International Business

Summer semester 2012

International Economics

Topic:

International competitiveness and current account:

“UK and Ireland compared” Supervisor: - Prepared by:-

Prof. Claus Thomasberger Mr. Rajab H. Kaoneka - 0529990

Due: August 31, 2012

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Table of Contents

1. Introduction 2

2. Economy – overview 3

2.1. Ireland Economy 3

2.2. United Kingdom Economy 4

2.3. The current situation in UK 4

3. Balance of Payments 5

3.1. Current Account 5

3.2. Ireland Current Account 5

3.3. UK Current Account 6

3.4. Comparing CPIs 7

4. Public Deficit/Debt 7

4.1. Overview for Ireland's gross national debt 7

4.2. Causes of Irish Debt 8

4.3. United Kingdom Debt 8

4.4. Debt and the Euro 8

5. European Fiscal Austerity 9

5.1. How this fiscal policy affected Ireland? 9

5.2. How is austerity in UK 10

6. Conclusion 11

7. References 12

8. Appendix 13

Figure 1: Irish and UK GDP, source: http://thinkprogress.org .................................13

Figure 2:balance of payment, Source: http://trueeconomics.blogspot.de ..................13

Figure 3: Balance of payment decomposition of invisible sector .............................13

Figure 4: Balance of Payments: Current and Capital Accounts ................................14

Figure 5: Ireland Unemployment rate .....................................................................14

Figure 6: European austerity programs interactive graph .........................................14

Figure 7:Ireland and UK Government debt as a percentage of GDP ........................15

Figure 8:Interest rates on Irish and UK Government Bonds .....................................15

Figure 9: The Current account balance of the UK ....................................................16

Figure 10: The CPI in Ireland and the UK ...............................................................16

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1. Introduction

This paper compares the International competitiveness and the current account on the

two countries Republic of Ireland and United Kingdom. This paper explain much the

balance of payments, Public Deficit/Debit and all factors which contribute to the

Country competitiveness including Export and Import which are the main factors

which determine the GDP.

UK and Ireland are countries in European Union but UK is not in Eurozone but

Ireland in the one of the Eurozone country. This explains some economical facts

which make the economical comparison between this tow countries in which one is

in Eurozone and one not in Eurozone.

This paper studies the economy of Republic of Ireland and UK in which explain

much on Balance of payments, Public Deficit/Debt and Financial Austerity, Starting

with Economical Overview especially before financial Crisis and After Financial

crisis, What happened during the financial crisis and to what extent the countries

have been affected and what measure taken to come out of financial crisis.

It seems that the main factors dominating the Irish and UK Economy are Budget

deficit, public debt and Austerity. Iris and Economy were strongest before thus why

we can see that the country affected much on financial crisis.

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2. Economy – overview

In this part, explain the economic overview in order to compare the economic status

for both countries i.e. Republic of Ireland and The United Kingdom.

2.1. Ireland Economy

Ireland is a small country, which has modern economy, not only that but also Ireland

its economy is trade-dependent. Ireland was among the first Countries to join EU, as

started to use euro in January 2002. Ireland had growth average of 6% from 1995 to

2007, since financial crisis the economy dropped sharply which contributed much to

the falling of GDP over 3% in 2008 which also rose to 8% in 2009 and 1%2010.

Ireland was in great depression in 2008 which it was the first time since more than

decades, the collapse of the Ireland caused by the construction and the domestic

consumption (www.taxpayersnetwork.org, 17.08.2012).

In 2007 the prices was too high compared to other developed countries, on the same

year the prices of houses fallen by 50%. And that was the downturn in export sector,

consumer spending and business investment along with collapse of construction

sector; all these were dominated by foreign multinationals companies which was the

key factor for Ireland’s economy. The most important sector was Agriculture where

now is led by Industry and services. In 2008 the government moved to guarantee all

bank deposits, recapitalize the banking system, and establish partly-public venture

capital funds in response to the country's economic downturn.

(www.taxpayersnetwork.org, 12.08.2012)

The Irish Government aimed to stabilize the financial sector that’s why established

the National Asset Management Agency (NAMA) in 2009. Its role was to make the

banking system and property stable which may lead to the developing loans for the

consumer from the banks for Ireland. NAMA played big role in reducing the budget

deficit. It affected many sectors including cut in spending, wage reductions for all

public servants. The budget deficit came up to 32.5% of GDP in the year of 2010

which it was larger deficit compared to other countries like UK.

(www.taxpayersnetwork.org, 17.08.2012). See Appendix: figure 1.

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Irish Economy grown up little bit in the year of 2011 and the budget was 10.2% of

GDP in which we can see the growth and also there was some expectation that in

2012 the economy would contract because of the euro crisis.1

2.2. United Kingdom Economy

The UK economy was highest worldwide in the period of British Empire in 1990s.

UK was one of the leading financial centres. It is considered that UK is the 3rd

largest

economy in Europe after Germany and France2.

Its economy shrunk after the Second World War in which the war had cost a lot of

resources which contributed to the great decline.

UK practiced the free market in 1979 which created the term “sick man of Europe”

from the Prime Minister Margaret Thatcher where he broke up the union which lead

to the free markets (http://www.altiusdirectory.com, 21.08.2012).

There was an increase of unemployment due to the decline of its economy in 1990 -

1993 which caused by recession.

2.3. The current situation in UK

During the financial crisis 2008, UK hit badly where by the currency (pound)

devaluated much more than other currencies and also this situation contributed much

to the higher unemployment.

During this UK’s recession in 2009 where by it was higher compared to 2008 many

sectors have been affected including Property finance, Industries, Agriculture and

employment and so on. See Appendix: figure 1.

UK experienced growth in 2010 first quarter where by the economy was higher than

0.29%, the economy continued to grow in which in second quarter was much higher

than first quarter up to 0.69% (http://www.altiusdirectory.com, 21.08.2012). See

Appendix: figure 1.

1 http://www.theodora.com/, (12.08.2012) 2 http://www.altiusdirectory.com (21.08.2012)

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3. Balance of Payments

In this section of Balance of payment explains the current account for the UK and

Ireland which shows competitiveness.

As by definition:

“The Balance of Payments details all of the transactions made between the

government consumers, businesses and Government and the rest of the world

over the course of a year. The components of the balance of payments must

necessarily sum to zero: Current account + Capital and Financial account +

balancing item = 0”3

3.1. Current Account

The current account issue between the two countries, this part shows the current

account balance which indicates the way country competes internationally.

Compare the two countries as usual Ireland and United Kingdom if the countries

recorded surplus or deficit. Sometimes country may have surplus where by it depend

deeply on the revenue from export in which it may have much savings with weak

domestic consumption. In other way country may record deficit with import

dependent, low savings and much consumptions4.

3.2. Ireland Current Account

Ireland have shown growth this year where by the current account reported

0.11percent of the GDP last year 2011. Whereby from the history in 1980s to recent

the current account to GDP was -1.90 per cent in which in 1994 was much higher up

to 4.10 per cent in the year of 199 also was recorded low percentage of -13.30% in

the year 1981.

According to the publication from the Statistical Office Centre, Ireland recorded the

surplus of €762 million, in which the previous was deficit of €1.11 billion from the

first estimation published in the 1st quarter (http://www.theodora.com, 25.08.2012).

In 2011, a deficit of €1 billion was recorded in the 1st quarter. This doesn’t mean that

this is good forecast toward the surplus; evidence can be taken in two year.

3 (http://www.civitas.org.uk/economy/Balanceofpaymentsfactsheet.pdf, 26.08.2012) 4 (http://www.tradingeconomics.com/ireland/current-account-to-gdp, 25.08.2012)

6

Irish services export has been seen as most changing fast sector on the economy for

past ten years, so you can see that the balance of payment give all information about

the services exports (www.theodora.com, 25.08.2012).

Services exports performed worse in the first quarter of the year which when you

compare to other previous years. See appendix: figure 2. Illustrate the trends on the

annual basis, providing forecast for 2011 based on data through September.

ICT services are seems to be the sources which have largest services export earnings

see Appendix figure. 3& 4 where it put overall increase since statistics were to put in

accordance in the year of 1990s

This service of ICT has increased the exports at least 15 per cent on the previous

years which it was €7.21 billion in the 1st quarter. Business services are seems to be

2nd

largest source or export, which contribute €5.4billion in the first three months

which it was 8 per cent increase (http://www.esri.ie, 26.08.2012)

3.3. UK Current Account

In the 1st quarter in 2012 the UK has a record of £11.20 billion on the current account

deficit which was more than the previous quarter record of £7.2 billion

The equivalence is 2.90 per cent of GDP in the 1st quarter. The decomposition of the

current account deficit is:-

There was increase in trade deficit from around £2.31 billion to about

£7.80 billion

Surplus from income went down from 2.20 billion to £2.20 billion

More on the current account transfer have downturn of £0.51 billion to

£5.50 billion

The total account which has been obtained from the addition of current account

balance and capital balance which all this implication that the country is in surplus or

in deficit.

In 2012, the UK seemed to have £10.22 billion net borrow; this was in the 1st quarter

where by in the 1st quarter recorded £6.41 billion, the causes of this record was the

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decrease of income surplus and trade surplus.

(http://www.ons.gov.uk/ons/dcp171778_269650.pdf, 26.08.2012)

See Appendix: figure 9, Current account balance (Seasonally adjusted).

3.4. Comparing CPIs

In the figure 10 in the appendix, compares the CPI of the UK and Ireland from the

year of crisis to the current years. The UK CPI rose to 13.20 per cent where by

compared to Ireland which has 2.1 per cent. As you can see that there is big

difference between these two countries.

I the year 2007 the CPI of Ireland came up to 4.81 per cent from comparison of 3.0

in UK. Further year of 2008 the Irish CPI decreased to 2.11% while of the UK went

up to 7.49%5. See Appendix: figure 10

4. Public Deficit/Debt

In this part explains and compare the National debt for both countries Ireland and

United Kingdom. The total amount the Irish and United Kingdom government owe

to the private sector.

4.1. Overview for Ireland's gross national debt

As it has been reported in the OECD report, the Irish debt has been recorded 105 per

cent of the GDP which is 109,610m euros or 109 billion euros. The forecast debt is

seems to be less than 113.6% of GDP by the year 2013, See Appendix: figure 8.

(http://www.economicshelp.org/blog/3118/economics/ireland-national-debt/,

26.08.2012).

According to the Eurozone rules in Growth and Stability which states that “National

debt should not exceed 60% of GDP”

Due to this criteria Ireland could be one of the country which has more debt to GDP

in the Eurozone (www.accountancyireland.ie, 11.06.2012)

5 (http://economic-incentives.blogspot.de/2011/01/comparing-cpis.html, 26.08.2012)

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4.2. Causes of Irish Debt

One of the most causes for the Irish Debt was one year before crisis 2008. The debt

was 19.6 per cent of the GDP which was believed to be the lowest in the Europe as

about €37.59 billion.

After crisis 2008 to current years the debt went to 49.30% of GDP which is 95 billion

euros. This caused by recession and buildings property downturn in which

government depended much on the tax revenue which at the end fallen to low.

Another big problem is the biggest fund given to the banks to rescue from the crisis

which was about €31.5 cost of the GDP used to rescue the banks which was equal to

€60.6billions which recorded the deficit of 31.9% of GPD in the year 2010

(http://www.economicshelp.org, 26.08.2012).

Interest rates on Irish and UK Government Bonds: See appendix: figure 9.

4.3. United Kingdom Debt

The debt for the UK is the total money the government of England owes to the

private owners where by the total public sectors debt was about £1,032.5 billion in

the year 2012 which is equal to 65.8 per cent of GDP

(http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/, 26.08.2012)

By including all financing sectors the Net debts seem to be £2311.7 billion (147.4%

of GDP. See appendix: figure 8, shows the national debt compared to other countries

including Ireland (http://www.economicshelp.org, 26.08.2012)

4.4. Debt and the Euro

UK compared to other countries in Eurozone its current debt is not causes of rising of

the Government bond yields. Compared to the Eurozone which seem to have same or

similar level of the debt but the bond yields is high which led to the government

spending cut (http://www.economicshelp.org, 26.08.2012).

Also see appendix: figure 8

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5. European Fiscal Austerity

Talking about austerity in Europe, it seems that much programs about austerity has

been implemented and are seems to be good by the outcome are hard according to

the Financial Times which has made nice graphic presentation6

(http://krugman.blogs.nytimes.com, 25.08.2012), See appendix: figure 7.

It seems that cutting spending in a country with weak economy depresses as much

the economy as much people think that it could be better. According to Nobel Prize

winning “the economist Paul Krugman”

“None of the countries slashing spending have seen the predicted private-sector

surge. Instead, the depressing effects of fiscal austerity have been reinforced by

falling private spending.” See appendix: figure 1 (http://krugman.blogs.nytimes.com,

25.08.2012)

5.1. How this fiscal policy affected Ireland?

On May 31st Ireland voted the European fiscal compact where by only half of the

voted but according to The Irish Times the results has a favor on the ratifying the

policy which could controlling and ruling the debt and Eurozone countries. The

Prime Minister Enda Kenny of Ireland received the policy by two hands whereby he

won the vote by 60.30% “YES” and 39.70% was “NO” (www.theepochtimes.com,

25.08.2012)

According to the Irish Times: “The referendum debate was dominated by a single

question: how can Ireland, which leaves an EU/IMF bailout program next year, fund

itself if it cannot then borrow on sovereign debt markets, and needs a second bailout

in 2014? For the Yes campaign, led by the government parties and supported by

Fianna Fail, the leading opposition party, that was the central argument. Only

countries that ratify the fiscal treaty can access the European Stability Mechanism,

the euro zone’s permanent €500 billion ($618 billion) bailout fund. So, if voters

rejected the treaty and access to EU finance was thereby denied, who would lend

Ireland money? On that, Sinn Fein and some smaller left-wing parties that led the No

6 (http://www.ft.com/intl/cms/s/0/feb598a8-f8e8-11e0-a5f7-00144feab49a.html#axzz1n1FdTaeo, 25.08.2012)

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campaign struggled to produce an answer to convince a skeptical electorate in

somber mood.”

As it has been written in the (www.accountancyireland.ie, 25.08.2012)

“Ireland’s general government debt has increased by 320% over the same period.

The level of national debt has increased rapidly as a result of successive bank

bailouts, allied to the budget deficits associated with running a pro-cyclical taxation

and expenditure mix.”

The bank of Ireland as a 2nd largest contribution to the economy has accounted the

bailout of 14.5% of its nominal GDP in 2009 where by 32% in 2010. The general

Government of Ireland planned to stabilize the debt at 108% of GDP by 2014

(www.ul.ie, 11.06.2012). Unemployment rose from 4.6% in 2007 to 14.2% in June

2011 as shown in the Appendix: figure 6

5.2. How is austerity in UK

In last year 2010, The UK government announced the steepest or the biggest public

spending cut which was biggest for over 59 years, It has been planned that there will

be more than €84 billion spending cuts in up to the year 2015, this cut will make up

11.1% of the GDP, which will be lower to 1% for the more 5 year to come. See

Appendix: figure 1.

The plan will reduce the government department cost up to 19.1 per cent; department

of culture will be affected by 23.9% cut. Retirement also will be affected where by

retirement age in 2020 will be 66, public sector will be affected where elimination of

490,000 jobs will be done over four years to come, and even university will be on the

cuts, benefit from unemployment will be lowed for long term from 94.9 per cent to

70.1 per cent and also the benefit fro who don’t find jobs will be eliminated, For

parent who their income is more than 70,000 euros their child benefit will be cut

including eliminating more on social welfare

(http://www.europeaninstitute.org/Special-G-20-Issue-on-Financial-

Reform/austerity-measures-in-the-eu.html, 25.08.2012)

More cut will also be in Defence where will be eliminated by 8% and 4% for police

will be eliminated.

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According to Chancellor George Osborne who declared in 2012 some measures will

be taken for five per cent cut in some top tax rate where he said to raise the personal

income tax allowance.

In the 2012 budget, Chancellor George Osborne announced several measures to ease

taxes - including a 5% cut to the top rate of tax and a rise in the personal income tax

allowance threshold. There will be rise in VAT tax by about 17.5 to 21 per cent.

(http://www.bbc.co.uk/news/10162176, 25.08.2012)

6. Conclusion

As it has reported in the Guardian, UK compared to Ireland in better in economic and

competitiveness. UK is in problem but still using the taxpayer’s money to bailout

Ireland economic problems more than £7bn.

As we seen on the charts that Ireland has recorded current account surplus compared

to UK. This shows that UK is still in in the bad situation

(http://www.guardian.co.uk/commentisfree/2010/nov/16/ireland-globalrecession,

27.08.2012)

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7. References

UK Economy 2012

(http://www.altiusdirectory.com/Business/uk-economy.php, 21.08.2012)

Consumer Price Index

(http://economic-incentives.blogspot.de/2011/01/comparing-cpis.html,

26.08.2012)

Financial pain in Europe (http://www.ft.com/intl/cms/s/0/feb598a8-f8e8-

11e0-a5f7-00144feab49a.html#axzz1n1FdTaeo, 25.08.2012)

Austerity Measures in the EU (http://www.europeaninstitute.org/Special-G-

20-Issue-on-Financial-Reform/austerity-measures-in-the-eu.html,

25.08.2012)

(http://www.ons.gov.uk/ons/dcp171778_269650.pdf, 26.08.2012)

History (http://www.heritage.org/index/pdf/2012/countries/ireland.pdf,

09.08.2112)

Imports and the Balance of Payments

(http://www.esri.ie/UserFiles/publications/QEC2011Win.pdf, 11.08.2012)

Balance of payments of Ireland

(http://www.tradingeconomics.com/ireland/current-account-to-gdp,

25.08.2012)

(http://www.irishtimes.com/newspaper/finance/2011/0624/1224299524666.ht

ml, 11.08.2012)

The Balance of Payments of the UK.

(http://www.civitas.org.uk/economy/Balanceofpaymentsfactsheet.pdf,

26.08.2012)

Irish Fiscal Advisory Council, Fiscal Assessment Report

(http://www.fiscalcouncil.ie, 11.08.2012)

Ernst & Young Economic Eye Summer forecast 2011 (http://www.ey.com,

12.08.2012)

OECD (http://www.oecd.org, 13.08.2012)

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8. Appendix

Figure 1: Irish and UK GDP, source: http://thinkprogress.org

Figure 2:balance of payment, Source: http://trueeconomics.blogspot.de

Figure 3: Balance of payment decomposition of invisible sector

Source: http://www.esri.ie/

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Figure 4: Balance of Payments: Current and Capital Accounts

Figure 5: Ireland Unemployment rate

Figure 6: European austerity programs interactive graph

Source: http://krugman.blogs.nytimes.com

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Figure 7:Ireland and UK Government debt as a percentage of GDP

Source: http://flipchartfairytales.wordpress.com

Figure 8:Interest rates on Irish and UK Government Bonds

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Figure 9: The Current account balance of the UK

Figure 10: The CPI in Ireland and the UK