Penniless 'PIGS' give us a bad name
The markets are wrong to lump us in with countries like Portugal, Italy, Greece and Spain. We have more in common with the Nordic countries
ACCORDING to the ancient Chinese philosopher Lao-tzu, "a journey of a thousand miles begins with a single step". This country took a crucial step toward economic recovery last week when the Government announced substantial cuts in public sector pay. These cuts will be delivered via a pension levy -- a pay cut in another guise.
Being a public sector worker myself, I'm sure you'll understand if the tone of this column is crankier than usual. But it is clear that the Government did the right thing. Without reductions in public sector pay, economic recovery is not possible.
We pride ourselves on having an agile, flexible economy. That flexibility is now being sorely tested. Our membership of the European single currency area means that we are not able to respond to the shocks that have hit the economy by devaluing the currency. Nor can we leave the currency union, as interest rates here would soar and national bankruptcy would be a foregone conclusion. Yet as a small, open, trading nation, it is obvious that recovery will be based on a return to the export-led growth that propelled the economy during the Celtic Tiger period in the 1990s -- before our core economic strength was sapped by the property boom. What is required to reverse the loss of international competitiveness that the country suffered during the housing bubble is internal flexibility in the form of widespread cost reductions. Since wages are the largest component of costs, regrettably that means wage cuts.
For all the political wrangling and all the huffing and puffing by financial commentators, the stark reality is that the policy options available to the Government are extremely limited -- and very tough. Our economy is not facing long-term decline, but there is simply no way to avoid a painful adjustment. Prices in Ireland (measured in a common currency) have jumped 25 per cent over the past decade relative to those in our trading partners. Some of this decline in competitiveness can probably be justified by improved productivity, but there can be little doubt that prices and wages -- in both the private and public sectors -- overshot their sustainable levels during the bubble years.
What is sometimes overlooked is that the adjustment process is already under way. Businesses have responded to the crisis by moving aggressively to restructure and take out costs.
'Divisive rhetoric aimed at pitting the private sector against the public sector is dangerous'
For sure, this retrenchment is painful as it involves pay cuts, reduced working weeks, and job losses. But the restructuring allows companies to whip into shape the core element of their businesses, thereby positioning themselves -- and the economy more generally -- for export-led growth when global economic conditions eventually improve.
Combined with reduced pay for workers in the public sector, these adjustments show us that our economy has a remarkable ability to cut costs quickly. Although the challenges facing us are daunting, with a little luck this extraordinary flexibility will win the day.
With the €1.4bn savings in public sector pay announced on Tuesday, along with other measures, the Government should hit its target of €2bn in spending cuts this year. An additional €1bn will be saved next year as a result of the deferral of the national wage agreement payments.
I suspect that the Government has already identified where the bulk of the additional €3bn in adjustments for next year will come from. At last, we are getting places. After a delayed start, the Government is making progress on its plan for national recovery.
External developments might derail recovery. Financial pressures are mounting in central and eastern Europe. Social tensions in some other members of the euro area are rising. Meltdown in one of these countries may set off the dominos.
International bond markets have lumped this country in with Portugal, Italy, Greece and Spain -- unflatteringly referred to as the PIGS -- as a high-risk borrower. The bond market is almost certainly wrong on this score. The Irish economy has strengths in modern high-valued sectors that the PIGS do not. In this regard, we have more in common with the Nordics than with the Mediterranean countries. When the problems in the property and financial sectors have been worked through, these strengths will come to dominate. We cannot control external developments, but the right policy actions at home can help to put clear blue water between this country and our more vulnerable neighbours.
Potential industrial unrest in the wake of the announced pay cuts is another risk to recovery. Rhetoric aimed at pitting private sector against public sector is dangerous. A statement this week by one commentator (and you know who you are) that "every five private sector workers carry one public sector worker on their backs" is a prime example of this divisive claptrap.
There is a hard and treacherous journey ahead, but if industrial disputes can be avoided, this country will have taken a leap toward recovery.
Alan Ahearne lectures in economics at NUI Galway and is a research fellow at Bruegel, the Brussels-based think tank. He is a former senior economist at the Federal Reserve Board in Washington DC
- Alan Ahearne
