What could be more appropriate on St. Patrick's weekend than a peek at the recovering economy in my adopted country of Ireland. There was good news in Dublin this week. For the first time since September of 2010, the National Treasury Management Association sold ten year bonds at auction. Their goal was to sell €3.B ($3.92 billion U.S.) but there were bids for €12B ($15.67 billion U.S.). They accepted bids for €5B ($6.53 billion U.S.) at yields of 4.25/4.30%. By comparison, this yield is less than Portugal 5.93%, Spain 4.88% or Italy at 4.62%, and was lower than the yield at the September 2010 auction of 4.76%.
The confidence vote in the bond market does not mean, however, that the Irish economy has recovered. The growth rate which had been forecast for a 1.0% GDP increase in 2013 was reduced by Ernst and Young today to a positive 0.1%, a feeble recovery rate.
As a consequence of the feeble recovery, unemployment remains quite high 14.1%. Only Greece, Spain and Portugal have higher unemployment. Further, the unemployment number is reduced because many young workers have left Ireland for jobs in Australia and England.
Ireland has followed the EU's remedy, austerity, as a fix for the government deficits and the existing debt. Much of the government debt was really caused by non-performing real estate loans made by the Irish banks. When the banks were no longer solvent, the government acquired the banks and then sought bail out money from the IMF and the ECB. Ownership of two of the Irish banks remains with the government, and there continues to be resentment about the handsome salaries currently being paid to the bankrupt bankers.
The government has cut expenditures by at least 15%, and raised taxes and fees. For the employed, the tax rate starts at 20% and quickly goes to 41%. With the universal social charge of 7% and the mandatory pension contribution, the withholding tax can approach 50%. For shoppers there is a 23% value added tax on everything except basic food items. In addition to the petrol tax, your car is taxed. For permission to drive a 1.8 liter engine car, the yearly tax is close to €800, and for a 3.0 liter the tax will approach €2,000 regardless of the value of the vehicle. Even the tax on pints of beer or a glass of wine has been increased.
With all the increased taxes and fees, the consumer is squeezed and it should come as no great surprise that consumer spending has been down for six straight quarters. Making up for this drag on the economy has been Ireland's exports.
The corporate tax in the US is 39%, compared to 12.5% in Ireland. Many major pharmaceutical companies have plants in Ireland, and their products make up 28% of Irish exports. Other exports come from chemicals 21%, data processing and software, 12% and food 8%. In August 2012, a monthly record of exports was set, €9.07B.
The level of the euro is very important for Ireland since 65% of exports go to non euro countries. They have gone the austerity route in Ireland, with an abundance of taxes, but without a vibrant export market the Irish economy will languish. The experts claim the economy will resume growth next year, but we have heard that before. If the euro trades closer to 1.20 than 1.30, that would give the Irish economy a big lift, but I do not hear the experts guaranteeing that. At 1.40 Ireland would be back in a recession.
Today we had both European and US CPI numbers. They showed modest increases, probably the result of higher energy prices, and nothing to provoke inflationary fears. The US Long-Term Investment Flows show in January the money continued to flow into the US. Perhaps funds were under weighted in US securities ahead of the over hyped fiscal cliff and they had to buy.
The European Council has had a meeting today, but unlike many other European meetings, so far little has been said to support the euro. We were able to rally the EURUSD (FXE, UUP) to the 1.31 handle where it traded briefly. Our posture remains the same, sell strength in the euro. The economic news from Europe will continue to disappoint.