Ireland\’s painful adjustment

So here\’s the success that is being claimed:

\”We don\’t see a problem for sterling at present levels. We have cut costs right through the economy with an internal devaluation of 15pc or 16pc and we are now highly competitive. We can take it,\” he said.

That\’s what they\’ve had to do. Internal devaluation. Here\’s some of the costs of that:

The outburst comes a day after Irish unions reached a provisional deal with the government for a further round of public sector pay cuts averaging 5.5pc, rising to 10pc for higher earners such as doctors. This follows 14pc pay cuts already in force.


The trade unions say internal consumption has collapsed by 26pc, and investment has fallen to the lowest level in recorded Irish history. Under-employment has reached 23pc despite emigration to Canada, Australia, the US and Britain.


Irish home prices have crashed by roughly 50pc. Lenders have been disguising the damage, stretching out mortgage repayments rather the foreclosing on bad loans and crystallising losses.

That hurts: 25% pay cuts, mass unemployment, halved house prices: but of course, nominal mortgages haven\’t been reduced.

This internal devaluation stuff is pretty brutal. Rather shows up the merits of having your own currency so you can just have an external devaluation instead really, doesn\’t it?

You know, like all the economics textbooks insist?

7 thoughts on “Ireland\’s painful adjustment”

  1. Next step will be writing off/down mortgages. They must be heavily provided against by now, anyway. They can’t be viable with the real wage cuts the Irish have endured. It would also be grotesquely unjust.

  2. Devaluing ones currency may work in the short term but over the medium to long term it causes more problems.

    Imports like raw materials, food, fuel etc become more expensive and these extra costs are passed unto the consumer.

    Also it is mathematically impossible for every currency to devalue their own currency.

  3. Or alternately that we have a currency backed with or better yet made of precious metals and we don’t subsidise banks that fail.

    This is pretty much what we had during the 19thC. Governments normally couldn’t devalue gold coinage. They also had regular bank failures, though one way of avoiding that is preventing bank owners having limited liability – like LLoyds.

    Ireland subdisised their banks, Iceland didn’t. Iceland is doing fine.

  4. Tim, does this external devaluation happen naturally? Or are you advocating that the government in question take steps to make it happen? If the latter, how would this fit with your support for the free-market, and the idea that the market is a computer providing feedback to everyone? Internal devaluation is brutal but that is what needs to happen when an economy has become uncompetitive. It is counter-productive to try to hide the need for change from people behind the inflation caused by a currency devaluation, or to try to spread it over everyone instead of focusing it on those who need to change most. Also, given how ridiculous Irish house prices got during the bubble, it is a good thing for future generations that they have halved.

    tolkein, write off the mortgages but let people keep the houses? So we reward the reckless, at the expense of taxpayers. savers, tenants and/or next generation? I think that would be grotesquely unjust. Bankruptcy courts exist, problem solved.

  5. “Ireland subdisised their banks, Iceland didnt. Iceland is doing fine.”

    True, but that was not one point but two. Iceland’s robust economy was because they didn’t stand behind the banks (because they couldnt) and ALSO because they have their own currency in the Iceland Krona, they are able to devalue it to an appropriate level.

    Ireland both supported its banks AND is trapped in the Euro, a currency over which it has no control.

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