Thursday 22 February 2018

EU stuck in deflationary trap with no escape plan

Ireland will struggle until the dysfunctional eurozone is turned into a proper monetary union

ECB HQ in Frankfurt.
ECB HQ in Frankfurt.
Economist Morgan Kelly
Colm McCarthy

Colm McCarthy

The inflating balloon of good feeling about the progress of the Irish economy has already stimulated happy talk about tax cuts and wage increases. The balloon took a couple of direct hits during the week, originating from what journalists would describe as "usually reliable sources". Both were domestic, to wit Professor Morgan Kelly of UCD's economics department and the Central Statistics Office. There were some developments internationally that worry me more than either Kelly's strictures or the CSO statistics.

Morgan Kelly expressed concern about the risk to the small business sector from upcoming bank asset quality reviews and stress tests. In brief, many small firms, although viable (anyone still open for business after six years of purgatory must be doing something right), are owned by people up to their necks in debt.

The businesses may be OK but the proprietors are possibly bust, through borrowing for risky punts in the property market. Since some of this underwater borrowing may be secured on business assets, banks under pressure to clean up their SME loan books risk closing down viable businesses needlessly. Many small companies are managed best by the proprietor, and the proprietor cannot readily be dispensed with.

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