independent

Friday 18 April 2014

Emmet Oliver: IMF arrival is chance to reform a failed system

STERN-faced IMF economists are walking the streets, national morale has been crushed, years of debt repayments lie ahead and sovereignty has been unnecessarily compromised by a group of jaded and deluded politicians.

It may seem churlish and naive to suggest that anything positive can emerge from such a catastrophic economic and political backdrop -- but it can, in time.

This week's arrival in Dublin of an IMF mission is, of course, a moment of national humiliation, although is anyone really surprised it came to this?

The decision of September 2008 to shift the bank's liabilities, without any get-out clause, on to Ireland Inc's balance sheet, was always likely to end in such a wounding moment.

Ireland's financial crisis has, when boiled down to its core, always been rather basic -- the country is too small to absorb all the bad debts and liabilities of six guaranteed banks with huge balance sheets.

Fixing those balance sheets, with billions of euros of taxpayer-provided capital, was always a big gamble and unfortunately for all of us, it has not paid off.

We don't get to decide whether it has paid off or not, the markets do and they have made a very firm judgment on this by not funding the Irish State at acceptable prices and not funding the banks at all.

Now the IMF and EU have arrived to sweep up the wreckage and their presence has come as a hammer blow to the national psyche.

An offer, genuinely made, from the British authorities of bilateral loans is not likely to improve national mood either. But it's worth remembering that Britain itself availed of IMF assistance in 1976 and lived to tell the tale.

Economies, allowing for Japan of course, in the main don't remain permanently mired in recession/depression. They get rebuilt and reinvented and carried along on a tide of global recovery. Ireland hopes for such a result.

But in the meantime there are two ways to react to the arrival of the IMF mission. There is the impulsive and predictable reaction -- tell the IMF, the EU and the ECB where to go. As Sinn Fein's Mary Lou McDonald said this week, we should tell the IMF to "get lost".

There is a more sensible alternative -- get the IMF/EU to take the politically-charged decisions that generations of Irish politicians haven't been prepared (or willing) to take before.

This is all part of an acceptance that our political system and financial system has fundamentally failed. Acceptance of this must come first, otherwise the IMF mission will just be a cold book-keeping exercise.

Ireland's parochial political system has stopped a whole range of reforms being adopted before, but now there is a chance to change that.

The existing system has given huge power to local kingpins like Jackie Healy-Rae to block initiatives by central government. Backbenchers of all political colours have been able to stymie sensible reforms, while unions have solely concentrated on what is beneficial for their members, rather than what is beneficial for Ireland as a modern economy.

National political leaders have avoided change whenever possible, simply on the basis that it is controversial and may cause a leakage of political support. Mild reforms of greyhound breeding earlier this year even threatened to upend the Government at one point.

The beauty of the IMF/EU rescue is that the various obstructionist forces no longer hold any great power. The IMF does not care one jot about backbenchers' concerns, does not care one jot about the Irish trade union movement/employer groups and does not care one jot about the fickle reactions of the electorate.

Of course it won't say that in public, but this is the reality. The IMF will be depoliticising Ireland. Its sole focus will be reviving the economy and doing what it sees as economically justified. To put it another way, it will help to run Ireland on a rational basis, with a view towards a reasonably bright future. Unfortunately, this involves a painful period of economic cleansing and there is a danger that even higher unemployment will be the initial outcome.

But the IMF team will help Ireland avoid a host of previous policy errors. For example, how did public spending end as 40pc of everything we produce annually, the highest level since 1997?

How did we arrive at a position where gardai, for instance, can retire on full pension at the age of 50, with teachers able to get out on full pension at 55 (Bord Snip Nua report, page seven). How did we end up in a position where judges cannot be told to reduce their wages at a time of national crisis because they cite judicial independence?

While the Government has spectacularly failed to halt the growth of quango land (there are still 203 of these bodies), the IMF might have a little more luck, not being hamstrung by trade union pressure.

The IMF's freedom of movement and immunity to political pressure could be a massive boost to the reform agenda. Plus, it's not all about using the IMF/EU team to slaughter the public sector. The private sector could taste some pain too.

For example, bank bondholders, in the main immune until now from the banking crisis, will be as nervous as anyone looking at the pictures of the IMF team entering the Central Bank. Holders of these debts in AIB and Bank of Ireland are still getting all their loans repaid, but it may not stay that way, market experts believe.

Even the labour market could get a dose of reform. Might the IMF look to reduce the minimum wage slightly to boost employment? It is very possible. Is it time to scrap stamp duty and replace it with a property tax, making the tax base more sustainable and giving a jolt of life to the housing market? Again this is very possible.

As reported in this newspaper today, precious resources of the State are tied up in a huge string of state-owned companies. With the IMF team on site, now is the chance to release the resources via sell-offs.

Yes, there will be a plethora of objections to all these reforms, but the IMF is bullet-proof in a way no politician ever has been.

It is time to think and do the unthinkable, without worrying about the consequences.

Irish Independent

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