Business

Sunday 25 February 2018

Austerity may be hard but reform proves harder still

Reform is proving almost as difficult as austerity.
Reform is proving almost as difficult as austerity.

LIKE Napoleon's favoured generals, the new prime minister of Greece may turn out to be a lucky man. That is, if he does not display the recklessness of the favoured Marshal Ney, whose futile charge may have cost Napoleon his crown at Waterloo.

Timing is everything. The campaign, and virtually all the comment, has been about Greek debt and debt forgiveness. Yet even a cursory glance at the Greek figures suggest debt is in some ways the least of its problems.

The same glance would turn a body white just looking at those problems. Truly, Ireland is not Greece, and very thankful we should be that it is not. Their austerity programme saw public spending on goods and services fall by €15bn in cash terms. In Ireland, the figure is €4bn.

Economic output is down by a quarter, which helps explain a fall in tax revenues of €6bn since 2010, despite tax rises and more effective collection. Irish taxes have risen by €7bn.

There is no doubt that these statistic represent a living nightmare for Greeks. There is plenty of doubt that debt forgiveness is the answer, or even the major part of the answer. Another figure, which gives quite a different comparison with Ireland is that interest payments on the Greek national debt is 4pc of GDP - rather less than the Irish figure, and quite a bit less if one uses the more realistic GNP figure for Ireland.

Historically, 4pc of GDP is the interest burden of a comfortably solvent country. One reason for the low cost in Greece is the that a large chunk of debt has already been written off. Austerity has even done its dirty work. Tax revenues now comfortably cover the cost of public services - a happy state we are promised for Ireland next year.

In theory, Syriza could default on its interest and repayments and the public services could continue uninterrupted. In practice, the banking system would collapse and the economy with it. And all to reduce that interest cost by, at most, 2pc of GDP.

In fact, an offer along those lines is certain to be made by the EU, with yet more interest holidays, low rates and repayment delays. The challenge for Mr Tsipras is to turn saving the same amount of money, but in a different way from the one he promised, into victory rather than defeat. After that, luck will not be enough. The challenge for the rest of us is quite different. Does anybody seriously believe that the cancelling of even all its debt would automatically turn Greece into a thriving economy?

People in Greece, Ireland and elsewhere have had their fill of tax rises and spending cuts.

The extraordinary thing is that, in all the fiscally challenged countries, "austerity" was politically easier than "structural reform" - changing the accumulated practices which damage the economy. In all cases, reform has lagged behind the fiscal squeeze which everyone complains about so much.

The list of changes demanded by the troika is similar everywhere, such as ending tax reliefs, putting pensions on a sound footing and introducing compulsory redundancy the public service.

Sound familiar? The difference with Ireland, and many other countries, is largely one of scale. Greece spends more on pension support than the cost of its health service. There is a myriad of low rates and exemptions for Vat, rather than just a couple. The job guarantee in the public service covers large numbers of workers who are surplus to requirements.

The troika recognised that the Irish economy is sufficiently flexible that there is limited scope to increase potential growth from such measures. All the same, while the desired reforms here may be more limited, it proved just as difficult to make much progress as in the more challenged economies with them.

The insistence on voluntary redundancy created an ever bigger mess in the health service; the creation of an effective employment and training service has run up against the opposition of those who like the existing glorified handouts; regulation continues to be organised so as to benefit producers (especially, but not exclusively, public ones) rather than customers.

The real comparison for Ireland is not, however, the trading economy but the public finances. All the crisis countries have a history of permanent instability but only Greece has a worse record than Ireland when it comes to national bankruptcies.

Something is wrong and it is obvious that it cannot be fixed by financial transfers; only by changing the way things are done. One can easily sympathise with the German view that, not only would more borrowing not solve that problem, but would make it less likely that the problems would be tackled.

This is the debate which does not take place in Ireland, and which to some extent is barely permissible. It is common to hear the austerity programmes, and the EU itself, described as a neo-liberal conspiracy for the benefit of big business.

It is a strange mindset which sees Germany, Finland and the Netherlands - the main austerity hawks - as neo-liberal ideologues. The question to be answered is why these countries have not the same sorry history and the answer is not that they are ideologically more right-wing.

The difference seems to be that the more stable, mostly northern, countries, while having their own differences between left and right, can also arrive at consensus on where the limits of economic safety lie.

Ireland, with its small, homogenous population, ought to be a perfect model for such consensus.

It also has first-class analysis, including from trade union-linked institutions, as to where the consensus should lie. Yet at every opportunity, it has followed spendthrift populist policies to the point of destruction.

It is striking that the one group which has received hardly any opprobrium for its role in the crash, and which has admitted no responsibility, itself is the trade union movement.

What is really surprising is that so many of the strongest critics of the fiscal correction programme, in the unions and elsewhere, were among the strongest proponents of extra public spending, even when it was rising at double digit levels. They were right then, and they are right now.

It is hardly surprising then, that they are returning to the old ways with a speed which might make a banker blush. As a delicate recovery gets under way, and the public finances begin to approach what could be called stability, SIPTU launches a campaign for pay rises and the abolition of the USC. Changing mindsets may be that hardest "structural reform" of them all.

Indo Business

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