UK same as Greece or Ireland?

Patrick Honohan, Governor of the Ireland’s Central Bank in a speech compares UK with Ireland. He says there are quite a few similarities in the way crisis hit both economies:

I can think of no better topic for an address to the British-Irish Parliamentary Assembly than the similarities and contrasts between the performance of our intertwined economies before and during the global economic crisis. Economic activity and employment have contracted sharply and property prices have plunged. Our economies have been hit hard by the global financial crisis but in addition, for all of us, the crisis has served to expose strikingly similar pre-existing vulnerabilities in our economies – not shared by most others in Europe – which would sooner or later have led to trouble even if it had not been for the global meltdown, notably:

• the wide-ranging imbalances created by a credit-fuelled property boom;
• increasingly in the form of foreign borrowing, and the growing dependence of the financial sector on wholesale market-funding,
• the extent to which the credit and property booms significantly boosted transitorywindfall tax revenues, which came to be relied on to finance strong growth in public spending.

While the economy of the Republic of Ireland was the more vulnerable, and has been hit much harder, I think that these parallels are no coincidence. Indeed, the involvement of banks from each side in funding the property boom of the other is an interesting dimension of the pre-crisis bubble. This of course reflects the fact that our economies have long been intertwined on a broader front.

Willem Buiter now Citigroup’s chief economist compares UK with Greece. He says UK’s fiscal mess is as bad as Greece. He says much of the UK fiscal mess is because of poor govt policies which was procyclical. In good times they spent more and relied on high tax revenues to show manageable deficits. And then the actual deficit could be higher because of creative accounting:

There are good reasons for the weakness and volatility of sterling. Among industrial countries, Britain’s economic fundamentals are uniquely awful. As regards public debt and deficits, Britain’s true fiscal circumstances are about as bad as Greece’s reported situation, once we allow for the understatement of UK public debt through the off-balance-sheet accounting tricks of the past decade (the private finance initiative, unfunded public sector pensions, student loans and other Enron-like constructs).

The difference between the two lies in political economy:

The crucial difference between Britain and Greece is in the political economy of fiscal tightening. Both need 8 to 9 per cent of GDP-worth of permanent fiscal tightening. Greece cannot deliver that without external support because its society and polity are deeply divided; its institutions of governance are weak and its government incapable of swift, dramatic actions.

The UK authorities, by contrast, should be capable of imposing a timely burden-sharing solution. This is an advantage of the UK’s “elected dictatorship” constitution: with a powerless second chamber, a first-past-the-post electoral system and no tradition of judiciary interference in economic affairs, there are no checks and balances constraining the executive when a single party has a parliamentary majority. Without a hung parliament, it is all but certain that the next government will impose early spending cuts and tax increases of sufficient size to calm the markets.

He points if UK has a hung parliament, then fiscal tightening could be postponed and what we see in Greece now could be seen in UK as well.

Very interesting.

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