New Working Paper: Experiencing financialisation in small open economies: An empirical investigation of Ireland and Iceland

Our new FESSUD Working Paper is here. 


We examine the macroeconomic factors associated with financialisation in Ireland and Iceland from the perspective of international capital flows. To understand financialisation in the two countries we construct three ARDL models using three aspects of financialisation: financial depth, credit growth and deposit liabilities of the financial sector. Focusing on the current account, we find that financialisation is associated with an increase in foreign rentiers’ profit due to excessive international borrowing. Our measures of financialisation indicate that trade openness, also a measure of globalisation, has a negative relationship with financialisation in Iceland, while in Ireland the relationship is positive. Our results also suggest that both countries experienced an increase in the wage share along with rapidly increasing household debt in Ireland and increasing non financial corporate debt in Iceland. We conclude that institutional differences played a vital role in the solutions to the crises which destabilised the economies of Ireland and Iceland. We use the institutional differences between the two economies and suggest policy prescriptions to limit the scale and scope of similar crises in small open economies.

Greek Crisis, Redux

(This is an unedited version of my Sunday Business Post column from last week).

If you are a 20 year old Greek man, Greece has been in a depression for all of your adult life. You have never had state-sponsored health care. More than 50 percent of your generation are unemployed. Greece has now endured more austerity and economic misery than Germany did after World War 1.

There is now no comparison which can be made to the sacrifices the Greek people have made in service of a large primary budget surplus to pay off its creditors without invoking wars. That should tell us something.

Greece is an economy with an unsustainable stock of debt. Everyone knows that. All of the parties involved have done their analysis of the sustainability of Greek debt. Every independent analyst’s spreadsheet has ground out a big fat Greek ’no’ to the question of whether this tiny, embattled economy can ever hope to pay off its debts.

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Ireland's way or Iceland's way?

(This is an unedited version of my Sunday Business Post Column from yesterday.)

Iceland knows how to deal with bankers who commit illegal acts in the course of their duties. This week, four former bank officials from the Kaupthing bank were sentenced to between four and five and a half years in prison, and asked to pay their full legal costs of close to €700,000. Ouch. The same bankers face further charges of fraud and market manipulation. Corporate malfeasance meets personal consequences for those who break the rules.

Iceland is an outlier in its treatment of bankers, as it is in many things.

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Is there a property market bubble?

(This is an unedited version of my Sunday Business Post on the 8th of February)

Credit. Economies can’t live with it, and can’t live without it. Credit greases the wheels of the economy, gets investment going, changes household and firm’s expectations about the future. Credit also blows up economies on a semi-regular basis. As a nation of 4.58 million reformed credit junkies, we should know our limits when it comes to using this potent stuff, but, in the end, nothing stays learned for long, and we’re back asking for more before we’re really ready for it.

A property market bubble shouldn’t be able to start without access to lots of credit. But that might be happening in parts of Ireland right now.

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Greece: it's not about the debt

(This is an unedited version of my Sunday Business Post column from the 1st of February).

The media have exhausted every possible Greek cliché and trope, and are now spilling into Roman ones as the crisis rumbles on. We’re told the Greek government is crossing the Rubicon when it announces that, for it, the bailout is over. The President of the Eurogroup, Jeroen Dijsselbloem, has held talks with the newly elected Greek government this week to discuss the approach Greece will take to dealing with its creditors.

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ECB's QE will Work

(This is an unedited version of my Sunday Business Post column from the 25th of January.)

ECB President Mario Draghi’s announcement of quantitative easing (QE) was like the Late Late Toy Show for monetary policy geeks. Having leaked the fact that the ECB would begin asset purchases of around 50 billion euros for 18 months to restore inflation to the flagging eurozone, Mario then announced 60 billion’s worth of purchases until at least September 2016.

An old hand I spoke right after the announcement to found it hilarious, calling it an old trick US corporates used to do in the 80s when announcing their earnings—leak a lower number then beat the leaked number to juice the stock, and to avoid the crucial announcement being greeted with a ‘meh’ by the markets. Mario’s body language, even joking with the Press, said it all: ‘relax folks, I’ve got this.’

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Swiss credibility go bye bye

(note: this is an unedited version of my Sunday Business Post column from last week).

Currency trading is not for the faint hearted even at the best of times. At the end of this week, most currency traders are probably a year closer to their first heart attack. Switzerland’s Central Bank removed its currency ceiling against the euro it instituted during the euro crisis and cut its base interest rate to -0.75% in order to avoid deflation. Now not only is the currency going wild on the markets, actually leaving money on deposit with the central bank will cost you money. Negative real interest rates are going to be a feature of central banking for the foreseeable future. It’s a weird time to be a central banker, and a frankly scary time to buy and sell currencies.

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QE, here we come.

(This an edited version of my Sunday Business Post article from last week)

The ECB will start serious asset purchases in 2015, similar to the Securities Markets Programme it ran in 2010, but on a much larger scale.

This process is called quantitative easing—QE for short. QE has been fiercely resisted by hard money fanatics at the Bundesbank and the Finnish Central Bank, but it appears they have lost the battle to stop these purchases from happening. Their objections have been swept aside as fears of an outright deflation have taken hold.

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Frankfurt’s way or Syriza’s way?

(note, this is the unedited version of my piece in yesterday's Sunday Business Post)

Greece has once again returned to the spotlight as the latest coalition has collapsed trying to elect a President. Snap elections held on the 25th of this month may well see the populist Syriza party in power for the first time, most likely as the dominant part of a coalition. If no stable coalition is formed, another set of elections gets triggered, creating the possibility of an anti-Syriza bloc forming.

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Irish journos: there is a style of post crisis communication in this country which needs to be studied in order to be understood. Any crisis generates the same response: The can kicking review/report, pledge to find lessons to be learned, all that stuff, knowing media don't really review these crises with any frequency. So: Study major crises for last 20 years in say Health. You'll find the same pattern, figure out ways to get behind it as it clearly and obviously works for those in power.


We're back to a system that doesn't encourage conservation

Water meters as e-voting machines. Really.

Also, this is my last Irish Independent column. This week I start as a columnist for the Sunday Business Post. I'm delighted to start at the Post and thankful for the years I spent at the Independent, working with Eddie Cunningham, Frank Coughlan, and Liam Collins. Having a column in a major newspaper is a privilege I don't take lightly.