Presentation by Philip R. Lane, Professor of Political Economy, Trinity College Dublin at the Conference "Have We Learnt Anything from the Crisis?" in Riga, Latvia. 17.10.2014

1. Lessons from Adjustment in Ireland*
Philip R. Lane
Trinity College Dublin and CEPR
Bank of Latvia Economic Conference
Riga, 17th October 2014
*Based on project funded by IRC

2. Outline
Four Interacting Processes:
•
Economic Adjustment
•
Banking Adjustment
•
Fiscal Adjustment
•
External Adjustment

3. Economic Adjustment
Sectoral Reallocation:
•
Collapse of construction sector
•
Contraction of public sector
•
Expansion of tradables/export sector
Expenditure Mix:
•
Collapse in investment with end of property bubble
•
Large shock to consumption
•
Fiscal austerity

Net exports; domestic demand

4. 90
110
130
150
170
190
210
GDP growth
Period (Quarterly)
GDP
GDP

5. 50
70
90
110
130
150
170
190
210
GDP growth
Period (Quarterly)
Industry
Construction
Public Sector
Services
Sectoral Output

6. Real Adjustment: Factor and Product Markets
•
Large decline in rents, property prices
•
Decline in wages for new hires

important for multinational location decisions
•
Mixed evidence on wage flexibility for existing workers in private sector
•
Large pay reductions for public sector workers
•
12.5 percent corporate tax rate maintained
•
Limits to tax hikes on high earners
•
No cut in minimum wage; reduction in employer taxes for low paid; cut in VAT for tourism
•
Reduction in replacement rate for young workers
•
Limited scope for “structural reforms”: even so, limited progress
•
Significant but limited net migration flows

7. Nominal Hourly Earnings
90
95
100
105
110
115
120
2006
2007
2008
2009
2010
2011
2012
2013
EA18
Ireland

8. Real Adjustment: Expenditure
•
Shock of crisis: surge in savings rate
•
Collapse in investment: construction sector
•
Fiscal austerity: public spending; tax burden
•
2010-2012: delayed recovery – sovereign/bank crisis; euro crisis
•
2013-2014: recovery taking hold
•
Role of macro-financial stabilisation
•
Role of euro stabilisation
•
Export markets: United States; United Kingdom
•
Credit crunch: multinationals; SMEs; sectoral differences

9. Banking Adjustment
•
Massive losses borne by: equity investors; foreign parent banks; subordinated bond holders; Irish tax payer
•
Local-HQ banks: large-scale public recapitalisations; private equity investors (Bank of Ireland)
•
Mergers: AIB-EBS
•
2009-2010: NAMA (commercial property); foreign asset disposals
•
2008-2011: Dependence on eurosystem liquidity; ELA
•
2013: Liquidation of IBRC (Anglo Irish Bank; Irish Permanent)
•
2012-2014: Loan Disposals to international investors
•
Resolution of distressed mortgages (owner-occupied; buy to let)
•
Sequencing: macro-financial stabilisation and banking stabilisation
•
Over-capitalisation strategy: diabolic loop?

10. Fiscal Adjustment
•
Collapse in tax revenues
•
Unemployment surge: expenditure pressures
•
Capital transfers in 2010: bank recapitalisation
•
Depletion of sovereign wealth fund; surge in public debt
•
Series of austerity budgets (2008 onwards)
•
Restoration of tax base
•
Public sector payroll (pay; employment)
•
Public investment

11. Fiscal Measures
2008
2009
2010
2011
2012
2013
2014f
Revenue
0.0
5.6
0.0
1.4
1.6
1.4
0.9
Expenditure
1.0
3.9
4.3
3.9
2.2
1.9
1.6
Total
1.0
9.4
4.3
5.3
3.8
3.5
2.5
Total (% of GDP)
0.6%
5.9%
2.7%
3.4%
2.4%
2.1%
1.8%
% Progress
3%
32%
45%
62.0%
74.0%
84.0%
94.0%
€bn Progress
1.0
10.4
14.7
20.0
23.8
27.3
29.8
% of GDP Progress
0.6%
6.5%
9.2%
12.6%
15.0%
17.1%
18.9%
NTMA

12. Structural Primary Balance
-10
-8
-6
-4
-2
0
2
4
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Structural Primary Balance

13. Government Debt
0
20
40
60
80
100
120
140
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Gross General Government Debt

14. External Adjustment
•
Peak current account deficit: 5.7 percent of GDP in 2008
•
Spectacular deterioration in net international investment position from -5.1 percent of GDP in 2006 to -106.6 percent in 2011 (- 96.3 percent in Q2 2014)
•
Role of valuation losses on foreign assets
•
Measurement issues: treatment of international financial services
•
Current account improvement – but overstated (redomiciled firms issue)

15. NIIP: Stock-Flow Dynamics
-120
-100
-80
-60
-40
-20
0
2006
2007
2008
2009
2010
2011
2012
NIIP/GDP
SUMCA/GDP
Lane (2014)

16. Conclusions
•
Costs of boom-bust cycles: “leaning against the wind” (fiscal; macro-prudential); system resilience (factor markets; financial system; legal system)
•
Counterfactuals: adjustment without the euro (eurosystem liquidity; stabilising versus destabilising exchange rate flexibility); alternative bank resolution paths
•
Looking to the future: debt reduction strategy; structural changes in property market and banking system

17. Conclusions
•
Significant progress in recovering from the crisis
•
Other adjustment paths superior?
•
Timing of fiscal adjustment
•
Timing of banking adjustment
•
Political economy of fiscal adjustment
•
Management of high debt levels