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http://newsweaver.ie/bloxhamresearch/e_article001314795.cfm?x=bf0GvBb,bcgrvNVl
Bloxham Morning Note
Wednesday, January 14, 2009
Company/Economic News
Strategy – Lex pointing out Ireland’s weakness

The weakness of Euro membership for Ireland is highlighted into today’s Lex column. With the UK doing what is needed to adjust to the new economic reality and devaluing its currency, Ireland is unable to devalue its currency to restore competitiveness. Therefore Lex points out that wages in Ireland will need to fall, something which is exceptionally difficult to achieve. While the Euro zone has provided us with the buffer of a central banking guarantee, the downside pain is in a loss of competitiveness against our nearest neighbour, the UK.

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specials.ft.com/cgi-bin/Common/FTToday/nph-todayEdition.cgi?latest=BACK1_LON
The Financial Times
THE LEX COLUMN
Wednesday January 14 2009
Eurozones of pain

The Irish must be feeling green, and so too the Spanish, Greeks and Portuguese. Over the past week, all four countries’ debt ratings have been placed on review for downgrade.
Dublin, Madrid, Athens and Lisbon may bat away such warnings with reassuring noises about how they will put their financial houses in order – even if they, meanwhile, suffer higher borrowing costs. What they cannot dismiss so easily, however, is the solution to their troubles: deflation.
The potential downgrades are only a manifestation of a deeper problem: a loss of competitiveness. That is largely why the Irish, Greek, Spanish and Portuguese trade deficits are so large and their economies slowing so fast. It has been a long decline. Euro membership lowered borrowing costs, but unleashed a credit boom and a rise in prices – most obviously in housing but also in wages.
Ireland shows the problem writ large. Since 2000, its relative wage costs have risen by 20 percentage points versus Germany. (Greek wage costs have risen by about 5 points.) Export performance has been further hurt by the weakening currencies of two of its major trading partners, the
US and the UK. That is why Brian Lenihan, the Irish finance minister, lashed out at the UK, saying the pound’s fall had caused Ireland “immense problems”. The quick solution would be for Ireland to devalue too. As a euro member, it cannot. Instead it has to deflate.
Germany managed this at the start of the millennium. But as its trading partners were inflating at the time, German prices only had to rise at a slower rate for relative wages to fall. Today, with inflation falling everywhere, that path is not open to uncompetitive eurozone countries.
Instead, wages have to fall in absolute terms. That is immensely painful. It is also politically unpalatable; democracies generally don’t “do” wage deflation. Even East Asian countries, with their more flexible labour markets, did not manage it during the 1997 crisis – or at least not without political change.
The Irish referendum this autumn on the European Constitution may well be an explosive vote.