Friday, November 1, 2019

Epilogue to a Primer on Negative Interest Rates: Europe Doesn’t Need Negative Interest Rates. Just Ask the Beautiful PIIG

Click here to read the original Cautious Optimism Facebook post with comments

6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff asserts radical negative interest rate policy is completely needless in Europe or anywhere else.

Just this September the European Central Bank pushed its already abnormal “deposit rate” down further to minus 0.5%. ECB officials cited continued sluggish growth and stubborn unemployment, particularly in the PIIGS countries, hence the need for even more aggressive measures.

Yet despite employing over a decade of interventionist medicines—historic quantitative easing, massive government stimulus spending, and radically negative interest rates—ECB officials and mainstream New Keynesian economists are still scratching their heads wondering why sluggishness has persisted into its second decade after the financial crisis.

Spain’s unemployment rate, once 26.3%, has improved to “only” 14%.

Greece’s, once 27.8%, has fallen to “only” 17%.

Italy’s jobless rate remains 9.7%. Portugal has done better at 6.2%, but eleven years removed from the crisis is still at what would be considered recession levels.

Even France, a core Eurozone state that was never officially a PIIG, has only reduced its jobless rate modestly from 10.6% to 8.5% over this decade-plus long saga.

These are Great Depression-level timespans and, in the case of Greece and Spain, Great Depression unemployment levels. So unsurprisingly the intractable and lethargic state of the continent’s periphery continues to make headlines in Europe and even in the United States.

And central bank officials, unable or unwilling to find an explanation, go back to the proverbial definition of insanity: more of the same. In their eyes governments "still aren’t spending enough,” or the central bank "needs to engage in even larger asset purchases,” and “negative interest rates need to be pushed down even lower.”

This is all nonsense. And the evidence that it’s nonsense has been right under their noses for years.

Noticeably absent from the headlines for several years now is the vigorous full recovery in Ireland, itself once a PIIGS member.


In 2008 Ireland suffered its own banking crisis and deep recession. Its institutions required massive and controversial government bailouts. For a single year (2010) the Irish government’s budget spiked due to a major rescue package to recapitalize the banking system.

But the following year, with distressed banks shored up, the Irish government launched the policy reversal that central bankers, Keynesian economists like Paul Krugman and Joseph Stiglitz, and major news outlets like the New York Times and Washington Post warned would plunge the country into a Great Depression:

True budget austerity—slashing fiscal spending and keeping it that way for a decade, and without huge tax increases.

Irish government spending in euros:

2009: 80.0B
2010: 109.2B (bank bailouts)
2011: 79.7B
2012: 73.7B
2013: 72.6B
2014: 73.1B
2015: 76.0B
2016: 75.4B
2017: 77.5B
2018: 82.2B (-24.2% from 2010)

(source: Eurostat)

But instead of the Great Celtic Economic Collapse predicted by Krugman, et al. the Irish economy has thrived, quietly reaching full employment while PIIGS members Italy, Portugal, and Spain are still spending much more today than they were in 2009 with tax increases across the board. Greece is the one exception, finally forced to give up “pensions-at-55-for-all” in exchange for conditional bailout loans and guarantees from the so-called European “troika,” but it also hiked taxes sharply.

Unemployment rate (all numbers Q1):

2011: 15.6%
2014: 27.0% (peak)
2019: 18.4%

2011: 8.0%
2014: 12.9% (peak)
2019: 10.5%

2011: 13.0%
2013: 18.4% (peak)
2019: 7.0%

2011: 20.6%
2013: 26.5% (peak)
2019: 14.3%

2011: 15.5%
2012: 16.3% (peak)
2019: 5.2%

(source: St. Louis Federal Reserve Economic Database)

(July 2019 story: Ireland at full employment - 4.5% unemployment)

OK, so Ireland is enjoying full employment while most PIIGS are still stuck in double-digit joblessness. But what about economic growth?

Looking at GDP the contrast is even more striking.

Annualized GDP growth rates (2011-2019, not seasonally adjusted):

Greece: -1.6%
Italy: -0.1%
Portugal: +0.6%
Spain: +1.2%
Ireland: +7.1%

(source: St. Louis Federal Reserve Economic Database)

Keep in mind these are annualized averages. 7.1% growth a year for eight years is prodigious—a 73% advance in well under a decade. In the same eight years Italy has contracted by 1% and Greece by 12.1%

There’s more. Ireland’s nominal per-capita GDP last year was $76,100.

That’s no typo. $76,100.

To put $76,100 in perspective, that’s slightly higher than the United States’ $62,600, and almost 80% higher than the United Kingdom’s $42,600 (source: IMF).

That’s right, the Irish—treated like the doormats of Britain for centuries by the English—are now the richer of the two by far.

Yet during the entire 2009-2019 period the ECB argued PIIGS economic malaise required lower and lower interest rates, going into negative territory. Even when the ECB deposit rate dipped under zero to -0.1% from 2012 to 2015, the central bank said it wasn't enough.

But when the ECB dropped rates again to -0.4% in early 2016, Ireland’s economy had already been growing rapidly and joblessness plunging. It was only the other PIIGS who remained stuck in neutral.

Clearly Ireland didn’t need radical, negative interest rates. And it didn’t need massive government deficit spending. Defying all the Keynesian orthodoxy Ireland was growing like gangbusters.


What was Ireland doing differently? And why have the ECB and the media been so quiet about Ireland?

The answer to both questions is the same: Ireland has employed by far the most free-market economic policies in the Eurozone and the second-most free-market policies in all of Europe (second only to bellwether Switzerland).

Ireland has only modestly intrusive labor laws and wages are more flexible than in most European countries. Unlike on the continent where governments make it extremely difficult, extremely expensive, or even impossible to fire even the most unproductive workers, “at will” work relations are much more common in Ireland. For example, the Irish government doesn’t back unions to nearly the same degree as other PIIGS and doesn’t tolerate violent worker riots every time they don’t like a new labor contract. You can bet workers don’t kidnap factory bosses and hold them hostage as is the norm in France.

The Irish government doesn’t promise pensioners they can lie on the beach the rest of their lives at age 55. The regulatory environment is much less strict. Tariffs are very low, and foreign investment is encouraged, not assaulted for the sin of “profit.”

And Irish taxes and government spending as a percent of GDP are among the lowest in Europe (22.8% of GDP versus the European average of 36%: 2016), as is its corporate tax rate which defines Europe’s floor at only 12.5%. Many European and even North American corporations have fled to Ireland for tax relief although the recent U.S. corporate tax cut from a top rate of 35% to 21% has stopped that trend.

Nevertheless, Ireland is a tax and regulatory haven, including income taxes which are comparable to those in the United States and much lower than the rest of Europe.

Therefore it should be no surprise that Ireland was ranked the world’s 9th freest economy in the 2017 Heritage Index of Economic Freedom, trailing only longtime leaders Hong Kong, Singapore, Switzerland, New Zealand, etc. It ranked 2nd freest in Europe, and 1st freest in the Eurozone.

Meanwhile the other PIIGS—Spain, Portugal, and Italy—placed far down the rankings at 70th, 77th, and 78th.

Greece rated an abysmal 127th, behind Guatemala, Honduras, Uganda, Burkino Faso, Senegal, and even Nepal which is governed by the Unified Marxist-Leninist Communist Party.

Is it a coincidence that a PIIGS country ranked less economically free than Communist Nepal has been the basketcase of Europe for over a decade?

Incidentally Ireland also rated nine spots above the United States (18th) which was at its lowest rank ever following two terms of the outgoing Obama administration’s ballooning regulations and government spending.

However the USA has regained several places in 2019 rising to 12th after the Trump administration’s deregulatory push, tax cuts, and reversal of many Obama-era controls and mandates. Ireland has also climbed to #6.

The remaining PIIGS still languish in 57th, 62nd, 80th, and 106th place.

Given the stark contrast between Ireland’s success and the other PIIGS’ failures, and the parallel contrast between Ireland’s accommodative business environment and the PIIGS’ traditional socialist interventions, it’s no wonder both the media and European policymakers have been nearly silent on the Irish recovery.

If they acknowledged that Ireland has found the key to growth—free markets, lower taxes, less government spending, and a more capitalistic environment—they would have to admit that negative interest rates are a needless ploy and that the real problem in Europe is the heavy hand of government taxation and regulations.

After all, interest rates in the United States have been positive throughout the last decade (albeit very close to zero from late 2008 to 2015) and its economy has vastly outperformed the PIIGS and other anchor countries like France, Denmark, and Sweden (although the latter two are not euro participants).

Since the massive deregulatory and tax relief pushes of the Trump administration began in 2017, the U.S. economy has become the envy of the developed world and outperformed vaunted Germany with a two-year GDP growth rate of 2.8% vs 1%, even as the Federal Reserve has aggressively hiked interest rates.

Meanwhile as negative rates distract from the real structural reforms needed in Europe, they also introduce enormous risks. Negative yielding bonds entice governments to go on bigger and bigger borrowing binges and a continent awash in ultra-cheap money risks reinflating dangerous asset bubbles across the continent…

…and the Swedish housing bubble that already began deflating in 2018:

Note: Sweden doesn’t allow zero-down loans and hasn’t forced lenders to make widespread loans to uncreditworthy borrowers, so its financial system may withstand the downturn better than the U.S. did in 2008.

So instead of looking for more ways to regulate the economy from the commanding heights, or force down interest rates further into unnatural negative territory, perhaps the ECB and European governments should look beyond the continent to the British Isles. The formula for Ireland has been deregulation, low taxes, flexible labor markets, and freer markets in general.

And that formula has emphatically worked. The evidence is right in their backyard.

It’s time for them and the media to end the news blackout.

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