As I have explained in my
previous posts I believe that the ECB was largely responsible for the Irish
property bubble becoming so inflated. Now I think it is important to analyse
what happened to Ireland during the recession.
With the collapse of Lehman
Brothers it became apparent that the world of banking was in turmoil. The ECB
made it absolutely clear that under no circumstances should a bank be allowed
to fail. However they did not provide any actual money for this to be achieved,
instead relying on countries to bail out their own banks from taxpayer funds.
The ECB lowered interest rates at first, but they appeared to reach the floor
at 1%, this does not compare well to the UK and US were rates were lowered
below 1%. Also the ECB did not engage in quantitative easing, as it is
technically not able to, which is obviously a massive flaw in a currency.
Due to this banal action, Ireland had severe deflation in 2009 and 2010. This downward spiral was helped by the ECB not being concerned about Ireland and being more worried about France and Germany which had both started to grow. Now I am not saying that the ECB was right or wrong to focus on the big picture. But it is extremely important to mention when one is comparing the Irish property crash to the British and the American collapses. Both the British and the Americans devalued their currencies in order to boost exports. However this also had an effect on prices within those countries, including property prices, for example in London house prices had begun to rise again by mid 2009. Now in effect the prices had dropped much more because the value of the Pound had decreased dramatically. However when prices began rising it made people more confident. In Ireland there was no easy devaluation, the Euro meant that deflation was the only way to become more competitive again. This meant massive wage cuts for private sector and public sector employees. However mortgage payments have stayed the same, obviously leading many people into arrears on their mortgage. In the UK or US this has largely not happened because the wage cuts have come in the form of a less valuable currency.
All of this goes along with the fact Ireland has had a banking system that has effectively not lent any money since 2008, I will not go into the reasons of why that has happened, but the blame must lie with the ECB as they are the Central Bank and it is their job to provide liquidity.
Due to this banal action, Ireland had severe deflation in 2009 and 2010. This downward spiral was helped by the ECB not being concerned about Ireland and being more worried about France and Germany which had both started to grow. Now I am not saying that the ECB was right or wrong to focus on the big picture. But it is extremely important to mention when one is comparing the Irish property crash to the British and the American collapses. Both the British and the Americans devalued their currencies in order to boost exports. However this also had an effect on prices within those countries, including property prices, for example in London house prices had begun to rise again by mid 2009. Now in effect the prices had dropped much more because the value of the Pound had decreased dramatically. However when prices began rising it made people more confident. In Ireland there was no easy devaluation, the Euro meant that deflation was the only way to become more competitive again. This meant massive wage cuts for private sector and public sector employees. However mortgage payments have stayed the same, obviously leading many people into arrears on their mortgage. In the UK or US this has largely not happened because the wage cuts have come in the form of a less valuable currency.
All of this goes along with the fact Ireland has had a banking system that has effectively not lent any money since 2008, I will not go into the reasons of why that has happened, but the blame must lie with the ECB as they are the Central Bank and it is their job to provide liquidity.
Interesting to note, rental
prices have only fallen by 25%, meaning many people who would like to buy a
property are unable to as the banks have no money to lend, so instead they must
rent.
In conclusion I believe the
Euro was the main reason for Ireland having such an outrageous property bubble,
with interest rates set by the ECB, at 2% from 2004-2006. For a comparison it
is very easy to look at the UK, they had interest rates of over 4% from 04-06
and then raised them to near 6% in 2007 as the British property market got a
bit too hot for the Bank of England’s liking. Meanwhile the highest the ECB
rate got up to was a pathetic 4.25%. It’s all too easy to blame people for
being greedy, from politicians to bankers and even the general public, but the
fact is cheap money flooded into Ireland thanks to the ECB’s low rates. If
someone has free drink at a bar then generally most people tend to take
advantage of it, that’s exactly what the Irish did, they drank too much and
have ended up with the mother of all hangovers. Speaking of the hangover, as
discussed in my last post, Irish property prices are down by 50% and closer to
60% in Dublin. This fall is so massive because of the deflation that is
required to make the economy competitive again because the ECB has control of
monetary policy, the only way for a country to devalue is to cut wages, this is
not something that can really work in democracies as seen with Greece and Italy
who both now have unelected leaders, which is quite disturbing.
The Euro caused Ireland’s
crisis and it is now making the recovery much harder, with a banking system
that hasn’t been functioning for 4 years, leading to the worst property crash
in history according to the Financial Times.
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