independent

Thursday 17 April 2014

Brendan Keenan: Time for Coalition to hedge their bets

Economic recovery is not under way as wagered so the Government is now playing for election victory or defeat

THE captain has just announced that a way has been found to plug the hole in the Titanic. Travelling companions Enda and Michael are delighted.

"Does that mean we get our deckchair back?"

A bit unfair, perhaps. Sometimes, events are so momentous that a tendency to concentrate on the trivial proves irresistible. Even so, the elevation of the bank debt question into the central issue of last week's European developments seems parochial, to say the least.

I can see the political calculation. If the euro is saved in a spectacular (and, alas, still unlikely) burst of activity by EU governments, the Irish Government will get little of the credit. Should it secure dramatic relief on bank debt (also, alas, unlikely), it certainly would.

But it may be that the only election winner is a rapid end to the euro crisis. Should that happen, the Government may not need a big-bang bank deal to have a chance by-election year of 2016. Should it not happen, even a bank deal probably will not save them.

That at least is the conclusion one might draw from a paper presented to an ESRI seminar on Wednesday by Irish economist John Bradley and a German colleague, Gerhard Untiedt. It is hard not to like an analysis which says that its forecasts are probably wrong, but it has a better feel to it than most.

It avoids extreme scenarios, while recognising that they could occur, both good and bad. It prefers to look at the consequences of a modest global recovery, mild recession or a strong recovery based on an end to the euro crisis.

The interesting thing for politicians -- alarming for Government, encouraging for Opposition -- about this forecast is that even these undramatic scenarios produce very different outcomes for the Irish economy.

Not so much in terms of the numbers, as an economist would look at them -- but in terms of the implications, as a political economist would see them.

We should not be surprised at the sensitivity of the Irish economy. The analysis points out how much more "open" (ie dependent on trade) the Irish economy is, compared with fellow piglets Greece and Portugal.

One effect is that the recession in goods and services has been less severe in Ireland: it is the collapse of the bloated construction sector which landed us in the same bailout boat as them. But we are more vulnerable to external conditions.

At this stage, the most reasonable assumption to follow is the one of mild recession. The euro economy has certainly been slowing, Britain's stagnant and America's below par. China is also weakening, which has indirect effects on Ireland, as it does on everyone else.

Using what they admit is a relatively simple model designed to assess EU structural funds, the researchers find that this mild slowdown throws Ireland well off course. Speaking unscientifically, and without any model, I have to say that this is what I would expect.

Domestic demand is still falling, albeit more slowly, real incomes will be cut again in December, while the endless shilly-shallying over what will be in the Budget damages confidence even more than pre-announced, pre-determined measures would do.

According to the analysis, a mild global recession starting this year produces two years of falling output in Ireland and recovery is delayed until 2015. Worse, from a political economy viewpoint, unemployment reaches almost 20 per cent in 2014 and is still above current levels in 2016.

One should stress again that such projections should not be taken too literally, but it would be foolish to dismiss the trends which they show. There was evidence last week that these dangers are beginning to move into the political mainstream.

The Coalition made a wager when it came into office. The odds were reasonable, but the bet was very large. The wager was that economic recovery would be under way by 2012, with trend growth from next year. The stakes, though, may well be victory or defeat in the next election.

Recovery is not under way. Other events last week -- from the German supreme court decision, to the Dutch election -- hold out the possibility of a real change of sentiment towards the euro and an avoidance of recession, but it may be time to hedge the bet.

The odds now are that the 2014 bailout targets will not be met. The irony is that, if the targets were achieved, the new eurozone schemes could make a return to commercial borrowing much easier.

This is the quandary raised by the Fiscal Advisory Council in its report on Thursday. Another €2bn of adjustments over the next three years might get us over the line.

The economy would be further depressed in the meantime, but avoiding another bailout may be the last card that the Government can play in the lifetime of this Dail.

What price would we pay for a return to national sovereignty by the Rising centenary?

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