As Ireland dithers, UK opens new front in war for economic survival
Published 06/07/2016 | 02:30
Britain's desperate fight to stave off a post-Brexit recession should be good news for us. Anything that keeps our most important trading partner afloat should mean more money flowing back into businesses and pay packets here.
Unfortunately, trapped inside the eurozone, there is now a real danger that Ireland's economy ends up collateral damage in Britain's war for economic survival.
Any doubts that economic policymakers in Britain had been sucked into the country's political car crash were dispelled decisively yesterday. The Bank of England, in its second major initiative inside a week, unilaterally lowered the capital requirements of commercial banks.
The U-turn reversed the bank's own decision to hike capital levels earlier this year, but changed circumstances mean new policies.
Bank of England governor Mark Carney reckons that the move frees an extra £150bn (€176bn) of potential lending and hands three-quarters of Britain's main lenders more flexibility to supply credit to UK households and firms.
As ever with central banks, the signal is as important as the action.
Mr Carney is determined to get the message out that a UK recession isn't inevitable and that his bank is ready to act in order to fight one off.
The Bank of England Monetary Policy Committee also indicated that it is likely to provide more stimulus in the coming months.
Two UK interest rate cuts between now and the end of the year are now firmly on the cards and the bank is clearly eyeing other options.
The stakes are high, as yesterday's shock move by three major property funds to block investors pulling out their cash showed.
For Ireland, Mr Carney's activism should be a blessing, but the plunging pound - the cornerstone of the UK fight back - means we risk being damned if Britain falls into recession and damned if it doesn't.
Sterling hit a three-year low against the euro yesterday; it may not seem like much, but three years ago we were barely getting back on our feet. Our real recovery took root after that, once the ECB belatedly acted to drive down the euro.
Sharing the euro means we can't devalue on our own. Without that advantage, the Irish bounce-back might have been very different and British firms are now well placed to wipe out the margins of Irish exporters.
Perhaps the biggest worry here is the contrast between Mr Carney and the equally re-energised George Osborne with our own leaders' tardy response to the Brexit threat.
It feels like the British leaders are everywhere and ours are nowhere.
Three things that we must do to stay competitive
We can't devalue our currency to boost exports, but there are still things that can be done.
The first is to loosen the so-called Fiscal Compact. Rules brought in after the crash to stop runaway spending have the unintended consequence of impeding sensible capital investment. That should be changed quickly so that investment in infrastructure is encouraged rather than stifled.
Second, we must look at competitiveness. There is no need for wage cuts right now, but the Government in particular needs to take a hard look at the medium-term affordability of any new rises.
Driving down living costs, including housing and childcare, would meanwhile leave workers better off without storing up new problems.
Third, there is a real risk that private investment – which has poured into Ireland since mid-2012, providing the stimulus the economy needed – will now be redirected to the UK, or away from these islands altogether.
We need an aggressive sales strategy, a coherent investment story and a stable and focused Government able to sell the Irish story.
Investors need to believe investing cash here, today, is a profitable and safe way to grow their wealth, be that in new branches, new products or new buildings.