We can start to dig ourselves out of hole by building houses people need
Wherever there is demand for homes, planning must be granted to help create jobs writes Colm McCarthy
Published 21/07/2013 | 04:00
EUROZONE leaders have maintained, since the first Greek bailout back in May 2010 that suitable adjustments by the distressed members – principally budgetary tightening and bank rescue financed locally – would ensure a successful emergence from the crisis. The initial policy foresaw no haircuts for bank creditors or sovereign bondholders in Greece or even when Ireland and Portugal joined the bailout club. After the Greek sovereign default, the largest in history, and the chaotic bank defaults in Cyprus, this policy stance has been abandoned (without apology, of course). A series of European Central Bank initiatives, including extensive liquidity provision to banks and the promise of sovereign bond purchases has helped to contain the crisis, which threatened to boil over last summer in Italy and Spain.
The current eurozone survival plan includes, it would appear, the belief on the part of the German government that Greece will now be able to pay its debts and that the Greek economy will begin to recover. German finance minister Wolfgang Schauble ruled out the need for any further Greek debt relief on a visit to Athens last Thursday. But economic output in Greece is expected to fall by at least another five per cent this year, over a quarter of the workforce is unemployed, the economy does not have an internationally competitive manufacturing or service sector and thus has no engine of recovery.
It is the universal opinion in the financial world, Herr Schauble excepted, that there will be another large haircut for Greece's creditors and this is reflected in Greek sovereign bond prices. But there can be no talk of further Greek debt relief, however inevitable, since the German election is due on September 22 and the voters are not to be frightened. They are already under the impression that Greece has been receiving large handouts from Germany and persuaded that no more is either deserved or necessary.
There have been no transfers from German taxpayers to Greece, or to any other troubled eurozone country for that matter. Greece has received large loans from official lenders, including the IMF, EU institutions and individual European countries but no budgetary transfers whatsoever. All of the official lenders were spared any writedowns during the last Greek default, which applied haircuts only to private sector lenders, mainly banks, insurance companies and pension funds, some German but others from around the world. Thus the German treasury has paid not a single euro to Greece, nor has it thus far written down a single euro on any lending to Greece. That the German electorate has been persuaded otherwise is a tribute to the German spin-doctoring profession, and to rogue elements in the German economics profession.
The problem for Herr Schauble and his government colleagues is that the next Greek default cannot be confined to private sector lenders, since there are now so few of them. Next time, the official lenders, including Germany, will be in the firing line. This cannot be admitted prior to the election. Nor can the likelihood of a similar outcome in Portugal, where the government has struggled to meet deficit-cutting targets, the economy is far from recovery and where default in some form looks unavoidable. Greece and Portugal are small countries. The real nightmare for Germany and the other creditor countries, whose banks and fund managers hold troubled assets in southern Europe, is that neither Spain nor Italy appears likely to grow out of their banking and debt crises. Spain's banking system remains fragile, the public finances are overstretched, the economy continues to contract and the government is mired in a deep corruption scandal. Italy has an even bigger public debt burden and no durable government has yet been formed. Italy could be headed for another general election with no guarantee of a stable government emerging. Unless Italy and Spain can find some early formula for a return to economic growth, their debt burdens too could prove unsustainable. There are just nine weeks to go to German polling day and the bond markets can perhaps be kept sedated until then. The sedatives consists of cheap ECB liquidity, regular hints that this will continue for quite some time, and the possibility of the ECB buying Italian and Spanish bonds.
Greece has already failed to complete its first bailout, which ended in default. The second looks headed for the same fate and Portugal, due to exit bailout in mid-2014, now looks extremely unlikely to deliver. This leaves Ireland, due to exit at the end of 2013 and expected to survive without official lender assistance thereafter. The Irish Government is scheduled to introduce the budget for 2014 on October 15, two months earlier than usual. The public are normally spared pre-budget speculation until the autumn but those days are gone and the budget rumour season has already commenced. Government ministers are already promising 'stimulus' measures and the opposition are demanding that the €3.1bn in tax increases and expenditure cuts required under the EU/IMF rescue programme be abandoned.
The Central Statistics Office has just announced that at the end of March, the Government's gross debt (including advance borrowing, held in cash, of about €25bn) had already reached €204bn.
Net of cash, the debt will probably exceed 140 per cent of national income by the year's end. Whatever the planned deficit for next year, it will be added to this enormous figure. The sustainability of Ireland's debt, whether next year's borrowing is the planned €7.5bn, a little more or a little less, is not greatly affected by whatever decisions are taken in October. There will be another large addition to outstanding debt by the end of next year.
As the IMF pointed out in their most recent assessment of Ireland's debt sustainability, a zero or low rate of economic growth over the next few years will see the debt total, and the ratio of debt to national income, continue to rise.
They are too polite to say so but the IMF are clearly not convinced that the Irish sovereign debt – bearing in mind the substantial private sector external debt contracted via the bank credit bubble – can be serviced given the depressed economic outlook. Many financial commentators also doubt that the prospective debt level is sustainable. Only an early return of economic growth, at a high rate and sustained for several years, would alter this picture. If you think this is a racing certainty, then it is reasonable to add a billion or two to the overall debt mountain in pursuit of 'stimulus'. If you think that Ireland is a basket case anyway and that default is inevitable, the same conclusion follows.
An intermediate position is also available. There is a sporting chance, if the right policies are followed, that the budget deficit could be cut to zero over the next couple of years and that the country could return to some kind of solvency in the public finances. The best way to scupper this prospect is to go for some gimmicky stimulus aimed at creating short-term and once-off construction jobs, based on extra debt. Construction spending does not create substantial permanent (or even temporary) employment. Borrowing money to build stuff that exceeded what was needed was pretty much what got us into this mess. It is depressing that last week's job creation targets announced by the Government were based yet again on a boost to construction, financed by letting the already excessive and unsustainable national debt grow faster.
Here's a plan which will cost the Exchequer nothing – boost construction employment, and make lots of young potential house-buyers happy. There is an emerging shortage in the Dublin area of three and four-bedroomed family homes and prices for second-hand versions are rising. There is also a plentiful supply of buildable land close enough to the city. There are still farms inside the M50!
There is no shortage of labour or of materials. There are even a few house-builders left standing willing to have a go! There is, however, a ludicrous shortage of planning permission in the Dublin area – one of the lowest-density cities in this part of the world. Of course, there are empty and unsold houses throughout the country but the demand is not there. The policy of letting the builders build only where they could get planning permission has been tried and the results are clear. Wherever demand emerges for housing, in Dublin or anywhere else, the Government should grant the permission. Jobs created for free!