The Irish Government and the European Central Bank - Essay Example

a) How successful has the Irish Government and the European Central Bank been in running the Irish economy over the last two years? The Irish Government and the European Central Bank have not been successful in running the Irish economy over the last two years. The recession that hit the rest of the world is also present in Ireland. The Irish economy that had boomed in the previous years has slowed down. The European Central Bank makes policies for Ireland to follow since Ireland uses the Euro. The measures being used now might be successful with time, but in the short run, Ireland is suffering like the rest of the world. The stricter stance on the economy by the Irish Government is a condition placed on help given by the European Central Bank. Basically, the Irish Government and European Central Bank are fixing a problem that has struck worldwide. In the end, the Irish economy will bounce back. As around the world, Ireland had a massive amount of bad bank debt. This bad bank debt has created a crisis within the Irish economy. This phenomenon has been worldwide. Banks have been making irresponsible loans, Irish banks were no exception. Kirby (2010: 4) reports “Government subsidies fuelled a frenzy of building around the country and banks lent recklessly to developers to buy land at grossly inflated prices and to customers to buy the houses and apartments built on this land at equally high prices.” When the economy was better, mortgage interest and collateral were seen as a win/win situation. However when the economy started taking a downward turn the banks began having too much collateral. Bankers do not want collateral, they want mortgage payments. Once these mortgage payments started to decrease, Irish banks started to fail. The banks were not tightly regulated before the recessions. Loans could be given on inflated prices. McCormick (2009) explains, “Overreliance on construction, cheap credit and securitization of housing loans exposed Ireland to a sharp reversal of economic activity. Irish housing prices collapsed and the banking sector faced losses and liquidity pressures.” The more given, the more the banks expected to receive. If regulations had been in place on how much could be loaned, property assessed correctly, and other common sense rules, the Irish economy might not be in a recession. McDonald and Moya (2010) reports: Hard-pressed Irish taxpayers are now rescuing the banks from the consequences of their greed and folly. In return, we must now insist that they go back to basic business, and that means keeping every fundamentally profitable company in business. The European Central Bank wants to have more financial controls on the banking industries. As a result of the failing banks, the Irish Government and European Central Bank formulated a plan to help the banking industry. Reuters informed “The European Central Bank said it would act as a safety net for the flagging Irish economy, but said it was up to Dublin to get its public finances under control.” This would entail cutting spending and raising taxes. Cutting spending would prove impossible, since the Irish Government had to spend billions of dollars on a bank bailout. A bank bailout had to be completed by the Irish Government if the economy had any chance of recovering. The Irish Government has set up a "bad bank" to help the banking sector rebound from massive losses on loans to property developers. The National Asset Management Agency (NAMA) will apply an average discount of 47% to $21.5 billion (16 billion Euros) of loans in the first tranche. The bank will take over a total of $107 billion ($80 billion Euros) of loans, transferring the debt from the balance sheets of Irelands biggest banks - Allied Irish Banks , PLC (NYSE ADR: AIB) and Bank of Ireland  (NYSE ADR: IRE). (Shannon 2010) By taking over the bad loans, the Government had the opportunity to refinance the loans, give extensions, or even take the collateral. However the Irish Government could not just take on all this bad bank debt. Shannon (2010) asserts: The banks control more than $200 billion in assets - more than Irelands gross domestic product in 2009, which was $177 billion. The new bailout could give Irish taxpayers a 70% stake in Allied Irish, and a 40% stake in Bank of Ireland. This much debt could not be taken on by the Irish Government. The European Central Bank backed the Irish Government in order to make the bailout work. Lenders will receive Government-backed bonds in exchange for their toxic loans, which they will be able to use as collateral to borrow from the European Central Bank – getting much-needed cash, and getting rid of their toxic assets. (McDonald and Moya 2010) This will allow an infusion of cash into Ireland. Euros will help pull Ireland out of the current recession. McConnell (2009) states “Irish banks are using billions of euro from the European Central Bank (ECB) to buy up Irish Government debt.” The banks are buying Government bonds, the Government is bailing out the banks, and the European Central Bank is funding the whole operation. The bank bailout is needed to support businesses. Businesses are needed to help the economy grow. If the economy is growing unemployment is low. Presently in Ireland, unemployment is at an all time high. When companies are having problem paying mortgages, layoffs tend to occur. When construction is sluggish, unemployment becomes more frequent due to the out of work construction workers. If more businesses are support through the bank bailout, unemployment would decrease. Ireland’s unemployment rate is: In two years the unemployment rate has gone from 4.9% to 13.4%. This rate is only expected to increase in the near future. In order for the unemployment rate to decrease the recession would have to ease. The influx of Euros into the Irish banks is supposed to boost the economy. The heavily taxed Irish need to have an economy boost. The bank bailout seems to be working. There is one reason that the measures the Irish Government and European Central Bank put into place are working. Shannon (2010) reports “Support for Irelands commitment to budget reduction is boosting the country toward recovery.” Hopefully with the bank bailout, new banking rules, and budget reduction will put Ireland back on the right track. The Irish Government and the European Central Bank have taken hard measures to rectify the Irish economy in the past two years. The measures taken do not have immediate results. Only time will tell if these measures can make a difference. It took years of Ireland’s irresponsible bankers to cause a recession. It will take years for the economy to recover. So far it looks like Ireland is on the right track. (b) Describe and evaluate the main macroeconomic policies used by the Irish Government and the European Central Bank over the last two years. The main macroeconomic policies used by the Irish Government and European Central Bank over the last two years are stricter banking policies, budget cut backs, the infusion of cash into Irish banks, promoting government bonds, and boosting businesses through modified loans. These methods have met with some limited success. The bank bailout helps business through modified loans. Government bonds backed by the European Central Bank helps fund the bank bailout. The Irish Government has also raised taxes in an effort to pay for expenditures. All of these policies have been good for the Irish economy. The Irish Government has been cutting back on expenditures. The Irish have been cutting back as well. The following chart shows the private sector credit change. (McCormick 2009) The shrinking credit in the private sector could be the effects of a sluggish economy, or stricter rules on lending. The European Central Bank has been pushing for stricter loaning practices. The second policy is a cutback on all expenditures on a government level. If the budget shrinks, the better the chance the economy will recover quicker. For example: The government has acted decisively by adjusting public finances in the presence of falling revenues. Four rounds of expenditure cuts and revenue adjustments since July 2008 total approximately €8.3 billion (4.8% of GDP), with close to €5 billion of the adjustment occurring in the 2009 fiscal year. This effort is part of a five-year plan to reduce the deficit to 3% of GDP by 2013. (McCormick 2009) By cutting expenditures, billions of dollars can be cut to reduce the deficit. Reworking the budget has given the Irish the edge on other EU countries. Since they have taken the stricter approach, Ireland seems to be recovering faster than other EU countries. Another policy enacted is the bank bailout. The Irish Government has created an agency that takes over property loans. In an effort to reverse its shrinking economy, the Irish Government has established a National Asset Management Agency to take over a massive amount of property loans from its largest banks. Despite having the second largest budget deficit in the Eurozone , analysts believe that the Irish Governments recent actions to rein in spending and relieve debt pressures may boost the countrys chances for recovery. (Shannon 2010) The government is bailing out the banks, but is not just lending money. The Irish Government is buying these property loans. This gives the Irish Government the property or revenue from the property. After the Irish Government takes over property loans, it has the right to modify the loans. The Irish Government has been modifying the loans in hope that the individuals will pay the mortgage. Like most bankers, the Irish Government would prefer mortgage payments to the land. By modifying the loans, the Irish Government has tried to set payments that the people could afford. The chart below shows how the Irish Government has modified loans: (McCormick 2009) Although the Irish Government will not receive the high interest, they will receive payment on an otherwise defaulted loan. The final policy that the Irish Government and European Central Bank have created is the Irish Government’s bonds. This policy is important because as long as the Irish trust the Government bonds, the more bonds will be bought. The European Central Bank is so confident in the Irish Government bond they are providing some of the funding. The process of the ECB channelling funds through the banks is aimed at preventing a bond sale from failing, and therefore allowing the Government to claims its policies are "working well", according to Government sources. (McConnell 2009) The Irish Government bonds are a way for foreign interests to invest in Ireland, as well as Irish citizens. Outside interests have always been necessary for Ireland to have a stable economy. The major partners of Ireland are: (McCormick 2009) While exports are a good way to make money, this recession is worldwide. The other countries that normally buy Irish products are in a recession of their own. This is what makes all the other policies necessary to pull Ireland out of the recession. While the bank bailout, cutbacks, and even tax hikes are helpful the Irish economy is not making an overnight recovery. The Irish economy can look forward to: It forecast a cumulative decline in GDP of over 12 percent from 2008 to 2010, and said unemployment would hit 11.8 percent in 2009 and increase to an average of 14.4 percent in 2010. (Reuters 2010) Still the measures taken by the Irish Government and European Central Bank are going to help in the long run. The Irish just need to remain calm and not panic. Irish Government and European Central Bank have imposed stricter banking policies, budget cut backs, the bank bailout, promoting government bonds, and boosting businesses through modified loans. All of these policies are helping to creating a boost in the economy. Hopefully, the economy will come out of this recession quicker than anticipated. If not, the Irish Government and European Central Bank are on the right track. Bibliography Kirby, P. (2010). Celtic Tiger in Collapse: Explaining the weaknesses of the Irish model. New York: Palgrave Macmillan. Print. McConnell, D. (2009). Banks using ECB funds to buy bonds. 3 May 2009. Independent.ie. Online. McCormick, F. (2009). Prudent policies and global demand key to Ireland’s Recovery. DBRS U.S. Financial Institutions Weekly. Online. McDonald, H. and E. Moya. (2010). Irish toxic loans are half as big as economy, bank bailout reveals. 30 Mar. 2010. The Guardian. Online. Reuters. (2009). ECB vows to support Irish economy, conditionally. 4 May 2009. Online. Shannon, K. (2010). Ireland Takes Aggressive Measures To Avoid The Same Fate As Greece. 2 Apr. 2010. NuWire. Online. TradingEconomics.com. (2010). Ireland’s unemployment rate. Online. Read More