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Authors: Brian Lucey
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was running dual external and fiscal deficits. Germany â another paragon of âstabilityâ â ran structural deficits on the fiscal side, i.e. spent beyond its means when it comes to government expenditure outside what is needed to correct for recessionary imbalances. Ditto for the Netherlands.
For Ireland, âexports-led growthâ is, alas, historically not an engine of external balances. The cumulated current account deficit for the country is -19.5 per cent of GDP. Reversing twelve years of that experience will require re-wiring our economy, preferences, political and institutional structures, etc. â all long-term and exceptionally hard to achieve measures.
The fact is, deficits are sticky and thus very hard to reverse. Past deficit experience shapes much of the future performance, as illustrated in Figure 3.3.
Once you are insolvent for a decade (1990s) you are highly likely to remain insolvent for the next decade as well (2000s). And the headwinds against Ireland reversing that and moving into strong surpluses in its current account in years ahead are strong. If we look at the transition from the 1990s external balance position to the 2000s position, the following holds for the Eurozone:
Finland and the Netherlands stand out as the only two countries that managed to improve their surpluses on the current account side between the 1990s and 2000s averages.
France, Belgium and Luxembourg are the only three countries that managed to retain surpluses, but their performance weakened between 1990s and 2000s.
Malta was the only country that managed to reduce its external deficits between the 1990s and 2000s in terms of averages.
Portugal, Greece, Estonia, Cyprus, the Slovak Republic, Spain, Ireland, Slovenia and Italy all saw average deficits of the 1990s deepening in the 2000s.
Only two economies, Austria and Germany, managed to reverse previous deficits (in the 1990s) to surpluses in the 2000s.
That means that, historically, the chance of reversing an average current account deficit in the previous decade to a surplus in the next decade is 2 to 17 or less than 12 per cent. Not an impossible feat, but an unlikely one.
Current account deficits do appear to correlate closely to general government deficits and structural fiscal deficits. Thus insolvency of the deepest (across all three measures) variety was the domain of ten out of seventeen member states when it comes to the last twelve years of Eurozone history. Another five member states are insolvent by two out of three criteria. Lastly, only two member states â Finland and Luxembourg â have actually been fully solvent since 2000.
And, of course, Ireland stands out once again, with:
Relatively solvent external balances averaging 1.74 per cent of GDP in 1990â1999 (fourth strongest) yielding to an average annual current account deficit of 2.35 per cent over 2000â2009 period (seventh worst performer in the Eurozone)
Mildly insolvent public finances in 1990â1999 (with average general government deficits of 0.90 per cent of GDP; third best performance in the Eurozone) yielding to a 1.02 per cent average deficit in 2000â2009 (twelfth best performance in the Eurozone)
Substantial structural deficits in the 1990â1999 period (with an average structural deficit of 3.09 per cent; the eleventh highest in the Eurozone) yielding to a 6.14 per cent average deficit in the 2000â2009 period (second highest after Greece)
It is worth noting that in the 1990s Irish current account surpluses were subject to potentially higher tax revenue capture than they are today. A combination of lower corporate tax rates and increased reliance on multinational corporations to produce these surpluses (evidenced by Irelandâs widening GDP/GNP gap â the gap that reflects outflows of payments from Irish-based multinational corporations) suggest this much.
Selective Restructuring as the Only Option
Put against the requirement for
For Ireland, âexports-led growthâ is, alas, historically not an engine of external balances. The cumulated current account deficit for the country is -19.5 per cent of GDP. Reversing twelve years of that experience will require re-wiring our economy, preferences, political and institutional structures, etc. â all long-term and exceptionally hard to achieve measures.
The fact is, deficits are sticky and thus very hard to reverse. Past deficit experience shapes much of the future performance, as illustrated in Figure 3.3.
Once you are insolvent for a decade (1990s) you are highly likely to remain insolvent for the next decade as well (2000s). And the headwinds against Ireland reversing that and moving into strong surpluses in its current account in years ahead are strong. If we look at the transition from the 1990s external balance position to the 2000s position, the following holds for the Eurozone:
Finland and the Netherlands stand out as the only two countries that managed to improve their surpluses on the current account side between the 1990s and 2000s averages.
France, Belgium and Luxembourg are the only three countries that managed to retain surpluses, but their performance weakened between 1990s and 2000s.
Malta was the only country that managed to reduce its external deficits between the 1990s and 2000s in terms of averages.
Portugal, Greece, Estonia, Cyprus, the Slovak Republic, Spain, Ireland, Slovenia and Italy all saw average deficits of the 1990s deepening in the 2000s.
Only two economies, Austria and Germany, managed to reverse previous deficits (in the 1990s) to surpluses in the 2000s.
That means that, historically, the chance of reversing an average current account deficit in the previous decade to a surplus in the next decade is 2 to 17 or less than 12 per cent. Not an impossible feat, but an unlikely one.
Current account deficits do appear to correlate closely to general government deficits and structural fiscal deficits. Thus insolvency of the deepest (across all three measures) variety was the domain of ten out of seventeen member states when it comes to the last twelve years of Eurozone history. Another five member states are insolvent by two out of three criteria. Lastly, only two member states â Finland and Luxembourg â have actually been fully solvent since 2000.
And, of course, Ireland stands out once again, with:
Relatively solvent external balances averaging 1.74 per cent of GDP in 1990â1999 (fourth strongest) yielding to an average annual current account deficit of 2.35 per cent over 2000â2009 period (seventh worst performer in the Eurozone)
Mildly insolvent public finances in 1990â1999 (with average general government deficits of 0.90 per cent of GDP; third best performance in the Eurozone) yielding to a 1.02 per cent average deficit in 2000â2009 (twelfth best performance in the Eurozone)
Substantial structural deficits in the 1990â1999 period (with an average structural deficit of 3.09 per cent; the eleventh highest in the Eurozone) yielding to a 6.14 per cent average deficit in the 2000â2009 period (second highest after Greece)
It is worth noting that in the 1990s Irish current account surpluses were subject to potentially higher tax revenue capture than they are today. A combination of lower corporate tax rates and increased reliance on multinational corporations to produce these surpluses (evidenced by Irelandâs widening GDP/GNP gap â the gap that reflects outflows of payments from Irish-based multinational corporations) suggest this much.
Selective Restructuring as the Only Option
Put against the requirement for
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