News Brendan Keenan

Thursday 18 September 2014

Brendan Keenan: Ireland has favoured inflation over realities of euro regime

Published 23/06/2011 | 05:00

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OSCAR Wilde warned against approval of what is approved of. If I may be so bold as to put it another way; the opinions of those who do not much approve of you are likely to be of more value than those of your admirers.

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Or so I thought, reading a recent analysis from the UK Institute for Economic Affairs (iea). This is a respected think-tank, but it is what the British would call right-wing -- which means it is beyond the visible spectrum in Irish politics. So we might hear things from it which would not find a voice in our own debates.

It would start from a different place. A body such as the IEA would not be very keen on the whole idea of the euro. It would have nothing against Ireland, per se, but it might share that British attitude which one has come across, more sorrowful than angry, that we have taken a wrong turn in joining the European currency, and really should have known better.

Great mistakes

We certainly should have known better -- but I still think the great mistakes were made after we took the turn to monetary union, not because we took it in the first place.

Well before there was any explosion of debt in the banks -- indeed before the euro was launched and the country was in the European currency system -- it was clear that the Irish ruling elites were making no adjustments to the new reality, but carrying on as if we were still linked to an inflation-prone sterling.

Speaking of which, am I the only one who is gobsmacked by the UK inflation rate, especially the difference with Irish inflation?

It surely deserves more comment than it gets. Perhaps it would get more attention if the two countries used the same measure, but they don't.

Britain, like everyone else, quotes the EU harmonised index: Ireland perversely insists on giving the headlines to the wider cost of living index which includes mortgages. When we do compare apples with apples, the latest figures show UK inflation at more than 5pc, while Ireland's is 2.7pc.

This has been the pattern since the crash, with living costs up 13pc in the UK, while they fell by 1pc over the same period in this country.

Astonishing. It might even explain why intending passengers had to be turned away from two of the Belfast- Dublin trains last weekend. The great tide of cross-border shopping is on the ebb again.

Despite Bank of England protestations to the contrary, such figures make it hard to believe that the UK is not deliberately inflating its way out of some of its problems.

One strange effect appeared in statistics last week showing that rents in most of England and Wales are at record highs.

The analysts explained that inflation had eaten into the value of savings for house deposits, and anyway mortgages are hard to get, so the strong demand is for rented accommodation.

Mortgages are hard to get here too, but deflation makes everything else quite different.

The inflationary world, though, is the one we are most familiar with, and it is always more comfortable than matching falling incomes with falling earnings, prices and profits.

Despite the recent deflation, there is no sign that we have broken the habit. Or know how to.

The usual response to any proposed reduction in incomes is that, while earnings may be high in Ireland, so are prices.

Less common is the recognition that the two things are intimately connected. When adjustments for prices are made, Ireland plummets to its rightful place in the EU-15 league of living standards -- fourth from the bottom, running Spain close for third.

Poorest

Were it not for the considerable deflation since 2008, we would be unambiguously the third poorest country in actual purchasing power.

We are still living in a world of money illusion, where pay rises are thought to bring increases in real income.

To judge from most public pronouncement on the subject, 50 years of evidence to the contrary have made no difference to the belief.

That being my view, I could not quibble with the broad conclusion of the UK institute that the Irish crash followed "a vast expansion of the state, an abundance of 'rent-seeking' behaviour and gross fiscal irresponsibility".

I might quibble with their choice of the dates 1999-2008, which incorporate the entire existence of the euro. We know the irresponsibility of government, banks, employers and unions became gross only after 2003.

There were four years in which to construct a system to deal with the challenges posed by euro membership, with its low interest rates and infinite supply of credit.

I cannot quibble with the IEA view that, not only were the lessons not learnt then, they still have not been.

The real lesson from Greece is that living with the euro requires both a competitive economy and a political and institutional framework which values restraint, efficiency and burden sharing -- not just with creditors, but with the powerful and well-connected lobbies and vested interests which have extracted that rent at the expense of the unorganised and unconnected.

Of course no one, whether they be judges, semi-state workers or well-off pensioners on free travel, see themselves that way.

But the list of those who feel entitled to an excessive share of national income is a long one. It will take more imaginative political leadership than has yet been apparent to shorten that list.

Perhaps the scale of the crisis now facing the eurozone, with its threat of another crippling recession while Ireland is still in the first one, may concentrate minds on what has to be done.

At least it may silence the purveyors of magic bullet and snake oil solutions who have so infested the debate.

As the IEA put it, the IMF/EU reform measures are a necessary, but not sufficient, condition of the reform of Irish economic policy and institutions. One cannot deflate or default away dishonesty, greed and incompetence.

All three have been far too much a feature of Irish political, financial and administrative life for too long.

There has been no determined effort by the new Government to root them out and hold those most responsible to account.

Indeed, recent pronouncements from senior ministers contained worrying signs of that money illusion and that more spending is the answer. I rather thought we'd tried that -- far too often.

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