The previous post is something I just found in my sent mail folder. I sent it to a discussion mailing list on the 5th of August 2000, and I think it is interesting enough to look at now. I posted it unedited to prevent confusion between what I wrote over a decade ago and my present commentary.
I don’t claim the piece is strikingly insightful: I had, and indeed still have, no formal training in economics, and the post is effectively a somewhat pompous and verbose narration of something really very basic.
To put it in historical context: though Euro notes and coins entered circulation on 1st January 2002,the Euro existed from 1st January 1999, in that the exchange rates of the member national currencies were fixed irrevocably at that point. Gordon Brown had been Chancellor of the Exchequer for three years, in Tony Blair’s first prime ministerial term.
The last paragraph makes a prediction:
Ireland, though independent for decades, only had an independent currency from the 1970s. Since that time, and with the help of EU subsidies, the Republic has become a modern and prosperous economy. It seems to be at a similar stage in the economic cycle to the UK. However, unlike the UK, the Republic of Ireland joined the Euro. Therefore, at present, where the UK economy is being restrained by relatively high interest rates, Ireland has the same cheap borrowing as the other Euro countries. This puts them in the same position described for Britain during the Lawson boom. Building projects are everywhere (remember Loadsamoney?), property prices are spiralling upwards. Under prevailing economic theories, these are effects of incorrect monetary policy. However, European monetary policy is not set for Ireland, which is a small economy compared with the stagnating economies of mainland Europe. The prediction is that within a few years, the Republic of Ireland will face a sudden and traumatic deflation, while any simultaneous change in Britain will start earlier, be more gradual and of less magnitude.
Does that qualify me as a prophet? Not really. “Within a few years” is clearly wrong: the “Great Moderation” meant the economic state in 2000 persisted much longer than I expected it to. Further, there is no prediction of the actual form that “sudden and traumatic deflation” was to take in Ireland: insolvency of first the banks, then the government that had unwisely guaranteed their debt.
The point is not that I am a genius. The point is that the problems caused by the Euro were extremely predictable. It is always going to be easy to dig through archives and find someone who predicted what would happen, and I’m sure we could find someone who predicted it more accurately than I did. But, since that is always possible, it proves nothing. The fact that I predicted the problems that the Euro would cause (and I remember nothing of actually writing that email) eliminates, at least from my point of view, the statistical error of pulling a single example from an unlimited search space. (If you’ve found this post by googling for Euro predictions, I’m afraid it proves very little).
Well the only way to attain fiscal union is to sell it as the only solution to the euro crisis.
And the EU has always wanted fiscal union.
ergo,
it needed a crisis. Now it has it.
Funny I made exactly the same prediction- or at least I didn't use big words like traumatic deflation, I mentioned a crash- but for a completely different reason. The problem was not that Ireland had adopted the European Euro, but that it had adopted the English- London based- practice of pushing up land costs by the adverse use of planning permission. This tactic creates a hot spot where everything is unnaturally expensive. It sucks in foreign workers who love the higher wages which they can save and then repatriate, perhaps investment also. Meanwhile the natives live in hovels, which they can sell for millions of pounds. But in the long run it makes the hotspot's products too expensive to sell elsewhere. England's industry went for a burton long ago. When Ireland's housing, and therefore everything else, was too expensive Ireland's products became uncompetitive.
Does that go for Greece and Spain too? Loose monetary policy will always produce asset-price booms, even without insane planning laws, as in the United States, where monetary policy was effectively designed to cause a housing bubble, as Paul Krugman notoriously called for. But neither Britain nor the US had monetary policy quite as inappropriate as the Eurozone periphery on German interest rates in the 2000s.
Unlike Greece, Ireland's economy is basically sound, and it can export itself out of trouble after adjusting to the economic shock: compare Felix Salmon's account of some sucker trying to start an olive oil web business in Greece with the fact that the likes of Google and Facebook tend to put their European headquarters in Dublin.
It's the same phenomenon, but applied to a different field. In England you can't build houses without planning permission (usually unobtainable), in France you can't practise a trade without studying for an unnecessary certificate, in Greece you can't sell stuff online without providing a stool sample. I can only suppose that in Greece the legislation exists to protect existing business interests, who don't want new guys coming along and taking their trade from them. But there is also the possibility that it has been developed by the administrators in order to make work for themselves.
I detect a similar tendency in our country with regard to personnel work. In the 60s the average job interview for low grade jobs consisted of something like "Got your boots, ave ya? Start on Monday." Since then personnel officers, who previously only bothered interviewing high grade candidates, have expanded their sphere of operations to include even the mentally sub-normal. To the great benefit of their own little empires, but the detriment of society as a whole. N needs a job, otherwise he will default on his mortgage: personnel officers slow him down, and then he is subject to a CRB check, which gets lost and causes further delay, and then requires 60 days before completion. If he defaults he will be yet another cause of the ongoing credit crunch.
It is traditional to blame bureaucracy. But if bureaucracy means you get a passport, a job, a CRB check, permission to import olive oil into U.S. within a matter of hours, then that bureaucracy is good. The trouble is good bureaucracy costs more than bad, but the cutback school prefers cheap to expensive.
Rivers silt up: societies become entangled in vast numbers of unnecessary procedures which slow down and even impossibilise growth. This is a characteristic neither of socialist nor capitalist societies, of state enterprises or public ones, or national governments or the EU, but of all of them. The growth of the scope of Law and Education in the Capitalist US, even of medicine, is a good example. Prisons, invented in 19th Century England, are wasteful and in need of rethinking. At any time since the 1960s there have in the UK been approximately 1000 times more aspirant musicians than the market can tolerate.
Some lucky countries escape one or other of these excesses: Japan has very few lawyers, for example, the USA far too many. Afghanistan under the Taliban had no musicians, but far too many clerical students (the Dari word for which is Taliban) who double as soldiers. Then of course we must mention 'financial services' and the oldest and most rapacious, literal empire-builders, the military.
Strangely, you are one of those who ascribe some good to the EU, in that you think that Ireland's growth may be due to subsidies received from the same. The tiny percentage of any country's GNP which comes from or goes to the EU, compared with national spending, means that either this is irrelevant or the EU subsidisers are the greatest financial wizards in existence. Berlaymont in Brussels, supposedly the seat of an enormous bureuacracy, is no larger than Habitat in Swiss Cottage.
The Irish prosperity comes from investment by such as the American computer firms which you mention. The trouble is, the Irish think that these firms have chosen to base themselves in Ireland because 1) it speaks English and 2) it uses the Euro.