and foreign bondholders; takes over the banks; and uses the savings from bond and interest repayments (€17-20bn a year) to start state directed investment in jobs, technology and funding small businesses, while staying in the euro to protect the savings of the people from destruction, keeping down inflation and avoiding a rise in foreign debt. The question of exiting the euro then becomes an issue for the Euro leaders to impose (and to be resisted by a campaign within Europe), not as the main policy plank of the left.
Corporate tax avoidance: where are the worst offenders?
This table comes via the Tax Justice Network (and Richard Murphy). It’s from a table produced by U.S. researcher Kimberly Clausing and as TJN notes “demonstrates which countries are working hardest to wage economic warfare on the United States (and, by extension, on other countries,) via the global tax system”.
Solidarity campaign to support the people of Greece
Mikis Theodorakis, famous Greek composer of Zorba’s Dance, and Manolis Glezos, veteran resistance fighter against the Nazi occupation, have issued a call for a European Front to defend the people of Greece and all those facing austerity. We have decided to support this call and work with trade unions, campaigns and parties across Europe to establish a European Solidarity Campaign to defend the people of Greece. We will organise solidarity and raise practical support for the people of Greece; they cannot be made to pay for a crisis for which they are not responsible.
Chris Dillow | Capitalism against freedom
[...]
During the Cold War, opponents of communism routinely, and not entirely wrongly, claimed to be champions of liberty. Freedom for capitalists and freedom of speech and thought go together, it was claimed. “Freedom is indivisible” wrote Bruce Winton Knight in 1952. “Economic freedom is…an indispensable means toward the achievement of political freedom“ wrote Milton Friedman in Capitalism and Freedom. And back in 1944 Friedrich Hayek complained that “We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.”
Today, though, this seems wrong. Many threats to freedom come from capitalists. The story is no longer capitalism and freedom, but capitalism against freedom.
Ian Stewart | The mathematical equation that caused the banks to crash
In The Observer, Sunday 12 February 2012
Anyone who has followed the crisis will understand that the real economy of businesses and commodities is being upstaged by complicated financial instruments known as derivatives. These are not money or goods. They are investments in investments, bets about bets. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives.
The equation itself wasn’t the real problem. It was useful, it was precise, and its limitations were clearly stated. It provided an industry-standard method to assess the likely value of a financial derivative. So derivatives could be traded before they matured. The formula was fine if you used it sensibly and abandoned it when market conditions weren’t appropriate. The trouble was its potential for abuse. It allowed derivatives to become commodities that could be traded in their own right. The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended.
Greece: a Sisyphean task | Michael Roberts
In a Eurozone that is unwilling to share its surplus with weaker, hardest hit economies there is no other option for those economies but default. Despite the agreement of Greek politicians to shorten their political life and accept the deal all that they have done is simply postpone this eventuality once again. However, even that postponement might be shortened by the Greek elections in April where the smaller leftist parties outside the coalition currently have 40% of the vote. Or so says Michael Roberts:
Whatever the Greek coalition leaders agree to and try to implement, such is the weakness of Greek capitalism, it will not be able to meet its fiscal targets or get its debt down to reasonable levels. Before the end of the year, the Troika will have to report that Greece is not delivering. Then the EU leaders will have to decide whether they ‘let Greece go’ or not. The EU leaders have agreed to more money for Greece (or more accurately its bondholders and banks) in return for draconian cuts in living standards in order to provide more time to try and ‘ring-fence’ other vulnerable Eurozone states like Portugal and Ireland (where they are preparing extra funding). So when Greece goes down, it will not affect the rest (or so the EU leaders hope). Of course, the Greek people may force the issue earlier if they vote in an anti-Troika government in April.
As Greece stares into the abyss, Europe must choose | Maria Margaronis
Do we really want to live in an economic union that must destroy the future of millions in order to just tick along? Maria Margaronis points out that the situation in Greece today says little about Greece and everything about the EU.
The trouble with historical metaphors is that they can obscure the present: what’s really at stake here is not Greece’s identity but Europe’s. All eyes are fixed on Athens, but the way out of the crisis requires a choice about what kind of Europe we want. The one we have now, with its deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children.
We welcome and encourage lively discussion from the public about articles on Irish Left Review. You can leave a comment using the form at the bottom of the page. Please read through the existing comments before posting your own.