It doesn’t seem that long ago when Greece was in the news regarding its deficit and need for bailing out. Back then, countries such as Spain, Portugal and Ireland were being mentioned as the next countries which might require financial assistance from the EU. It is now the Irish economy that is in trouble, even though the Irish government has not yet requested any financial help. The EU, however, is ‘ready to act’.
The Irish economy experienced an extremely strong boom, but they also suffered from the biggest recession in the developed world, with national income falling by over 20% since 2007. Savers are withdrawing their money; property prices continue to collapse; and banks needed bailing out. Austerity measures have already been implemented – tax rises and spending cuts equal to 5% of GDP took place, but it has still not been enough to stabilise the economy’s finances. All of these problems have contributed to a large and unsustainable budget deficit and a significant lack of funding and that’s where the EU and possibly the IMF come in.
If the Irish economy continues to decline and experiences a financial crisis, the UK would probably be one of the first to step in and offer finance. As our closest neighbour and an important trading partner, the collapse of the Irish economy would adversely affect the UK. A significant proportion of our exports go to the Irish economy and, with Irish taxpayers facing troubled times, UK exporting companies may be the ones to suffer.
One thing that this crisis has done is to provide eurosceptics with an opportunity to argue their case and blame the euro for the collapse of Ireland. With one monetary policy, the Irish economy is tied in to the interest rates set by the ECB and low interest rates fuelled the then booming economy. The common currency also increased capital flows from central European countries, such as Germany, to peripheral countries, such as Ireland, Spain and Portugal. In themselves, capital flows aren’t a problem, but when they are used to fund property bubbles and not productive investments, adverse effects are inevitable, as Ireland found to its detriment.
As prices collapsed and banks simply ran out of money, the government stepped in and rescued not only the depositors of Irish banks, but also their bondholders. Unable to devalue their currency, as it’s the euro, the Irish economy was unable to boost exports and hence aggregate demand and in turn economic growth. Although, the Irish government has not requested any financial help, as the French Finance Minister commented about a potential bailout: “Is it six months or a few days away? I’d say it’s closer to days.” The following articles look at this developing situation in Europe.
EU plays down Irish republic bail-out talks BBC News (17/11/10)
Ireland bailout: the European politicians who will decide Telegraph, Phillip Aldrick (17/11/10)
Don’t blame the Euro for Ireland’s mess Financial Times, Phillipe Legrain (17/11/10)
Britain signals intention to help Ireland in debt crisis New York Times, James Kanter and Steven Erlanger (17/11/10)
Ireland will take aid if ‘bank issue is too big’ Irish Times, Jason Michael (17/11/10)
Irish junior party says partnership strained Reuters (17/11/10)
Ireland resists humiliating bail-out as UK pledges £7 billion Telegraph, Bruno Waterfield (17/11/10)
Markets stable as Ireland bailout looms Associated Press (17/11/10)
The implausible in pursuit of the indefensible? BBC News blogs, Stephanomics, Stephanie Flanders (16/11/10)
Ireland bailout worth ‘tens of billions’ of euros, says central bank governor Guardian, Julia Kollewe and Lisa O’Carroll (18/11/10)
The stages of Ireland’s grief BBC News blogs, Stephanomics, Stephanie Flanders (18/11/10)
Q&A: Irish Republic finances BBC News (19/11/10)
Could Spain and Portugal be next to accept bail-outs? BBC News, Gavin Hewitt (19/11/10)
Questions
- Why will the UK be affected by the collapse of the Irish economy?
- If Ireland were not a member of the eurozone, would the country be any better off? How might a floating exchange rate boost growth?
- The Financial Times article talks about the euro not being to blame for the Irish problems, saying that ‘tight fiscal policy’ should have been used. What does this mean?
- Why is the housing market so important to any nation?
- What are the arguments (a) for and (b) against the euro? Would Ireland benefit from leaving the euro?
- Should the UK government intervene to help Ireland? What are the key factors that will influence this decision? What about the EU – should Ireland ask for help? Should the EU give help?
- Austerity measures have already been implemented, but what other actions could the Irish economy take to increase competitiveness?
GDP (or Gross Domestic Product) measures the value of output produced within a country over a 12-month period. It is this figure which we use to see how much the economy is growing (or shrinking). We can also look at how much different sectors contribute towards this figure. Over the past few decades, there has been a significant change in the output of different sectors, as a percentage of GDP, within the UK economy. In particular, the contribution of manufacturing has diminished, while services have grown rapidly.
However, there is one specific area that is making a growing contribution towards UK GDP and is expected to see acceleration in its growth rate by some 10% annually over the next few years: the internet. Although the internet is not an economic sector, the Boston Consulting Group (BCG) said that if it was, it would be the UK’s fifth largest sector and according to a report by Google, it is worth approximately £100 billion per year to the UK economy. Furthermore, it is an area in which the UK is one of the leading exporters. The emergence of the internet has transformed industries and individual businesses and the trend looks set to continue. The report by Google found that some 31 million adults bought goods and services online over the past year, spending some £50 billion.
What are the benefits for businesses of internet shopping and does it have an impact on the retail outlets on Britain’s highstreets? The answer is undoubtedly yes, but is it good or bad? What does the emergence of this new ‘sector’ mean for the UK economy?
Articles
UK net economy ‘worth billions’ BBC News (28/10/10)
UK’s internet industry worth £100 billion report Guardian, James Robinson (28/10/10)
’Nation of internet shopkeepers’ pumps £100 billion into economy Independent, Nick Clark (28/10/10)
UK internet is now worth £100bn to UK economy Telegraph, Rupert Neate (28/10/10)
Google at 10 BBC News, Success Story, Tim Weber (4/9/08)
Britain’s £100bn internet economy leads the world in online shopping Guardian, James Robinson (28/10/10)
Report
How the internet is transforming the UK economy The Boston Consulting Group October 2010
Government Statistics
United Kingdom: National Accounts, The Blue Book 2009 Office for National Statistics 2009 edition
Questions
- What is the UK’s GDP? How does it compare with other countries and how has it changed over the past 10 years?
- How does internet provision contribute towards growth? Think about the AD curve. Illustrate this on a diagram and explain the effect on the main macroeconomic objectives.
- Is there a problem with becoming too dependent on this emerging sector?
- How has the internet and online environment helped businesses? Think about the impact on costs and revenue and hence profits.
- What explanation is there for the change in the structure of the UK economy that we have seen over the past few decades.
- Will internet shopping ever replace the ‘normal’ method of shopping? Explain your answer.
Reforms and budget cuts seem to be the norm across the world. In the UK, we’ve seen announcements about substantial cuts in government spending and reforms to our welfare state, including child benefit and pension reforms. But how will people react? Perhaps, we should look to France to see what could be to come. People across the country are protesting against the plan to raise the pension age from 60 to 62.
Workers at French oil refineries have ceased work and, as as a result, shortages of petrol across France look set to continue. There has been mass disruption to various transport markets, including cancelled flights and lorry drivers using ‘go-slow tactics’.
Furthermore, it’s not just workers at oil refineries who are on strike. Rubbish remains uncollected; oil tankers are floating off the coast; rail strikes and postal strikes have disrupted daily life; and even the school system has been affected. But, what are the costs of these strikes? Will the French economy suffer? Will economic growth be affected? It’s certainly an inefficient use of resources and will undoubtedly cost money.
Yet, despite these strikes, the President has said that the reforms will still go ahead, as he looks forward to a Senate vote on the pension bill. But what are the problems necessitating pension reform, not just in France, but across the world? And will it be France’s turn to experience a ‘winter of discontent’?
French strikes force petrol stations to shut BBC News (18/10/10)
Defiant Marseille, heart of France’s social unrest Reuters (18/10/10)
French Fuel Crisis: Protests turn violent Sky News, Huw Borland (18/10/10)
JPMorgan says French strike will cut demand for oil next year Bloomberg, Grant Smith (18/10/10)
French strikes hit airlines, trucking, gas pipes Philippine Star (19/10/10)
French riot police clash with students as petrol stations run dry Telegraph, Henry Samuel (18/10/10)
French based for another day of strike action Guardian, Angelique Chrisafis (18/10/10)
France strike: flights cancelled, airlines told to carry enough fuel for return journey Telegraph (18/10/10)
Questions
- What action other than striking is open to workers? What are the costs and benefits of each?
- Why are strikes by groups of workers likely to be more effective than protests by individual workers?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
- What are the efficiency arguments against strike action?
- How are oil prices determined? What will be the impact on oil prices of these strikes in France? Will there be an impact on the rest of the world?
- What are the key issues necessitating pension reform? Are these issues worth the price of the strikes?
According to GDP figures released on 15 August, China overtook Japan in the second quarter of 2010 to become the world’s second largest economy. This raises two questions: just what do the GDP figures mean and why has this happened?
The GDP figures are total figures measured in US dollars at current exchange rates. According to these nominal figures, Japan’s GDP was $1.286 trillion in the second quarter of 2010; China’s was $1.335 trillion. This follows several years when Chinese growth rates have massively exceeded Japanese ones.
As far as explanations are concerned, economists look to a number of different factors, including investment policies, relative exchange rates, confidence, deflation in Japan and the scope for catching up in China.
The following podcasts and webcasts look at these questions, as do the articles.
Podcasts and webcasts
China eyes Japan’s slowing GDP growth BBC News, Roland Buerk (16/8/10)
Japan’s economic strategy ‘not happening’ BBC Today Programme Interview with Dr Seijiro Takeshita of Mizuho International banks (16/8/10)
China’s growth rate slows to 10.3% as lending tightens BBC News, Chris Hogg (15/7/10)
China exports jump in May BBC News, Chris Hogg (10/6/10)
China Overtakes Japan in 2Q As No. 2 Economy Associated Press on YouTube (16/8/10)
China’s economy takes over Japan’s AsianCorrespondent on YouTube (16/8/10)
Articles
China overtakes Japan to become world’s second-biggest economy Telegraph, Roland Gribben (17/8/10)
Chinese economy eclipses Japan’s Financial Times, Lindsay Whipp and Jamil Anderlini (16/8/10)
Decoding China’s modesty Financial Times blogs, Jamil Anderlini (17/8/10)
China ‘overtakes Japan in economic prowess’ asiaone news (17/8/10)
China overtakes Japan to become second largest economy in world Irish Times, Clifford Coonan (17/8/10)
China Passes Japan As Second-Largest Economy Huffington Post, Joe McDonald (16/8/10)
Data
World Economic Outlook July 2010 Update IMF (7/7/10)
China Economic Statistics and Indicators EconomyWatch
Japan Economic Statistics and Indicators EconomyWatch
Questions
- Why may simple GDP figures be a poor indicator of the relative size of the Chinese and Japanese economies?
- If purchasing-power parity figures were used, how would this affect the relative sizes of the two economies? Explain why purchasing-power parity exchange rates are so different from nominal exchange rates in the two countries.
- What impact have the relative exchange rates of the two countries had on economic growth?
- Why are simple GDP figures a poor indicator of living standards?
- What factors will determine whether income inequality is likely to widen or narrow in China over the coming years?
- What factors explain Japan’s low rate of economic growth since the early 1990s? How likely is it that these factors will apply in China in the future?
UK unemployment now stands at 2.47 million, which is a fall of 34,000 people in the three months to May. Meanwhile, the claimant count, which measures the number of individuals claiming Jobseeker’s Allowance, fell by 20,800 between May and June to stand at 1.46 million.
The total number in employment increased by some 160,000 in the three months to May to reach 28.98 million. The increase in the number of individuals in work is largely due to an increase in the number of part-time workers, which now stands at some 27%. The development of the flexible firm has played a huge role in creating more and more part-time jobs.
Although declining unemployment is good news, and the jobless rate of 7.8% is now comparable with the EU and the US, there are suggestions that it may rise again next year. Indeed, unemployment is expected to peak at nearly 3 million in 2012 (10%) and an employer’s group has said that the UK may face serious job deficits for the next decade. As more and more jobs are lost in the public sector, estimates suggest that the economy must grow by 2.5% per year from now until 2015, in order to compensate these losses with extra jobs in the private sector.
As John Philpott, the Chief Economic Adviser at the CIPD said:
“A slightly milder growth outcome – which many would consider a decent recovery in output given the various strong headwinds at present facing the economy – is easily as imaginable as the OBR’s central forecast and would leave unemployment still close to 2.5 million by 2015, meaning Britain faces at least half a decade of serious prolonged jobs deficit.”
So, although the fall in the jobless rate is undoubtedly good news, the uncertain future for unemployment in the UK, will put a slight dampener on this news.
Articles
UK unemployment declines to 2.47m BBC News (14/7/10)
Economy Tracker BBC News (14/7/10)
Unemployment to peak at 3m by 2012 Telegraph (14/7/10)
Labour market report to show outlook for jobs worse than OBR projections Guardian, Katie Allen (14/7/10)
Part-time work boosts UK employment rate Sky News, Hazel Tyldesley (14/7/10)
Unemployment figures: what the experts say Guardian, Katie Allen (14/7/10)
Data
Labour market statistics latest: Employment ONS
Labour Market Statistical Bulletin – July 2010 ONS
Labour market statistics: portal page ONS
Questions
- How is unemployment measured in the UK? Which is the most accurate method?
- What is the flexible firm and how has it allowed more part-time jobs to be created?
- Why is unemployment expected to rise again in the next few years?
- The ONS has reported that wage growth has eased sharply. How will this, along with falling unemployment rates, affect household incomes and consumption? Will one effect offset the other?
- Brendan Barber in the Guardian article, ‘Unemployment figures – what the experts say’, wrote that unemployment lags behind the rest of the economy. Why is this?
- What type of unemployment are we experiencing in the UK? Illustrate this on a diagram.
- Consider the government’s plans in terms of spending cuts. How are they likely to affect the rate of unemployment in the UK?