Wednesday 26 October 2016

Latvians will need all the chutzpah they can muster

Published 09/01/2014 | 02:30

Illustration by Stephen Byrne
Illustration by Stephen Byrne

WHY didn't we think of that? The Latvians marked ('celebrated' may be too strong a word) their joining the euro in the headquarters of the failed bank that helped bring down their economy.

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Imagine if the end of the Irish bailout had been marked ('celebrated' is definitely too strong a word) in the abandoned skeleton of the planned Anglo Irish headquarters. With attitude like that, we could even have invited Messrs Barroso and Rehn.

There may be a Latvian word for that kind of attitude, but there isn't an English one. The Yiddish 'chutzpah' is what we have to use, although my partly native Scots 'brawlie' comes close.

It is hardly brawlie to turn the Anglo shell into a new headquarters for the Central Bank, which is the present plan. That other fine Scots word, 'sleekit', seems more appropriate.

The Latvians will need all the chutzpah they can muster. They are plunging into the euro not long after staggering out of their bailout.

Famously, they went for the big bang approach, slashing and burning government pay, costs and services to an extent that made the late Brian Lenihan look a right softie. The result was a one-quarter collapse in output and a great deal of misery in what is a relatively poor country.

Not nearly as poor as it was, though. The statistics say that output per person was just $1,700 when the Soviet Union, to which the country belonged, collapsed. By the time the crash came in 2008, the figure was almost $18,000.

Two years of growth have brought output back to more than $15,000. The net loss of around 15pc from the peak is about the same as Ireland's, where the initial collapse was less but there was no resumption of growth -- until now.

That could be just coincidence. The two economies are very different. Just the same, it makes you wonder. The bigger the initial adjustment, the bigger the social dislocation. But the cyclical turn may come sooner, leaving the loss in output after five or six years much the same in either case.

Even if that is true, it is still a matter of judgment whether the extra dislocation is worth the shorter, deeper contraction. The Japanese, with their horror of social disruption, thought not, and moved very slowly indeed.

Ireland's experience suggests that, in our political culture at least, attitudes are influenced at least as much by the length of the adjustment as by its severity.

Suppose it had been possible to stretch the Irish fiscal targets to 2017, rather than 2015? Budgets would have been a bit easier, and growth a bit higher. But would that mean there would now be political acceptance of three more years of adjustment?

It seems unlikely. Instead, it is pretty apparent that, after five years of correction, Irish tolerance for more of the same has just about expired -- and there is still one more rough Budget in the plan.

Five years may well represent a kind of natural limit to austerity before the politics become impossible. If the economy does pick up this year, it will have done so just in time. It certainly seems to have picked up. The year-end saw positive surveys of both purchasing managers in industry and small Irish firms.

It is certainly possible, to put it no higher, that analysts such as the ESRI and Davy Stockbrokers, who thought the economy would grow by 2pc in 2013, will be proved right.

Figures are only part of the story in trying to determine what exactly is going on. Patent cliffs and brass-plate companies have turned the customary GDP and GNP into dubious measures of growth.

The December tax returns, while satisfactory, still seem out of kilter with the surveys and the remarkably strong employment figures. Behind this may lie the unusual nature of this recovery -- which in itself will create political difficulties.

One report said those shops that opened on St Stephen's Day saw a 20pc increase in sales compared with 2012, even though pre-Christmas trading was only marginally better.

Consumers remained cautious during 2013. Recovery or not, the pressures on household income -- from pay restraint, more tax rises and, perhaps, higher interest rates -- will persist.

Economists have said all along that recovery from this kind of 'balance sheet recession' will be led by business, not by personal spending as is the case in the more normal consumer recession. Commentators are painfully aware of the disbelief, even anger, which talk of recovery provokes in many people. Yet even that may be on the mend.

Last week's Behaviour & Attitude poll found that little more than 10pc expected their incomes to increase this year, but more than half planned to take a foreign holiday and a quarter were thinking of buying a car or doing improvements to their home. This is a challenge for the political system.


It might now make economic, as well as political, sense for the Government to pre-empt some of the future gains from a stronger economy by easing the burden on consumers through tax cuts or (however reluctantly) mortgage debt relief.

Even a year ago doing so would have been a waste of borrowed money, because it would not have been spent. Now it could work, but the markets may not yet tolerate it, so early after Ireland's return to their clammy embrace, and the new EU rules may not allow it.

Without such measures, even if recovery is sustained there will be disappointment at what the end of the crisis actually means in practice.

There may also be trouble. It is not a good sign when the head of the Labour Relations Commission warns about the number of pay claims building up in anticipation of a return to business as usual.

Economic history tends to show that lost disposable income is quickly recovered in higher wages. With Ireland so dependant on export growth, a repeat of that pattern would be deeply damaging.

As for the Latvians, thanks to the euro crisis, they know what they are getting themselves into. They have the incentive of Mother Russia across the border to encourage closer integration with western Europe. Yet more than half would prefer not to join the single currency.

This is a big change from the heady days of 1999.

Remarkably, the Latvians maintained their currency's peg against the euro during the crash.

Nowadays, most economists would advise them to keep the lat, and its peg, and stay out of the euro but politics prevailed. There, or here, it usually does.

Irish Independent

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