independent

Thursday 17 April 2014

It's tricky to change your tune, especially in a time of crisis

Whether you're in camp austerity or camp spend, the prom note deal won't ease burden

ONE of the striking things about the financial crisis is that almost nobody seems to have changed their minds since it began. Striking because, while the crisis is by no means over, the situation is not remotely the same as in 2008. It keeps evolving all the time.

I suppose we might exempt the government parties, which changed their minds spectacularly about almost everything, once they had hold of the reins of office. One must expect a certain amount of that after an election, but even St Paul might have been embarrassed by conversion on this scale.

I suppose I cannot exempt myself. I too have held much the same view of events since the start. All I can say is that I never thought these opinions would hold true for ever. The question, a la John Maynard Keynes, was when would the facts have changed enough for one to change one's mind?

These trenchantly held views, as we know, fall into two main camps, albeit with variations among individuals. One maintains that the reduction of deficits (aka "austerity") has to take precedence over economic growth. The other camp maintains more or less the opposite.

That's deficits. There is a complication about attitudes to debt. Differences are less extreme – ranging from a view that Ireland's debt is on the very edge of what is sustainable, to those who say it is completely unsustainable.

Despite this lack of fundamental difference, the debt arguments have been the most heated of all. An enormous amount of energy was expended in the early years when net debt was just 40 per cent of GDP.

It's now 107 per cent, but somehow all that past slugging seems to have exhausted debate about what exactly should be done (as distinct from just saying something should be done).

The moment of decision on debt may not yet have come, but new circumstances have thrown the deficit issue into a sharper relief. This is the deal on the promissory notes, and what should be done with the savings.

That most unusual thing in politics – a civilised argument – seems to be taking place. There have been calls from trade unions, some Labour politicians and others, that all of the savings should be used to make the next two Budgets easier than would otherwise be the case.

Fine Gael – or at least its ministers – seems to be on the other side, even if sotto voce at this stage. Michael Noonan says it it is too soon to say what should be done. Transport Minister Leo Varadkar did go further, arguing that the money – estimated at €1bn by the Government – should be used to reduce the deficit faster than planned.

But nobody is making a big deal out of it. Perhaps they are all so laid back because they know the troika will not approve of spending the money, and it calls the shots.

Still, I am not sure that it would go to the wire to insist on the lower fiscal targets which the deal makes possible. A more dangerous adversary for the spenders may be the German Bundesbank, via the European Central Bank.

If the Budgets are explicitly made easier because of the deal, it becomes impossible to pretend that the Government has not been financed by central bank money – something which is forbidden by law and the German soul. True, it is a pretence anyway, but it is one thing having no clothes on, and another to have no clothes on in the street.

The danger is that some kind of crisis, domestic or international, erupts over what are very small sums of money saved by the deal. The changes to repayment dates should be significant in helping Ireland return to market borrowing, but the cash difference in the Budget is insignificant.

The most significant deficit – the gap in the cost of running the county – is meant to finally be closed next year. The appalling performance of the European economy means that will be difficult to achieve, but it should be sacrosanct. The savings from the deal could copperfasten a return to basic solvency and that is more important than what would be minor, transient political gains from spending the money.

So I have not changed my mind. Not yet. The trade unions are right that only a stimulus package, involving an increase in net debt, can make any difference to the citizens' woes. The prom note deal cannot.

We have the resources for only one stimulus – and that's stretching it a bit. But the stimulus may fail if it does not coincide with a general upturn, and the resources wasted. At the right time, it could accelerate the trend. When the facts point that way, it will be time to change one's tune.

Irish Independent

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