Thursday 23 October 2014

Our little island is floating in a sea of indecisiveness

Published 18/07/2013 | 05:00

NO man is an island, wrote the poet John Donne. Less poetically, in these days of global financial integration, not even an island is an island. As we are discovering all too painfully.

The process of discovery has been slow. When Ireland was a small closed economy, theories about small open ones had not been much developed. Possibly there weren't enough such economies back then to make the research effort worthwhile.

It took quite a long time after Ireland opened up in the 1960s for the implications of being an SOE to be addressed. To some extent, though, they still haven't been.

Much of the fierce debate about the austerity programme has sounded like a discussion about America. It may not have helped that quite a lot of it came from Americans.

American pundits know their SOE theory, of course, but they sometimes cannot quite grasp this world is so very different from their own continental economy. Here, even when we know our SOEs, we cannot always escape the influence of American debate.

The greatest naivete has been the touching faith in boosting consumer spending. Borrow more, leave the money in people's pockets, and watch the economy prosper, goes the popular line.

It is true that consumption is the biggest part of the economy, and has been the biggest contributor to growth. But the biggest slice of that growth was financed by borrowed money.

First, we consumed the past surpluses from trade with the rest of the world. That was reasonable enough, up to a point. Then, when the surpluses were gone, foreign borrowing through the banking system kept the tills buzzing. Now that has gone as well.

By a bitter irony, buying houses (at a reasonable price) is one of the most beneficial forms of consumer spending, as far as the economy is concerned.

With everything else, in this open little economy, most of the money goes to foreigners. If we borrowed it from them in the first place, the net benefit is negligible, if not actually negative.

The mooted public investment programme, if carefully crafted, would be the next best thing. But it sounds as if the amounts will be small. Individuals (i.e. "consumers") will get the bulk of any budgetary use of the Anglo promissory note savings.

Of course, it would help growth and employment if we could get back even to neutral Budgets which did not actually take money out of people's pockets.

But the idea which seems to be abroad, that such a Budget in October could spark a growth cycle which would avoid the need for future austere Budgets flies in the face of the evidence.

HEAVY RELIANCE

That evidence suggests the Irish economy, with its heavy reliance on exports, gains pretty much one-for-one from eurozone and UK growth – the old EU-15, more or less.

If it could expand at 2pc a year, so would Irish output. To that can then be added the rise in domestic investment and consumption in response to higher sales, more jobs and wage increases. In such a happy scenario, Irish growth could be expected to increase by something like 4pc a year.

But the European economy has been shrinking for two years, and the UK is little better. If Ireland has slipped back into recession, as the latest preliminary figures suggest, this gloomy international situation is the prime reason.

Stress has been defined as living with unpleasant circumstances over which one had no control. It seems an accurate description of Ireland's situation. The public and political stresses are all too obvious.

Ireland's integration with the rest of Europe has had the harsh side effect that most of what matters is outside our control. This was not the case with the closed economy.

During the 1950s general boom, Ireland stagnated. During the 1970s slump, it was shielded by the first government borrowing boom. Even the 1930s depression was ameliorated by the initial success of industrial protectionism.

This time, Irish excesses were among the worst in the widespread excesses. We must bear the costs of our own folly, as well as the folly of others.

In Europe, the folly goes on. Admittedly the task is daunting. In its gloomy update on the euro area economy, the IMF urged an easing of immediate austerity, but changes to things like pensions and health entitlements which could improve medium term debt prospects.

Oh yes, and don't forget labour and product market reform, plus identification of bank losses and re-capitalisation, ideally from the new European rescue fund.

Leaving aside the uncomfortable fact that the eurozone banking system is bigger than the eurozone economy, this is a daunting political menu. But current realities are just as daunting.

The IMF forecast is for a euro area contraction of half a per cent this year, and growth of less than one per cent in 2014. In plain language, that translates as nothing. The stresses from what even the ESRI medium-term forecast called a "zombie" euro economy will also continue to grow.

Dramatic changes in policy are required, of which the only obvious quick fix is the mutualisation of a large chunk of government debt into a single eurozone debt agency.

But that is well off the agenda. The bloc's leaders are already stumbling over initial proposals for dealing with failed banks. As a result, deposits are again flowing out of the banks of stressed countries.

Perhaps the only remaining question is whether these leaders see the fracture opening in time to prevent it, or whether they prevaricate too long. They may make what I tend to see as the Fianna Fail mistake – believing that you can fix anything if you have to, so why bother before you have to, and then finding out that you can't fix this one.

It is stressful to feel so helpless in the face of such adversity. It is only a minor consolation that this is not only because we are a small, hugely indebted country. The 9pc fall in the purchasing power of UK wages since the crash is a sobering comparison.

The only way to at least reduce the feeling of impotence is to get on with what we can do and take it seriously. That means an end to burbling about creating growth and jobs until there is some sign of better things happening abroad.

It would also mean an end to Budgets based on slogans, such as "core welfare rates" or "competitive taxes." The relevant issues are how to share available national income, not just on the basis of richer and poorer but between the indebted and less indebted.

The other is the even more difficult one of how to share employment, between those in work and those out, as well as those in education and training, who need a system which is more responsive to the condition in which we find ourselves.

The two issues are related, and should be part of an overall strategy.

Vera Lynn sang that there would be blue skies over the white cliffs of Dover – "just you wait and see."

Nice song; bad policy.

Irish Independent

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