If you are an Irish resident, you may be feeling very worried! As Irish debt levels reach new heights, the bill will once again fall on the tax payer. Irish government borrowing is almost 12% of GDP, but with two key banks requiring a bail out, government borrowing is expected to treble this figure to some 32% of GDP. The Anglo-Irish bank requires approximately £30 billion and Allied Irish also requires more cash. The Irish Finance Minister said:
‘The state has to downsize these institutions to prevent them becoming a systemic threat to the state itself.’
The Irish have already faced a round of austerity cuts and with the latest banking catastrophe, the next round is about to start. There are concerns that the Irish economy could move into a downward spiral, with more money being removed from the economy causing more people to lose their jobs, which will weaken public finances further and mean that more borrowing will then be required. It is hardly surprising to find a pessimistic mood on the streets of Ireland.
However, with a new interdependent world, this crisis will not only be felt by Ireland. The UK exports a large amount to Ireland – more than to Spain or Italy. With Irish tax-payers facing higher burdens and unemployment still relatively high, UK exporters may feel the squeeze. Other countries on the periphery of Europe, such as Portugal, Greece and even Spain are also feeling the pressure. There are concerns of a ‘two-speed Europe’. Below are some articles about the Irish crisis. Do a search and see if you can find any information on the problems in Greece, Spain or Portugal.
Ireland: a problem soon to be shared BBC News blogs, Stephanomics, Stephanie Flanders (30/9/10)
European recovery hope grows despite Ireland’s swelling deficit Guardian, Richard Wachman (30/9/10)
Ireland bank rescue spurs global debt concerns The World Today (ABC News), Peter Ryan (30/10/10)
Irish debt yields in new record despite better job data BBC News (28/9/10)
Euro Govt-bonds fall after overdone rally on Ireland, Spain Reuters (30/9/10)
Ireland’s love affair with masochism Telegraph, Jeremy Warner (30/9/10)
EU austerity drive country by country BBC News (30/9/10)
Anglo-Irish was ‘systemic threat’ BBC News (30/9/10)
Questions
- What do we mean by government borrowing?
- With such high levels of government debt, what would you expect to happen to interest rates on government debt? Explain your answer.
- When deciding whether or not to bail out the banks, what process could a government use?
- The Irish Finance Minister talks about the institutions becoming a ‘systemic threat’. What does he mean by this?
- Why might the UK economy suffer from the problems in Ireland?
- To what extent do you agree that there is a two-speed Europe, with the core economies, such as France and Germany making good economic progress, but the peripheral economies still suffering from the effects of recession?
- How might the situation in Ireland affect other members of Europe? Will there be an impact on the euro exchange rate?
The growth in money supply is slowing. This is not surprising, given that the programme of quantitative easing, whereby the Bank of England injected an extra £200bn of (narrow) money into the banking system between March 2009 and February 2010, has come to an end.
Should we be worried about this? Has sufficient money been injected into the economy to sustain the recovery, especially as fiscal policy is about to be radically tightened (see the BBC’s Spending Review section of its website)? One person who thinks that the Bank of England should do more is Adam Posen, an external member of the Bank of England’s Monetary Policy Committee. In a speech on 28 September 2010, he argued that the UK was in danger of slipping into Japanese-style sluggish growth that could last many years. The reason is that capacity would be lost unless aggregate demand is increased sufficiently to bring the UK back up towards the potential level of output. Firms are unlikely to want to retain unused plant and equipment and underutilised skilled labour for very long. If they do start ‘disinvesting’ in this way, potential output will fall.
What, according to Adam Posen is the answer? With fiscal policy being tightened and with Bank rate as low as it can go, the only option is to increase money supply. But with CPI inflation at 3.1%, considerably above the target 2%, is there a danger that increasing the money supply will cause inflation to rise further? Not according to Posen, who sees inflation falling over the medium term.
Not surprisingly other economists and commentators disagree – including some of his colleagues on the MPC. The following articles look at the arguments on both sides. You will also find below a link to the speech and to money supply data. There is also a link to the latest Bank of England inflation and GDP forecasts.
Articles
Posen calls for QE to be resumed Financial Times, Chris Giles (28/9/10)
Weak lending data fuel debate on QE Financial Times, Norma Cohen (29/9/10)
Bank of England’s Adam Posen calls for more quantitative easing Telegraph, Philip Aldrick and Emma Rowley (29/9/10)
Posen pleads for new stimulus to save economy and democracy Independent, Sean O’Grady (29/9/10)
Bring back the usury laws Independent, Hamish McRae (29/9/10)
Rocking the boat on the MPC BBC News blogs, Stephanomics, Stephanie Flanders (28/9/10)
A Response to Adam Posen The Source, Alen Mattich (28/9/10)
Adam Posen is posing the Bank of England a tricky question Guardian, Nils Pratley (28/9/10)
UK economy: optimists vs. pessimists FT blogs, Chris Giles (29/9/10)
What should the Bank of England do next? BBC Today Programme, Stephanie Flanders and John Redwood (1/10/10)
Interest rates will rise, predicts former Bank of England deputy governor Guardian, Dan Milmo (4/10/10)
UK interest rates on hold at record low of 0.5% BBC News (7/10/10)
Speech
The Case for Doing More Speech to the Hull and Humber Chamber of Commerce, Industry and Shipping, Adam Posen (28/9/10)
Data
Money supply data
Money and Lending (Statistical Interactive Database) Bank of England
Bank of England Inflation and GDP forecasts
Inflation and GDP forecasts (Inflation Report) Bank of England
Questions
- Summarise Adam Posen’s arguments for a further round of quantitative easing.
- How may changes in aggregate demand affect a country’s potential (as well as actual) output?
- What are the similarities and differences between the UK now and Japan over the past two decades?
- Describe what has been happening to the various components of money supply over the past few months.
- What might suggest that the Bank of England was wrong in believing that the trend rate of growth was about 2.75%?
- What are the moral arguments about personal and state borrowing? Should we begin the ‘long retreat from the never-never society’?
- Analyse the arguments against a further round of quantitative easing.
One of the structural problems facing the UK economy is that people have been borrowing too much and saving too little. As a result, vast numbers of people have been living on credit and accumulating large debts, and many people have little in the way of savings when they retire.
So should the government or Bank of England be encouraging people to save? Not according to Charles Bean, Deputy Governor of the Bank of England – at least not in the short term. While acknowledging that people should be saving more over the long term, he argues that the main purpose of the historically low Bank Rate since the beginning of 2009 has been to encourage people to spend, thereby boosting the economy. In other words, if the purpose of a loose monetary policy is to increase aggregate demand and stimulate the economy, then what is needed is increased consumption and reduced saving, not increased saving.
In the following webcast, Charles Bean gives his views about interest rates and counters the criticism that savers are being pid too little interest. He argues that for many the solution is to start drawing on some of their capital – not a solution that most savers find very appealing!
Webcast
Bank of England: savers should eat into cash Channel 4 News, Faisal Islam (27/9/10)
Articles
Savers told to stop moaning and start spending Telegraph, Robert Winnett and Myra Butterworth (28/9/10)
Bean Says Bank of England Trying to Get Reasonable Economic Activity Level Bloomberg, Scott Hamilton and Gonzalo Vina (27/9/10)
Spend, spend, spend, demands Bank of England deputy governor Investment & Business News , Tom Harris (28/9/10)
Data
International saving data (see Table 23) Economic Outlook, OECD
AMECO on line (see tables in section 15.3) AMECO, Economic and Financial Affairs (European Commission)
Economic and Labour Market Review (see Table 1.07) National Statistics
Questions
- What is meant by the ‘paradox of thrift’?
- Reconcile the argument that it is in the long-term interests of the UK economy for people to save more with the Bank of England’s current intention that people should save less?
- Is there a parallel argument about fiscal policy and government spending (see the news item The ‘paradox of cuts’?)
- What are the determinants of saving?
- Look at the data links above and compare the UK’s saving rate with that of other countries.
- What has happened to the UK saving rate over the past four years? Attempt an explanation of this.
The price of gold has hit a record high of over $1282 per ounce. By contrast, in 2007 it was trading at under $700 per ounce and in 2001 at under $300 per ounce. Various uncertainties in the world economy have led to large rises in the demand for gold by both central banks and investors in general.
But why has the gold price risen so dramatically and what is likely to happen to the price in the coming days and months? Some commentators are saying that the gold price has further to rise. Others are saying that it is already over priced! The following articles look at the explanations and the arguments.
Articles
Monetary easing fears lift gold to record high Financial Times, Javier Blas (17/9/10)
Five-fold rise in gold price ‘is not a bubble’, claims industry body Independent on Sunday, Mark Leftly (19/9/10)
Gold Prices Today Are Increasing to Record Levels Business and Finance News, Aidan Lamar (18/9/10)
Gold hits new peak of $1,283 Telegraph, Richard Evans (17/9/10)
Gold hits new record high Guardian, Julia Kollewe (17/9/10)
Gold prices – the highs and lows since 1971 Guardian, Julia Kollewe (17/9/10)
Gold is overpriced, so be wary of those ads to buy it Idaho Statesman, Peter Crabb (17/9/10)
Data
Gold prices World Gold Council
Commodity price data (including gold) BBC Business: Commodities
Questions
- Why has the price of gold risen? Illustrate your arguments with a demand and supply diagram.
- How are these demand and supply factors likely to change in the near future?
- What is the role of speculation in the determination of the gold price? What particular factors are speculators taking into account at the moment?
- Why have actions by the Bank of Japan (see A Japanese yen for recovery) influenced the gold price?
- Why have possible future actions by the US Federal Reserve Bank influenced the gold price?
The market for food in the UK is highly competitive. From dining in style to a simple take-away, one of the key words when it comes to dining seems to be choice. Competitive prices and high quality are on offer, which is largely due to the sheer number of restaurants available to consumers. However, consolidation seems to be on the menu.
Nando’s is a well known restaurant and a popular eating destination on UK and Irish high streets, with more than 230 restaurants. This chicken restaurant group has made a £30 million bid for Clapham House, the company behind the Gourmet Burger Kitchen chain with 53 branches. Clapham’s shareholders were advised to accept the deal and on the 17th September 2010, it is reported that a deal was reached with Nando’s Group Holdings and its private equity owner Capricorn Ventures International. The 74 pence per share deal was met with disappointment by some analysts, who felt that the company was under-valued, despite failed attempts by Clapham House’s Board to persuade Capricorn to raise the offer price or find an alternative bidder.
The restaurant industry has suffered from the recession and especially by the weak economic recovery, so perhaps lower valuations are to be expected. Nando’s said:
‘As macroeconomic weakness has persisted in the UK, the trading environment for restaurant businesses in the UK has been difficult. This is evidenced by Clapham House’s vaolatile weekly trading performance.’
Nando’s intend to invest significantly in Clapham Houses’ businesses to reinvigorate their previous competitor. This may be essential, given the expectation that conditions in the UK will remain fragile, with consumer confidence staying low, as well as a somewhat untimely rise in VAT in January next year, which is almost certain to have an adverse effect on the restaurant business.
This take-over deal is not the first in the restaurant industry and nor is it likely to be the last, as the UK economy remains in a vulnerable state. The following articles look at this and over takeovers.
Nando’s to buy Gourmet Burger Kitchen for £30m BBC News (17/9/10)
UK restaurants serve up £50m in takeover deals Management Today, Emma Haslett (17/9/10)
Nando’s swallows Gourmet Burger Daily Mirror News, Clinton Manning (18/9/10)
GBK team plots next move after Nandos deal Telegraph, Jonathan Sibun (18/9/10)
Nando’s to buy Real Greek chain for £30m Independent, Alistair Dawber (18/9/10)
Mithcells & Butlers and Nando’s to feast on rival restaurant chains Mail Online, Ben Laurance (17/9/10)
GBK owner Clapham agrees to Nando’s offer Reuters (17/9/10)
Questions
- What type of takeover is Nando’s purchase of Clapham House?
- Why has the weak macroeconomic environment adversely affected the restaurant industry? What might be the impact of next January’s rise in VAT?
- Will Nando’s takeover (or indeed any other takeover in the restaurant industry) allow the company to prosper from the weak economic climate?
- In which type of market structure would you place the restaurant industry in the UK? Explain the characteristics of the market structure you choose and why you have placed the restaurant industry in it.
- How was the finance for the deal raised by Nando’s Holdings Group? What other sources of finance are available to firms for this purpose? What are the (a) advantages and (b) disadvantages of each?
- What other takeovers have occurred recently in the restaurant industry? What types of takeovers are they?