A no-deal Brexit and debt forgiveness in Ireland (and elsewhere)

It may well be necessary to make some very quick decisions about debt forgiveness in Ireland (and several other EU countries) in the aftermath of a no-deal Brexit, if we take the analysis of Tim Morgan seriously.

What made me think this is reading two articles on Tim Morgan’s website “Surplus Energy Economics” where he argues that a number of debt crisis trends appear to be converging this autumn. It includes a passage where Morgan questions whether it is true that Britain is the most vulnerable country to the negative impacts of a no deal Brexit. He disagrees with the idea that

“a chaotic “Brexit” will inflict far more economic harm on the United Kingdom than on the other EU member countries. My model suggests that this is simply not true. The country at single greatest risk is Ireland, whose economy is far weaker than its “leprechaun economics” numbers suggest, and whose exposure, both to debt and to the financial system, is as worrying as it is extraordinary.

Ireland is followed, probably in this order, by France, the Netherlands, Italy and Germany. The French economy looks moribund, despite its relentlessly-increasing debt, and the prosperity of the average French person has been subjected to a gradual but prolonged deterioration, a process so aggravated by rising taxes that it has led to popular unrest.”

For more detail on this claim we can turn back to an earlier article of his written in mid February titled “Primed for detonation” where Morgan analyses the situation in different countries on a number of risk criteria. For example, take Ireland. It has seen its debt/GDP ratio rise to 312% at the end of 2018 from 249% in 2007. This is “only” a 25% increase – because while debt doubled in that period GDP increased by 56%. However, as Morgan argues:

“Unfortunately, this type of calculation treats GDP and debt as discrete items, with the former unaffected by changes in the latter. The reality, though, is very different. Whilst GDP has increased by €111bn since 2007, debt has expanded by €470bn. Critically, much of this newly-borrowed money has flowed into expenditures, which serves to drive up the activity measured as GDP.

According to SEEDS, growth without this simple spending of borrowed money would have been only €13bn, not €111bn. Put another way, 89% of all “growth” reported in Ireland since 2007 has been nothing more substantial than the effect of pouring cheap credit into the system, helped, too, by the “leprechaun economics” recalibration of GDP which took place in 2015.”

There’s a further point to be made here. Tim Morgan is unusual for being an economist who takes the supply of net energy to the economy as being a determinant of real production and “personal prosperity”. “Net” energy (or surplus energy) is an important figure because a part of the gross energy supply must be used in the energy sector itself. It is the part left over, delivered to, and used by, the non energy sector of the economy that determines “personal prosperity”. As depletion occurs the energy cost of energy rises and the proportion of gross energy that can be delivered to the rest of the economy falls with a negative impact on “personal prosperity”.

If we adjust the Irish figures for the spending of borrowed money – and, we if we also take into account the rising proportion of energy in Ireland that cannot be delivered to the rest of the economy because it is must be used in the energy sector itself – we get a more realistic measure of “personal prosperity”.

“…. personal prosperity has declined by 7% since 2007, whilst debt per person has risen by 78%. The conclusion for Ireland is that debt now equates to 589% of prosperity (compared with 308% in 2007), and it’s hard to see what the country can do about it. If – or rather, when – the Global Financial Crisis II sequel to 2008 turns up, Ireland is going to be in very, very big trouble.”

So how can we cope with this? Some concrete suggestions are made in an article originally published in 2015 – but even more relevant today – from my book Credo: http://www.credoeconomics.com/the-reform-of-the-financial-system-and-techniques-for-debt-cancellation/.

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