Saturday 29 October 2016

Only risk to economic recovery is now political - and it's a definite danger

With a general election now less than one year away, political instability looms - and that could spell disaster for Ireland's fortunes

Published 12/04/2015 | 02:30

'Those who say that this could allow for a stable and effective government point to the first administration of Bertie Ahern from 1997. It depended on four Independents. It lasted five years and never came close to collapse'
'Those who say that this could allow for a stable and effective government point to the first administration of Bertie Ahern from 1997. It depended on four Independents. It lasted five years and never came close to collapse'

Assessing the state of an economy at any given time is not straightforward. As is the case with a person's health, there is no single test that can tell that all is well. Just as medical check-ups involve doctors testing for a broad range of things in order to get an assessment of the person's general health, so it is with economies.

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What is happening in the different sectors - services, industry and agriculture; in the labour market; in the financial system; and in the public finances all tell part of the story. So, too, do surveys that try to capture confidence levels, be it among consumers, investors or folk at the corporate coalface. The many measures of competitiveness are also to be watched to allow an assessment of an economy's general fitness levels.

Only when all of these indicators are assessed in the round can one make a stab at assessing the momentum in an economy at any given moment.

Happily for the Irish economy right now, almost every one of these indicators is pointing in the right direction, and many indicators suggest that the pace of recovery is quickening. Every sector is in growth mode; even construction is picking itself off the floor. The jobs market has turned around quite spectacularly. The fiscal position is improving gradually. Every confidence indicator is surging. The only thing that is not showing signs of the sort of normalisation that would aid recovery is bank lending to businesses, which remains in the doldrums.

The economy is, by any comparison with peer countries, doing well. It is doing very well, given the scale of the damage caused by the crash and the legacy effects of that disaster, which will be with us for a long time to come, even in the best-case scenario.

But if economists can gauge pretty accurately what is happening in an economy at any given moment, they are very bad at predicting what will happen next. A system as complex as an economy does not lend itself to easy predictions.

What can be said about the future is that the momentum in the economy now is such that it is difficult to see the recovery running out of steam over the remainder of this year, barring a big shock.

The most obvious foreseeable shock is Greece exiting the euro. The chance of that happening are high, but the consequences are, again, difficult to predict.

Nobody fully understands the way the financial system works. Its sheer complexity and interconnectedness mean that although Europe's banking system is much less exposed to Greece than five years ago, there is no knowing precisely how mass public and private default in a new drachma scenario would spread beyond Greece's borders.

Here in Ireland, it is hard to see a weakness in the domestic economy that could be exposed in a highly disruptive way in the short term. While there are financial and fiscal fragilities, they are of slow-burn nature rather than of the kind that could suddenly erupt.

That leaves political risk. And it is politics that now poses the biggest foreseeable risk to recovery, even excluding the possibility of a coalition, after the next election, that takes its lead from Greece's Syriza government and adopts the sort of policies that have plunged that benighted country's economy back into crisis just as it appeared to be starting to recover.

As events in Britain over the past week have shown, the prospect of political instability, even in countries with long histories of political stability, unnerves business, investors and markets.

But while the next Westminster parliament is likely to be different in a number of respects from those over recent decades, the next Dail will be radically different from any that has gone before.

Irish politics has entered a new era. The dominance of the civil war parties is over. It is very difficult to see Fianna Fail and Fine Gael ever again commanding two-thirds and more first-preference votes as they have done over most of the last 80 years. This will have consequences for stability.

While many democracies which use proportional-representation voting systems have experienced fragmentation of party support resulting in multi-party coalitions, in no other country is it as easy for independents to enter parliament (most democracies require any candidate to reach a 3-5pc threshold of the national vote before taking a seat).

Even if the mainstream parties win back support before the election, the next Dail is likely to be unprecedented in recent Irish and European political history in terms of the share of parliamentarians that aren't members of political parties. This will make forming a coalition much more difficult. It will, in all likelihood, make any coalition which is dependent on large numbers of Independents more unstable and less capable of taking decisions.

Having just passed the one-year mark from the latest possible date for the next election, it is worth sketching out some of the possible scenarios in the coming era of fragmentation.

Among the less talked about eventualities is that the next Dail does not produce a government because no candidate for Taoiseach can muster a majority. It is easy to see this scenario playing out.

After the votes are counted there will almost certainly be three biggish parties - Fine Gael, Fianna Fail and Sinn Fein. But never since the 1930s will the biggest party be so far short of a majority. Even if Fine Gael wins the 60 seats it hopes for, it will be 20 short (previously, the biggest shortfall was 13 in the 27th Dail after the 1992 election).

While the conventional wisdom has it that the two civil war parties will join forces if that is what the parliamentary arithmetic dictates, the allergy to becoming the junior partner is one factor - among many - that will work against a FG-FF tie up.

Rightly or wrongly, most people in politics believe it to be an iron law that junior parties suffer more loss of support when in government than larger parties. The fates of the Progressive Democrats up to 2007, the Green Party thereafter and now the Labour Party, are the basis for this belief. The experiences of the Liberal Democrats across the water over the past five years merely reinforces this view.

Whether it is true of not - there are plenty of democracies where it is not the case - it is believed to be true, and that is what matters. That perception may scupper a Fine Gael-Fianna Fail coalition, unless both have very similar numbers of TDs and neither party can be portrayed as the junior partner.

In the event of a failure to cobble together a government, the current coalition will remain in office in a caretaker capacity before a fresh election is called. That may take months.

A second scenario, be it after the next election or a second election, is that a combination of parties needs a large number of Independents to make up the numbers.

Those who say that this could allow for a stable and effective government point to the first administration of Bertie Ahern from 1997. It depended on four Independents. It lasted five years and never came close to collapse.

The likely future situation differs in two important respects. The 1997-2002 period was extraordinary in terms of the scope the then government had for largesse. Revenues were gushing into the exchequer at an unprecedented rate. This allowed problems to be solved easily and quietly.

For all the improvement in the economy of late, the public finances position is still precarious and it will be well into the next decade before the government debt position is back in the safe zone. If buying off a dozen or more Independents on an ongoing basis is required to hold an administration together, it will send the public finances back into a tailspin.

It would be a tragedy if, having come through such a long and difficult period of economic instability, that political instability were to plunge the economy back into crisis. There is an all-too-real possibility of that happening.

Twitter @danobrien20

Sunday Independent

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